Aggressive Pricing Strategies Kill Long-Term User Growth
Discounts are short-sighted and make for difficult convos with investors
Gosh, that was a rough weekend for my inbox. Between Black Friday and Cyber Monday, I was in a dogfight against consumer brands to hit inbox zero.
Getting inundated with discounts over the past several days made me reevaluate my stance on SaaS pricing tactics and what I’ve learned when it comes to markdowns.
TLDR: aggressive pricing strategies stink.
Discounts are Short-Sighted
Discounts work for retail, but they kill SaaS companies.
In retail, you want someone to make a one-time purchase. You’re not nearly as worried about retaining a customer, you just need them to make the leap for a cute (or ugly) sweater. And then, when a new product line comes out next season, retailers start from the top again.
In SaaS, you should be primarily concerned with retaining customers. It’s a subscription, and when your subscription is discounted it brings down customer LTV.
[1] Discounts kill LTV
Take a look at this report from ProfitWell, which shows discounting SaaS products led to a 30% decrease in customer lifetime value. This was driven by two levers: first, the customer isn’t willing to pay as much; second, they churn at 3x the rate.
[2] Discounts set unrealistic expectations with investors, resulting in an endless cycle of markdowns
The VC-backed startup world is already full of aggressive growth goals. In the SaaS space specifically, your typical investor is looking for anywhere between 15%-30% month-over-month growth in user acquisition.
Discounts typically lead to higher user acquisition months, as you push users to convert now when most would have converted in a month or two anyways. So, you’ve got elevated conversion this month followed by reduced conversion in the coming months. This leads to a dangerous discount cycle, where — instead of accepting the inevitable downturn in the following month — you try to beat your acquisition target again and see discounts as a driving force to increasing acquisition.
[3] Discounts are lazy
If users are converting due to discounts, you’re not addressing the problem. Usually, this means one of two things:
You’re not providing customers with enough value. You should aim to capture anywhere from 5-10x of the value you provide to users. If you’re not providing enough value, you should either change your price permanently or find ways to increase the value you’re providing to customers.
You’re not showcasing value effectively to your users. From awareness through activation, users should be able to clearly see the value you provide. If there’s a disconnect, that’s what you need to fix. The best way to do this is simply interviewing your users as much as possible.
Pricing Pitfalls
Discounts aren’t the only aggressive pricing strategy that kills user growth. Here are just a few ways that by getting pricing wrong or asking users to pay at the wrong time impacts your growth trajectory.
[1] Inability to Try Before You Buy
I talked about this a bit in my last newsletter. This is a big one for me, as I view “pay upfront” or even “enter credit-card upfront” as a lose-lose scenario.
Lose, Version A: By forcing users to pay for something (or put down a credit card) before testing it out, you’re turning user conversion into a high-friction event. And by pushing for a conversion when a user might not be ready (i.e. they’re still evaluating solutions or have a busy schedule in the coming weeks), you’re limiting your at-bats to turn a signup into a retained user into a super user.
Lose, Version B: If a user has a good experience, whatever — the upfront payment isn’t a net-positive. If the user has a bad experience, however, they’re furious — they paid for a product that they’re unhappy with. When products don’t meet user expectations, it becomes a headache for your customer support team (costing you time, money, and resources) and it turns users into detractors. Detractors are a no-go: they write negative reviews online, they dissuade friends and family from using your product. They have the opposite effect of referrals — they’re actively working against your company, leading to higher CAC and lower acquisition numbers.
[2] Abusive Discounts
I made up this phrase. I didn’t really know what else to call it.
Let’s look at my current enemy, Headway. I am a substantial detractor of Headway; I included them in my last newsletter as a company to stay away from, and I have personally steered six or seven people away from signing up.
Quick recap: Headway is similar to Blinkist or Sparknotes — it provides book summaries, specifically those around growth or productivity or self-improvement.
Headway technically lets you try before you buy, as you can sign up and view the main navigation without putting down a credit card. They have a beautiful user interface and curated content feeds with self-growth channels. Everything thus far really aligns with why I signed up as a user and the expectations that were set in their marketing efforts.
However, once you click on your first book, you need to make a purchase. It pushed me to sign up for $80 for the year, with a smaller CTA allowing me to view other plans (where the monthly monthly pricing lives). When I X’d out of the pricing screen, it gave me a one-time offer of $20 for the full year (75% discount). ← I call this an Abusive Discount, as it’s heavily incentivized and is a “one-time offer” that I need to make a decision on before being able to use my phone for literally anything else.
I should’ve friggin’ known, dude, that this app was going to be straight garbage.
The first book I read was SO AWFUL. The summaries are obviously written by AI, which makes them impossible to comprehend. This is where Headway’s core value lies — providing high-quality book summaries is the main reason everyone is signing up. It did not deliver on that core value, and it tricked me into paying $20 in the process.
Headway has made an enemy for life.
[3] Inconsistent User Prices
As you’ll see in the screenshot above, Headway used to offer free trials. They had a conversion problem after the trials ended, and instead of solving the real issue (low-quality book summaries) they simply pushed users to pay before reading.
Naturally, I went to cancel my subscription, as there was no way I was paying this company any more money. And that’s when… I saw… this.
Headway has 38 different subscriptions listed. Yup, 38. Some people are paying $14.99 per year, others are paying $119. Some are paying $6.99 per month, others are paying $49.99. Some people are getting a free trial, others aren’t.
This is insanity.
If you’re going to do some price testing or run discounts, you’ve gotta be discreet about it —otherwise, you’ll piss off all your customers paying full price. And those customers are the ones with the highest LTV.
What To Do Instead
I’ve told you a lot about what to avoid; let’s outline some alternatives.
[1] Strategic and Sustainable Re-Engagement Strategy
Rather than relying on discounts, put together a re-engagement campaign that sends users back into your platform at the right time — when they’re ready to give your product a test run.
Lenny Rachitsky does a great job outlining strategies and tactics for increasing conversion here, but I’ve screenshotted the basics of how you can re-engage your userbase.
[2] Friendly nudges on the benefits of upgrading to paid
When it comes to asking users for money, it’s all about timing. How is the user feeling in that moment about your product? Are they feeling good enough to slap down a credit card?
Slack’s integrated upsell prompts are a great example of showing the benefits of upgrading while giving the user sufficient time to discover the value of the app on their own.
[3] Conduct Price Testing
One of the benefits of running discounts is that you might discover your pricing is wrong. If your conversion rate skyrockets during a discount, it’s an indicator that you should re-evaluate pricing.
Typically, it’s best to run a price test of some capacity every six months. This gives you stability for a couple quarters, then provides a period for re-evaluating the value you’re providing to users and how much of that value you can capture.
To see how Shopify, Zendesk, and StatusPage have evolved over time, check out this article from Chargebee. And if you’re taking the route of charging a monthly subscription fee, read up on Van Westendorp’s Price Sensitivity analysis.
Final Words
With SaaS, you want to really focus on two things:
Customer Retention. This isn’t about getting a user to purchase something one time; it’s about retaining them for the long-run.
Customer Referrals. Referrals drive down your CAC and typically increase product adoption.
You won’t get either of these through running discounts or aggressive pricing strategies. If you decide to ignore my warnings and pursue those misguided avenues, you’ll be setting yourself up for some difficult board meetings with your investors.
Til next time.
-Zac