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How Discounts Impact Retention

In this episode of the ProfitWell Report, Patrick Campbell explores how discounts influence renewal and retention rates in subscription businesses, revealing that while discounts can accelerate sales, they often lead to increased churn and a devaluation of the product over time.

This episode might reference ProfitWell and ProfitWell Recur, which following the acquisition by Paddle is now Paddle Studios. Some information may be out of date.

Originally published: April 4th, 2018

Discounting is a huge topic of interest in the subscription economy, primarily because most people don't know how to discount effectively. As the data suggests, using unnecessary discounts can have a real negative impact on your business.

On this episode of the ProfitWell Report, Olof Mathé of Mixmax asks us to dive into the data around discount pricing. To answer his question, let’s look at the data from over 6,000 companies and 600,000 subscription consumers.

But first, if you like this kind of content and want to learn more, subscribe to get in the know when we release new episodes.

Affinity for discounting amongst sales teams

Discounts are a promotional pricing strategy seen as a virus within our current subscription community, not because they’re necessarily bad, but because we treat them like a sledgehammer instead of a scalpel.

To ease in here, let’s first look at the mindset of our sales and marketing teams. Just over seventy percent of practitioners believe that discounts should be used in some capacity to get customers to convert. On the flip side, less than ten percent of us believe that discounts should only be used as an absolute last resort.

Discount Preferences amongst sales teams

This isn’t necessarily bad, but the level of discount we’re willing to give is startling. Just under eighty percent of respondents believe that the appropriate discount to give is over 25%.

Appropriate Discount Level Preferences

You may be looking at these numbers and thinking this isn’t that shocking, but let’s lay this out for a second. Your price is the exchange rate on the value you’re providing. Your sales and marketing team’s job is to justify that value to the prospect in order for them to convert at that value. Yet, Most of our sales and marketing teams are saying that in actuality, your value is only three fourths or worse.

Discounting makes revenue growth unpredictable

Personally I don’t think we’re aware just how prevalent this phenomenon is within our businesses, because discounts do get us to our goal. When profiling companies who’ve reached their goals with discounts vs without discounts, you’ll note they both cross the finish line, but this success indicates an elementary understanding of unit economics.

Goal Progress Comparing Discounting Strategies

In reality, these discounted customers have just over double the churn rate as those who weren’t given a discount. When broken out by the level of discount you’ll notice a strong correlation of churn increasing as the discount level increases.

Discounted customers tend to churn at a higher rate

Renewal willingness to pay goes down after discounts

These individuals have simply been trained to devalue the product or just weren’t the right customers in the first place. In fact if we strictly look an annual contracts and we look at the willingness to pay of the customer at annual renewal compared to the discount level given at the original purchase, we see a dramatic drop off after the 30% discount mark in willingness to pay.

Discounting Impact on Renewal Willingness to Pay

Yet, our teams think this is perfectly appropriate. We’re essentially robbing Peter to pay Paul where Peter is your customer success and product teams who gets dumped the problem of retention.

So should you not discount at all? No, that’s not what the data says, but you need to think about a discount as a scalpel - efficiently used as a catalyst to lower the activation energy of a prospect to get them to convert and see the true value of your product with expanded willingness to pay.

Want to learn more? Check out our recent episode: How Great Support Impacts Retention and subscribe to the show to get new episodes.

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You’ve got the questions and we have the

data.

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Each week we dive deep on benchmarks of the

subscription economy that you just can’t

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get anywhere else.

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This is: The ProfitWell Report.

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Hey Patrick, Olof from MixMax here, I’m

super curious: how do discounts affect renewal

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and retention rates?

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Loving that mixmax wallpaper, Olof.

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So, let’s talk discounts.

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To answer Olof’s question, we looked at

over six thousand companies and data from

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nearly six hundred thousand subscriber buyers.

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Here’s what we found.

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Discounts are a virus within our current subscription

community, not because they’re necessarily

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bad, but because we treat them like a sledgehammer

instead of a scalpel.

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To ease in here, let’s first look at the

mindset of our sales and marketing teams.

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Just over seventy percent of practitioners

believe that discounts should be used in some

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capacity to get customers to convert.

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On the flip side, less than ten percent of

us believe that discounts should only be used

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as an absolute last resort.

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This isn’t necessarily bad, but the level

of discount we’re willing to give is startling.

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Just under eighty percent of respondents believe

that the appropriate discount to give is over

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25%.

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You may be looking at these numbers and thinking

this isn’t that shocking, but let’s lay

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this out for a second.

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Your price is the exchange rate on the value

you’re providing.

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Your sales and marketing team’s job is to

justify that value to the prospect in order

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for them to convert at that value.

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Yet, Most of our sales and marketing teams

are saying that in actuality your value is

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only three fourths or worse.

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Personally I don’t think we’re aware just

how prevalent this phenomenon is within our

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businesses, because discounts do get us to

our goal.

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When profiling companies who’ve reached

their goals with discounts vs without discounts,

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you’ll note they both cross the finish line,

but this success indicates an elementary understanding

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of unit economics.

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In reality, these discounted customers have

just over double the churn rate as those who

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weren’t given a discount.

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When broken out by the level of discount you’ll

notice a strong correlation of churn increasing

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as the discount level increases.

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These individuals have simply been trained

to devalue the product or just weren’t the

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right customers in the first place.

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In fact if we strictly look an annual contracts

and we look at the willingness to pay of the

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customer at annual renewal compared to the

discount level given at the original purchase,

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we see a dramatic drop off after the 30% discount

mark in willingness to pay.

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Yet, our teams think this is perfectly appropriate.

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We’re essentially robbing Peter to pay Paul

where Peter is your customer success and product

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teams who gets dumped the problem of retention.

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So should you not discount at all?

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No, that’s not what the data says, but you

need to think about a discount as a scalpel

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- efficiently used as a catalyst to lower

the activation energy of a prospect to get

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them to convert and see the true value of

your product with expanded willingness to

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pay.

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That's all for now.

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If you have a question, ship me an email or

video to pc@profitwell.com and let's also

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thank Olof for sparking this research by clicking

the link below to share on Linkedin to give

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him a shoutout.

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We’ll see you next week.

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This episode of the ProfitWell Report is brought

to you by Litmus.

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Litmus is the easiest way for teams to create

great email for every subscriber, everywhere.