Anti-discounts, Bad Fit Customers, and Not Doing Whatever It Takes to Retain Them
Awhile ago a few of us Customer Success professionals gathered and discussed the benefits and problems what to do under the following scenarios:
Something in the product goes haywire for the customer
They’re “going to cancel” because we don’t have such and such feature
We don’t have X feature and “they really really want it”
We don’t have X feature yet
Our competitor has a feature we don’t have, so we need to consider discounting our pricing
Note, the scope was limited to either product failures or missing features.
As you can imagine, this brings about a number of unintended consequences:
Devaluing of our product
Lost ARR (Annual Recurring Revenue)
Enabling the team to kick the metaphorical can down the road
Converting customers into missing feature bounty hunters
If we’re a pushover here, do we draw the line anywhere?
Not being proud of our product
There are certainly more, but, brevity. 🤷♂️
You may have not seen a problem with giving temporary or permanent discounts. You may see a problem, but can’t verbalize the implications. You may see the problem, but can’t convince your teammates. That last one is definitely difficult. Focusing on the last one, here are some strategies to help think through the long term implications for your company.
Loss of ARR means less engineering investment
The more discounts you give, the fewer engineers the company can hire. If you do that, you will certainly go into a spiral and will only amplify the need to give more discounts to more dissatisfied customers. That will likely mean fewer or smaller product/feature launches—the exact opposite of what you need.
Freely handing out discounts also hurts your gross profit margin. If you’re a SaaS company, you need to aim for 80-90% with the higher the better. Giving out discounts lowers your revenue even though you still have to provide services to your customers.
Discounts can be good to help drive your business forward. Unnecessary ones will hurt you.
(Note: you could manipulate your gross margin to be whatever you want. Don’t play accounting tricks.)
Budgeting and forecasting
Similar to above, if you’re constantly giving discounts to many customers, not only does this make your financials look terrible, but this introduces so much ambiguity, uncertainty, and questioning into your forecasting. For instance, how many discounts should we predict for next year? If we do that, how many employees won’t we be able to hire?
“We will build such and such feature by _____”
I think everyone is aware of this, but unless there’s a contractual obligation, committing to a feature or product is a terrible idea. Things change (like roadmaps). Even if that’s the most obvious feature to build, what happens when a major customer asks/demands you to build a different feature? Or industry upheaval or a broad compliance/regulatory change happened? Could you certainly still commit to that timeline?
They’re a bad fit customer / Solving for the wrong problem
If they truly are a bad fit customer, why are you even trying to please them? They’ll always be unhappy because you’re not the product for them. Let them go before they become a major drain on you (mental energy, phone calls, social media complaints, etc.). You wouldn’t keep a toxic friend, why keep a toxic customer?
If you give the discount, you’re solving for the wrong problem and aren’t building a sustainable business. You either have a bad fit customer and need to let them go, or you need to build the product to fit your customers. If you retain bad fit customers, then they will only badmouth your company which will make it harder for sales to win future prospects.
Speaking of time, it’s limited. Bad fit customers will tend to require more time from us. So not only do we risk getting badmouthed and hampering marketing and sales, we will also find that we spend 80% of our time on 20% of our customers.
If I get one discount because one feature is missing, do I get another discount? What if I find 4 features that are missing? Do I get 4x discounts?
Does the discount hit the company, or the sales rep who sold them?
If I have to give a discount to a customer, can I then dock that sales rep’s commission? If the sales rep is suggesting we give the customer a discount, do they want that permanent discount to come from their future comp?
If you give that discount, it should count as a downgrade and go toward churn. Investors/leadership won’t like that. In fact, no one likes that. If it’s a long term discount (e.g., we likely never will ship that or won’t for X months/years), that’s really a downgrade. We can split hairs here, but it should affect your overall retention figures since the company’s revenue will be less next month than the prior month.
Roadmap based on discounts
Right now your roadmap is likely based on the likelihood of 1) new sales, 2) retention, and/or 3) account expansion. If we’re doling out discounts for these things, does that mean our roadmap is now designed based on how much money we can get back from shipping the features where we gave discounts?
Those are just a few reasons. Ultimately, I believe discounts are good for closing deals and a few other areas, but we should think of discounts like salt. Sprinkling some salt on our meal helps enhance the flavor, but too much will ruin it. Discount responsibly.