Aug 13, 2020 • Podcast

Why do software (SaaS) companies use discounts as negotiation tools?

In this episode, Paul shares why SaaS/software sellers use discounts to negotiate.

Show Notes:

“Profit margins in this industry are at crack levels. When your margins are this high, it’s easier to give up a little profit. But that’s not the main reason why they’re using discounts.”

There are three primary reasons sellers use discounts.

Lack of urgency in adopting your solution. Your buyer is already using something that is probably okay. There’s no sense of urgency to move the process forward. 

The seller also hasn’t created enough pain in the buyer’s world. Dig for root canal type pain. 

“People only change when the pain of not changing is greater than the pain of changing.”

Other times cheap competitors establish anchor prices in the market. 

Pressure points mitigate the importance of price. Identity their pressure and take the focus off of the price. 

Free is the worst four-letter F-word you can say in sales. 

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Check out this episode!

Why do software (SaaS) companies use discounts as negotiation tools?

(Transcribed from podcast)

We have a question that came from the website. This question came from Fabian. Fabian is actually selling software. He has a question today for the software industry. This is an interesting question. I’m sure many of my software or SaaS-type of salespeople out there can relate to this question. This question is, “Paul, from your experience, do you find that software companies normally offer some sort of discount as a negotiation tool?”

And a little background. He works for a software development company, competes with several companies in their specific industry. And he’s found that most of them use the discount as a negotiation tool to get the customer to commit. On the other products that they offer, it seems like the software is the discount to hook them, like a loss-leader type of project. So we’re going to tackle that question, and we’re going to tackle why we’re experiencing this pressure as well on today’s episode.

Before we get into that, a quick shout-out to Andrea and The Creative Impostor Studios. Check out her website. If you’re interested in starting a podcast, if you need some support, some help— She’s been with the podcast since day one, and she’s a big part of why the podcast continues to be a hit around the world. Almost in 50 countries now. In fact, July was an absolute record for number of downloads. So, big shout-out to Andrea for that. We’ll have the link to her website on our episode’s webpage for this one.

Also, make sure you pick up your latest edition of Value-Added Selling. In the book, we talk about pressure points and how they take the focus off of price. In fact, that’s one of the ways you can compete on value, establish urgency, and move the sale forward. So there’s a complete guide on how to do that in Value-Added Selling. In fact, it’s in a chapter called Customer-izing. So if you already have your copy of the book, read the Customer-izing chapter. It’s going to help you sell value.

Let’s get back to that question: “Paul, from your experience, do you find that software companies normally offer some sort of discount as a negotiation tool?” And the answer is YES; a resounding YES. With all the software companies I’ve worked with, this has been a common challenge. It’s been more common than other industries that I work in. So, Fabian, I can tell you without any hesitation, you are correct, sir. You’re experiencing more of this than the typical salesperson.

There are a couple of reasons why this is. The first one is looking at the profit margins within the software or SaaS world. You think about this. Once a product is created, you have that sunk cost. Once a company typically makes up that sunk costs and they’ve made their money back, the margins on software are ridiculous. It’s up there with crack, alright? So be aware of that. When you have stupid-high margins, it’s easier to discount those margins. Now, keep in mind that most SaaS organizations or software companies, they do have to feed the machine. They’ve got a lot of overhead, but, the margins on their products are phenomenal.

Anytime you are selling a product or service with extremely high margins, it seems a little easier to give up a little just to win the sale. That’s one of the reasons, but it’s not THE reason. It’s not the reason why companies will do this.

There are three primary reasons why the salesperson will give up these discounts just to close the sale. The first reason is lack of urgency. When you’re selling a house software-type of product, we’re going to assume for a moment that most of the software that you’re selling is replacing something that is currently working. Maybe it’s not working optimally. Maybe it’s not the best solution, but it’s something. It’s working. So, the pain isn’t great enough for them to want to switch. There’s a lack of urgency there. And when we’re trying to encourage the buyer to move forward—when we know they’re almost there and they’re ready to buy—we want to offer a discount just to get them over the edge. That lack of urgency is really what we’re dealing with.

