Importance of Discounting in SaaS Billing
Billing SME, Synthesis Systems
All of us are fond of discounts! Come any special day, such as Black Friday, we see long queues in front of retail stores and heavy traffic on e-commerce sites.
Discounts and promotions play a vital role in business growth, as they promote customer acquisition, retention, and increased revenue growth.
This article will discuss the importance of discounting in SaaS Billing.
SaaS providers can improve customer acquisition and customer retention by leveraging the benefits of discounts and promotions.
In addition to B2C and Retail segments, discounting plays a crucial role in Enterprise and B2B segments by encouraging potential clients to spend more and incentivizing many purchases. Enterprise customers often demand personalized services or offerings; accordingly, a discounting mechanism should be tailored to their needs. Due to its flexibility, custom pricing for enterprises can be achieved through discounting.
A discount is a charge type in the product catalog through which service providers offer price reductions to customers on different charges such as subscription fees, usage fees, one-time fees, account level charges, etc. Discounts are mainly defined by Product owners, Sales, and Marketing teams to attract new customer segments, retain the existing customer base, and improve customer loyalty.
The most widely used types of discounting are based on:
Fixed amount: This provides the flexibility to apply a fixed discount amount. (E.g., Purchase an item equivalent to $500 or more and get a flat $50 discount.)
Percentage: It allows applying a percentage-based discount on the charge amount. (E.g – Subscribe to the Platinum plan and get a 5% discount on the monthly bills.)
Credits: In this mechanism, discounting can be applied to promotional credits or non-currency resources. (E.g., Subscribe to an Air mile plan and accumulate 300 extra air miles on each flight journey.)
The most common forms of discounts include:
Account level discount: This type of discount is applied to the overall account level charges irrespective of the number of subscriptions attached to the account (such as granting a 10% flat discount to all the branches of a manufacturing firm on purchases of raw materials).
Cycle or recurring discount: This is applied to grant a recurring discount on cycle-based charges (such as granting a flat $10 rebate on monthly license fees for the next six months).
One-time discount: This is applied to one-time charges like activation fees, device fees, etc. (such as on purchase of a Pay TV subscription, there is a 100% discount on Set-Top box and installation fees).
Real-time or usage discount: This is applied based on the usage consumption of a specific service (such as consume service usage of $100, and you get a discount of $5 on the final bill).
Billing time discount: This conditional discount is applied during the bill run. It is based on the aggregated bill amount or the period of subscription. Such as –
- If aggregated bill charges cross $500, apply a billing time discount of 5%.
- If the customer has subscribed to a service for over a year, then apply a fixed discount from the 13th month onwards.
Bundle discount: This type of discount is applied when combinations of services or products are purchased together (such as a discounted rate for comprehensive health check-up packages).
Volume discount: The more you purchase or consume, the more you receive the volume discount. It is offered to amplify the sales revenue or service consumption (such as providing a volume discount to an enterprise customer for a multi-year contract or subscribing to the yearly plan of a Magazine; you get an additional three months free).
Promotional discount: This kind of discount is offered as a part of a campaign for a limited duration (such as when a new software upgrade version is released, and it is offered for the first 15 days at a discounted price per license).
Group discount: This kind of discount is also known as Parent or Company level. In this mechanism, a group discount is applied to the collective purchases/consumption of the group which comprises Parent and several Child accounts (or subsidiaries). Discounting benefits are enjoyed by all the group members (such as when a large enterprise has availed group discount for buying manufacturing raw materials for its ten subsidiaries and includes purchases from vendors).
As understood from the above, discounting feature is quite flexible and can be moulded to cater to the different needs of businesses and targeted customers.
The importance of discounting lies in all the stages of the Subscription lifecycle in a SaaS world
Customer Acquisition: Promotional discounts, Freemiums or Free trials play a significant role in acquiring new customers. Freemium or free trials allow businesses to showcase their offerings to potential customers without burdening them with upfront commitments. As customers experience the benefits, they will likely subscribe to paid or upgraded plans.
Similarly, promotional discounts offered during acquisition campaigns help to achieve more sign-ups and conversion to high-value plans.
Discount offerings during acquisition help to achieve the conversion of leads or prospects to paid customers.
Post-Acquisition: Once customers are acquired, they can be motivated to increase high usage or consumption through volume, usage, or billing time discounts. They can also be offered a one-time discount during activation or installation of services. During onboarding, customers opting for maximum contract durations can be rewarded with bundle or recurring discounts.
Upselling/Upgrading: Post customer acquisition and initial phase of service consumption, businesses often try to offer discounts to promote upgrading or upselling to higher revenue plans. Customers switching to longer-term contracts are also rewarded with additional discounts. Through such measures, businesses increase the probability of customer loyalty and long-term relationships.
Renewal: Businesses become more attentive towards the subscription end period and strive for customer renewal. Rebates can be offered to the customers whose auto-renewal setting is true. To avoid losing a loyal customer to a competitor, discounts are offered during the subscription renewal. Personalization and analytics are critical in defining custom discounts based on customer segments, usage patterns, interests, or other parameters.
Downgrade/Cancellation/Termination: A customer, if not satisfied, may request for service downgrade, plan cancellation, or complete account termination. Any such requests can be handled by offering retention discounts. This may be one-time, recurring, account level, or billing time discounts. Such discounts can also be bundled with offering additional complementary services to the customers.
The retention discount approach should be approved by a designated business unit head so that it won’t cause revenue loss to the business in the long term and serves the purpose of customer retention and improved loyalty.
Post-Termination: Businesses can define targeted campaigns to win back such customers through time-based or reactivation discounts. Measures should be taken to filter out high-risk or non-paying customers from such campaigns.
Businesses should use personalization and various analytics to define and offer discounts judiciously. It should match and align with the business forecast and customer needs. Businesses can use customer segmentation, competitors, churn, sales, usage, and predictive analytics to define the most effective discounting rules. However, discounts must go through an approval and audit process to avoid pilferage. And, since offering discounts has a sizeable impact on revenue recognition, it may also lead to potential revenue leakage if not adequately monitored or used beyond intended promotional periods.
In conclusion, since customer satisfaction and revenue growth are the main business goals of most companies, discounting and promotion strategies play a crucial role in achieving the desired results. Discounting is an effective sales enablement tool for attracting and retaining customers. So, the features SaaS billing systems provide should be extensively used.