After analyzing data from 88 SaaS companies, researchers discovered that the use of discounts can have a significant impact on two critical business metrics: churn rate and lifetime value (LTV). The findings reveal that while discounts might boost short-term sales, they often come at a steep cost in the long run.
Here’s what the data showed:
Average Exit Rate (Churn) Over 3 Months
- Minimal Discounts: Companies offering small or no discounts experienced an average exit rate of 3.44%. This relatively low churn suggests that customers acquired at regular pricing tend to stick around longer, likely because they see the full value of the product or service.
- Aggressive Discounts: On the other hand, companies offering steep discounts saw a much higher churn rate of 10.82%. This indicates that customers drawn in by aggressive deals often leave quickly, either because they don’t see the value at full price or never intended to stay beyond the discount period.
Average Relative Lifetime Value (LTV)
- Minimal Discounts: Customers who came in through minimal discounts provided a healthy lifetime value, contributing positively to long-term revenue growth and stability.
- Aggressive Discounts: In stark contrast, offering large discounts led to a -31.41% relative LTV. This means that customers who entered through aggressive pricing deals not only churned faster but also generated significantly less revenue over time. The impact on profitability was negative, essentially eroding the value of acquiring these customers.
The Big Takeaway
The data highlights a crucial trade-off: while discounts can help secure new customers quickly, they can hurt customer loyalty and long-term profitability. Minimal discounts seem to attract more stable, high-value customers who are likely to remain engaged and see the full worth of the product. Aggressive discounts, on the other hand, tend to attract price-sensitive buyers who are less committed and more likely to leave once the initial deal ends.
This underscores the importance of pricing strategy in the SaaS world. While it might be tempting to use heavy discounts to hit short-term sales targets, it’s clear that such tactics can backfire by increasing churn and slashing LTV—ultimately harming the business.
What This Means for Your SaaS Business
When crafting your pricing and discount strategy:
- Focus on demonstrating the value of your product rather than relying on discounts.
- Use promotions sparingly and target them at the right customer segments.
- Prioritize building relationships with customers who see the value in your product at full price—they’re the ones who’ll stick around and contribute to your growth.
Source: Price Intelligently