Everybody loves a discount. When we see the words like FREE or 50% off it puts most of us in a consumer frenzy – we must have it. It works for retail, but does SaaS discounting really work in a monthly pricing model?
A month ago our growth team at the company I design for wanted to test whether offering a perceived discount would, in turn, increase acquisition. For the test we kept the current monthly price with no discount – I’ll refer to this as the control. For the variation, we flooded the site with a 50% discount label next to the same price to make jt look as though this was some amazing deal.
Note, the goal here wasn’t related to LTV or MRR – all the boss wanted to do was increase the number of visitors entering the top of the funnel.
This is merely a perception that the potential customer would be getting a huge discount off the normal price of the service. Whilst this could be termed deceptive, the company went through a massive pricing model shift recently where the price was actually double the currently monthly – so it’s not totally morally wrong…
Pricing in general is a tricky business with no one size fits all, but in general most gurus say that SaaS discounting isn’t a good idea, particularly when you’re looking at LTV and average revenue per customer. Supported by this article by Sixteen Ventures, I can’t help but agree.
“Discounts are the laziest path to SaaS customer conversion, and dramatically lower LTV.”
50% off will bring more customers, right?
The assumptions we had running were that when visitors see the 50% off wording it’ll result in increase in sales. Discounts win more sales, right? It’s true in retail so surely it’s true here…
Actually, the results represented otherwise. We ran the test for 15 days and it was exposed to 530,000 visitors – a significant sample size. With 265,000 exposures to each variation, we actually saw very little difference in the transactions that went through. In fact, the 50% off did worse by a very small margin. Very interesting.
Why didn’t it work?
Putting my opinions of SaaS discounting aside (I hate it), it was really interesting to see first hand the result of trying a ‘no brainer’ test and seeing the data show that really it makes no difference. Firstly it highlights the importance of using data to aid your business decisions, but more importantly, tactics pulled from other industries often have little or no legs in a completely different realm.
My only logical conclusion as to why it didn’t work is that with our SaaS pricing model we offer a 14-day free trial before you make the call to convert to a paying member. When you pair the label 50% off next to ‘Try it FREE for 14 days’ it just becomes super confusing… In my mind, I’m like ‘So I’m getting 50% off something that is free? How does that work? 50% free… This is confusing – bounce’. That’s my assumption, I don’t pretend to be an expert in this area!
Ultimately though it did add friction to the sign-up process in a way that didn’t accelerate the sales cycle. It may have come down to execution, but really the effect wasn’t even close to supporting any argument for keeping the discount wording.
The idea of discounting could have more effect at the end of the free trial, but really I believe focusing on offering more value or more justification via other means (copy, social proof) that the price we charge is, in fact, the right price.
Another alternative I’ve seen fly – Xero has a nice approach where they send you an email mid-way through your trial period offering 50% off the next four months. This is where discount coupons work well. It’s not an indefinite discount (in 4 months you’ll pay full price) but it serves the purpose of activating a new member over that four months period alongside reducing price related friction. I signed up recently and that got me… :-)
With that said, I’ve never liked SaaS discounting for premium products or services and prefer to set a price that suits both the business and the customer. If you are priced too high, you’ll only get the elite customers (which is fine if you’re predominantly wanting to serve premium clientele) and likewise, with low-level pricing, you’ll attract a lot more customers but with a lower LTV and average MRR per customer.
The sweet spot is being able to offer a product that the customer perceives to offer excellent value for the price, and they’re happy staying on indefinitely. Price objections are just value objections by your potential customers – you’re not offering or displaying enough value for the price you’re charging. I’d focus there.
Of course, none of the above holds up in a retail world where discounts are proven to supplement revenue nicely in a lot of cases.
Hope you enjoyed, have you had any similar experiences with you pricing experiments in the past?