When sales are slow, it’s tempting to turn to discounts as a solution.
Discounts intuitively feel like they work. After all, we see them in retail all the time.
But running a discount without a plan can be a costly mistake.
Here’s an example. Say you sell a product that normally retails for $1000.
You normally sell 100 units per period, but you’ve got ambitions and want to increase sales to 125 this period.
So you decide to offer a 20% discount. Based on previous discounts, you estimate that you can close another 25 sales.
But by offering a 20% discount, you’re losing $200 revenue on every sale.
And if you offer the discount to everyone, you’re discounting deals that would have closed anyways.
So the first 100 that would normally result in $100,000 in revenue is now only $80,000 in revenue.
You have to make the 125 sales just to break even.
Say you close out the period with 108 sales. It feels like you came out ahead, but you actually gave up $13,600 in revenue.
Some SaaS sales teams think that they come out ahead in this because the revenue is recurring, but this is actually worse for two reasons.
One, unless you’ve limited the discount to a promotional period, you’ve now locked in those losses every month. In addition, discounted customers are more likely to churn, leaving your LTV even lower than usual.
Aggressive discounts often feel like a win, but they rarely produce one. Make sure you’re doing the math before you slash that price.