The other piece here is the salesperson hasn’t created enough pain in the buyer’s world. When we talk about creating pain, we’re making the buyer aware of the pain that they are feeling. And what we’re going for here is root-canal pain, because people only change when the pain of not changing is greater than the pain of actually changing. We’ve got to make them aware of that pain. Most salespeople don’t spend enough time creating that pain earlier on in the sales process. They don’t spend enough time talking about the pain they feel and then how it impacts their business. The impact is really the greater part. Think about this for a moment. If we’re talking to a buyer and we say, “Tell me about your current software and what you’re using.”

“I remember using Blah Blah Blah Software,” (ABC Software,you name it, fill in the blank, whatever it might be.)

Basic question. “What are some of the challenges you’re facing with your current software?”

“Well, it doesn’t let us do this,” or, “It takes longer to do this,” or “We’re struggling with this.”

“Really? What does that mean? I mean, how is that impacting your day-to-day operation?”

And then they start talking about the pain. “Oh, well, it’s harder to get projects through. It’s harder to complete things. The accuracy has become an issue.”

“Really? How did those accuracy issues affect you last quarter?” You can see, we keep digging and digging and digging. Our goal is to dig for root-canal pain. And once we dig and get that pain up there where it’s real and tangible to them… Once the pain becomes real, the buyer is more likely to act.

The third reason that we’re going to face more pricing pressure is for the reason that Fabian mentioned. We have some sort of competitor out there that is offering stupid-low anchor pricing. When we do this, we’re setting an expectation in the marketplace. What will happen is these competitors throw out these prices almost like a loss leader just to get their foot in the door, or the hook so they can sell them additional products. That’s another reason why software companies are having to give those deeper discounts as well.

When I think about this specific scenario, it also reminds me of a conversation I had with a friend. Actually, we ran into each other. I was flying back to St. Louis from Phoenix. I just finished up a speaking engagement. He was on his way back to St. Louis as well. We were talking about the software industry. He’s a software salesperson. He knows what I do, so he was asking me some advice for the client that he just went to go meet with. And we were talking about discounting.

He said, “Here’s the deal. I’ve been working on this opportunity. I’m having trouble establishing some urgency, getting them to move forward. I really need to close this deal this quarter.”

And I said, “Okay. Why do you need to close it this quarter?”

He said, “If I don’t close the deal this quarter, I will not get a chance to close it again because we have another salesperson that’s getting started out here. They’re going to be covering it. So this is the last opportunity I have to win the deal.”

That salesperson was feeling the pressure to get the deal to close. And so, naturally, they want to do anything they can within their power to sweeten the deal, to make it better so that the customer does decide to move forward. I truly cannot blame the salesperson here, because they’re thinking, “If I don’t close it now, man, I’m never going to close it. I’m never going to get that commission check. I need the discount.” But there still is a better way. There’s a better way to establish urgency and to create some pain to get that buyer to move forward.

And here’s how we do that. I already gave you kind of a hint talking about it already. We need to use pressure points. Pressure points are things that mitigate the importance of price. Whoever feels the most pressure in any negotiation is going to make the most concessions. And so, as I mentioned earlier, in Value-Added Selling, we have a whole chapter on customer-izing, and we have a list of pressure points that buyers could experience.

Now, buyers, they tend to conceal their pressure points. They don’t want to feel too exposed, because they know if they’re too exposed—if you know the pressure they’re feeling—they’re not going to get any discounts. And so the key is trying to figure out what pressure they are experiencing. Is it the timing and sense of urgency? Is it the pain that they’re feeling from production issues? Or, is there a problem that you can solve that really is on everyone’s radar? Do they prefer to work with your company? Have you already generated buy-in with multiple decision makers? Have they had bad experiences with some of your competitors? All of these can be pressure points that you use to help establish urgency in the buyer and have them move forward quicker. The key is making the buyer aware of it, and also, the pain that comes as a result of that pressure. By reminding the customer of that, hey, you have a better chance of moving the sale forward.

And, you know? A bonus tip to wrap things up today: Rather than cut price, increase value. Think about this for a moment. Anytime a buyer objects on price or you’re trying to sweeten the deal, don’t cut the price, add more value. Include value-added training to go along with your software. Include value-added implementation. Whatever you do, don’t use the word free when you’re talking about the extras that you provide. The problem with free, whatever follows free cheapens it. When people hear free, they think it’s free and doesn’t have any value. Free is the worst four letter F-word you can say in sales, I promise you that. So use the word value-added. Build more value in with complementary services or additional product. But don’t cut that price.

Make it a big day.

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