I guess at some point, the tech community decided that the price of software was 100% negotiable.
I get it — nobody wants to get ripped off. Our biggest fear is proudly pulling into the driveway with that brand new car, only to find out the neighbor bought the exact same model, but paid less.
So now we find ourselves hunting for the “best deal” and playing hardball when we negotiate for software. The problem is that people get so distracted by negotiating the price that they forget why they even wanted to buy the software in the first place.
I understand negotiating on enterprise-sized deals and on very long-term contracts. The costs associated are significant and it’s worthwhile to spend time analyzing the terms. But that means you’d probably involve your procurement team to negotiate for you. For SaaS, most of these deals are low cost of entry, easy on software, and it’s actually more important to focus on a successful implementation and adoption rate than to focus on getting a few dollars off the price.
It’s time we start having conversations with our prospects about why they’re doing themselves a disservice if they focus solely on discounts.
Discounts Hurt the Ability to Service the Account
Everyone knows that discounting will cut your revenue, but discounts are even more harmful for a SaaS business. The lifeblood of SaaS companies is Monthly Recurring Revenue (MRR), or the money customers pay each month for your service. A SaaS company feels the pain of a discount every single month for the entire lifetime of a customer. This adds up to a lot of lost revenue. In fact, research shows that SaaS discounting lowers Lifetime Value (LTV) of a customer by more than 30%.
Big discounts limit the company’s ability to actually service the account properly.
SaaS prospects, however, still buy software as if it were a tangible good, “a product.” However, they should remember that they’re buying Software-as-a-Service. Think about the service. Big discounts limit the company’s ability to actually service the account properly. Smart companies look at profitability or efficiency by account. If you’re the customer that held a rep over the barrel at end of year, you’re probably the account that the back end of the house doesn’t want to support. You’re actually costing them money!
Price is a Reflection of Value, Not an Anchor Point
If your product will provide real value — solving a pressing business need, saving time, bringing in more revenue — keep reminding prospects of this fact with solid numbers. Focus the conversation on the prospect’s end goal and ask them: “Why are you buying our product in the first place?”
For us, it’s pretty clear: we help other growing tech companies identify the weak spots in their sales and marketing, and then we give them actionable reporting to go and fix those problems. We help you win more deals! Because of that, we often think about ROI on our software by comparing it to the prospect’s Average Sales Price (ASP). If InsightSquared is effective in helping you win more deals, then how many more deals do we have to help you win before we show a positive ROI?
I worked with a prospect who had an ASP that was 3X our cost to him. He told me it was mission-critical to get InsightSquared in and functioning correctly at their company. In fact, the CEO was on him to get data about their sales team as soon as possible. However, he told me he wouldn’t budge without an extra 5% off the price — which was about $1,000. When we finally got down to it, I said: “You said your goal was to try and drive an extra $100,000 in bookings/month with InsightSquared, but now we’re arguing over $1,000 — is this really worth your time?”
We’re arguing over $1,000 — is this really worth your time?
With better context, he realized he should probably stop haggling over points on a low ASP deal and go focus his efforts on a larger negotiation. In reality, his talents were better used in helping his own reps on the deals they were fighting for!
Adoption is the Measure of Success
Ask the prospect: “Is it more important the product works and gets implemented correctly? Or that you get a discount?”
Outside of necessary cost centers (like an office space), nobody buys software with the goal of breaking even. They think there’s a major return or else they wouldn’t have made it a project in the first place. Most SaaS companies have their price on the website, or it comes up on the first call. We’ve benchmarked the average SaaS sales team, and their sales cycle is 30 – 60 days (larger deals could be 90 or more.) That means, your prospect has spent months thinking about the project, and being fully aware of the cost the whole time.
Is it more important the product works and gets implemented correctly? Or that you get a discount?
And now that they’re all the way through the evaluation, they must still think it’s a good decision or they’d have walked. So, how could it be a good decision at 90% of your price, but not a good decision at full price? Those ten points are the key? They’re not wasting their time on projects with that slim a margin of ROI.
You’ve got to reframe that conversation. The biggest challenge in buying software isn’t a tech fit. It’s not proving ROI on the concept. It’s not about finance or legal. It’s actually implementation and adoption. Your prospect’s biggest fear, and your biggest fear too, should be the concept of shelfware. Your solution gets purchased, but then never gets used, and then never gets renewed. A failed project.
With all that said, discounting is crazy. Focus on the business case. Prove your ROI. Be competitive with your competitors or a homegrown solution. Manage the project effectively. Then, just make sure you partner with your customers and co-create a successful rollout and support plan, which is actually the most important piece. Make sure you sold the right solution to their problem and stop believing that price is the only lever.