July 12, 2022
Should you offer customers annual discounts?
Everyone loves a good discount. But SaaS companies, D2C subscription businesses, and other companies with recurring revenues offering customer discounts for up-front payment as a cash flow strategy can face steep downsides. Let’s talk about why companies offer annual discounts, the impact those discounts have on businesses, and how you can give customers the payment terms they want—without sacrificing cash flow or your top line.
Are discounts bad for business?
There are plenty of reasons to offer discounts—maybe you’re clearing out your inventory, running a seasonal sale, encouraging trial signups at a lower rate, or even helping students, healthcare workers, or first responders get easier access to your product or service. Discounts aren’t inherently bad or good—no one knows your business better than you, which means you’re also the one with the most insights into a discount’s rationale.
Sales, clearances, and special offers that help you manage your business or support your community are always going to be around, and can make sense and have positive effects in many instances.
But there’s another kind of discount to think about too: the annual discounts many companies give customers to get them to pay up front rather than waiting for monthly or quarterly payments to trickle in. These discounts can have outsized impacts on your business. Let's take a closer look.
Annual discounts can diminish revenue and profits
While discounts are a common strategy to improve cash inflow, companies often offer customers as much as 15–30% off to incentivize those up-front yearly payments. It feels good to get the cash boost when the payment comes in—but those percentages are big numbers that can cut deeply into both revenue and profits.
Read a related piece from the Pipe archives: Rethinking the up-front annual contract in a cash flow-conscious world
Annual discounts can hurt your top line
When you’ve cut the price of your product or service by ~25% to get a lump-sum payment, you’re no longer charging the full monthly rate—which, of course, means you’re also not bringing in what should be the full annual rate. That also means you can’t recognize the full contract value on your financial statements, and your top-line and other numbers could take a hit.
If you don’t offer those annual discounts, you may be able to recognize the full contract value on financial statements. This can help you maintain your top-line revenue and valuation, as well as profit margins and the lifetime value of your customers (aka customer LTV, customer lifetime value, or CLV) . All of this can support the financial health of your business—which can mean better term sheets when raising equity or other capital, and a higher trading limit on Pipe.
Annual discounts can degrade customer value—and the perceived value of your offering
In addition to impacting customer LTV, discounting can also damage the customer’s perception of what your product or service is worth. Think about it like this: The discounted rate becomes a new price anchor—a lower one. If a customer can pay $75 for what you offer, why would they want to pay $100? By defaulting to discounts to encourage sign-ups and annual payments, you effectively devalue your offering and can make the full price seem too high.
Do annual discounts incentivize recurring payments?
Chances are that if you’ve got customers paying annually, you’re also doing the right thing and sending them a reminder before their yearly payment is due. Sure, there’s something to be said for a “set-it-and-forget-it” strategy. But as everyone knows—since we’re all customers ourselves—this can also backfire. Even with an annual discount, a steep payment once a year can give customers pause when they see that upcoming payment reminder. How many times have you canceled a pricier subscription because you just didn’t want to spend the cash right now?
If your response is to offer them discounts—as we’ve covered, you’re not alone. But instead of those discounts, you can embrace the strategy of allowing customers to pay on the timelines they prefer… at the prices that are truly right for the health and sustainability of your business. How? Keep reading.
Avoiding the downsides of discounts
So, we know that discounts can get customers to pay up front, which can help your cash flow—but that the downstream effects of regularly undercharging for your product or service can be pretty heavy. How can you solve the cash flow problem and the discount problem?
With Pipe’s revenue trading platform, you can let customers maintain, for example, monthly or quarterly payments while you pull forward the cash flow. This gets you access to funds when you need them—at a far lower cost than steep annual discounts—with no impact to your customers.
Another plus? You can sidestep the potential negative impact on the perceived value of your offering or a downward push on your future pricing. By charging the right amount for your offering, you can see more profit down the road—leading to a bigger cash cushion, more runway, and an overall healthier and more enduring business.
Distancing yourself from discounts
Ready to stop offering discounts while still getting your cash up front? Sign up and get connected on Pipe to get approved and see your trading limit (that’s how much capital you can access) and bid price (that’s how many cents on the dollar or pence on the pound you can pull forward). There’s no obligation to trade, and every opportunity to grow on your terms.
Discover more Pipe use cases for SaaS financing, D2C subscriptions, service businesses, and more.
Disclaimer: Pipe and its affiliates don't provide financial, tax, legal, or accounting advice. What you're reading has been prepared for knowledge-sharing and informational purposes only. Please consult your financial and legal advisors to determine what transactions and decisions are right for you and your business.