Why not offer a CRAZY discount?

You know Xero, the accounting software? I’ve just noticed they’re offering a 90% discount for the first 6 months! The standard package was £30 p/m, and now it’s £3 p/m. That’s a crazy discount.

By the way, this blog isn’t an advert to buy Xero (although I do love it). I’m going to analyse this marketing strategy and perhaps inspire you to try it.

But why are Xero offering such a crazy discount? You may think, “They’ve got loads of money. They can do what they want.” Yes… but no. The reason is that they know their product is incredibly sticky.

According to saastr.com, Xero’s average customer stays almost 7 years! So offering a crazy discount for 6 months hardly touches the side, financially speaking. But it will massively increase sales.

If your product becomes embedded in your client’s tech stack to the point where they think, “We couldn’t operate without this!” why not offer a crazily enticing discount?

If you’re great at keeping customers for a long time but struggling to make sales, this could be your solution.

Let’s do some math….

I’ll move away from Xero and look at a more ‘down to earth’ startup example.

First, you need to be clear on your customer lifetime value (LTV), which is the average total revenue you make per client from onboarding to churn.

• Avg client subscription = $400 per month
• Avg lifetime of client = 24 months
• LTV = $9,600 ($400 x 24)

Now, let’s say you make 50 sales per year. That’s a predicted annual revenue of $480,000 (50 clients x $9,600).

But what if you were to offer a crazy discount? If you offered 70% off for the first 6 months, this is how it would look:

• Avg client subscription = $330 per month (6 months at $120 and 18 months at $400)
• Avg lifetime of client = 24 months
• LTV = $7,920

Let’s suppose that because of your crazy discount, you increase sales by 40%, equalling 20 additional sales per year (70 in total). That’s a predicted annual revenue of $554,400 (70 x $7,920).

Your crazy discount has just made you an extra $74,400 in annual revenue. Nice.

Beware, if you offer a crazy discount, your ‘average lifetime of client’ may be reduced, as some customers may jump ship when the price jumps. Focus on countering this by reducing your overall churn with better customer service and product development.

Most SaaS brands wouldn’t dream of offering such crazy discounts. Are you crazy enough?!