BSMS 29 - How to manage discounts with an empowerment matrix

Giving special terms to customers, such as discounts or payment plans, is a tried and true method of acquiring new business, maintaining and bolstering relationships, and an important facet in achieving T2D3 growth. As a member of the executive team, you can usually do this whenever you like. But what flexibility should your sales, customer success, marketing, or other teams have to make decisions around discounts and concessions? When are they (or anyone else) empowered to change terms or conditions and to what extent?

Episode Transcript:

Mike: 

Hey, welcome to episode 29 of B2B SaaS Marketing Snacks today, Stijn are talking about a simple tool that team leaders can use to enable their sales, success, and marketing teams to make rapid decisions about discounts, promotions, special terms, concessions, things like that, without having to get individual approval each time. So Stijn likes to call it an empowerment matrix, and it's designed to act as a reference for your team when they're trying to close deals so that they can see the specific types of concessions they're allowed to use depending on their role. So as your team scales, I think you definitely want to make sure that you have something like this in place so that your team is actually enabled to make discounting decisions really quickly, but then also has a really clear set of rules to follow when doing so, so that they're not going too far out of the... Coloring outside the lines too much, so to speak so that your pricing integrity stays intact.

So today we go into the theory behind it and talk a little bit about some of the specific line items and concessions that you should be including in your empowerment matrix. And I think it's a good one. All right, let's jump into it.

Stijn:

Why do you need an empowerment matrix to manage your sales team?

Mike:

And how do you manage sales empowerment? Yeah. Okay, so obviously as a company grows and your sales team has new targets to hit, and same with customer success, they're probably goaled on upsells and retention, and sales is goaled on net new deals. At some point, you're probably going to run into the issue where you have sales wanting to discount the product, and maybe customer service as well in upsells in order to hit some of those targets. And obviously there's probably a fine line that needs to be ridden when it comes to discounts versus maintaining product pricing. I'm wondering... it looks like in the book you have in chapter 6.2, what you call an empowerment matrix. And I'm wondering if you can give a little bit of detail into what that is, and how it's used. And maybe we can have a little conversation around that.

Stijn:

Yeah. It's a topic that I've been very passionate about for probably now 12 or 13 years. When I was at Microsoft in the Netherlands, I ran sales there for part of the Dutch market, and managing discount levels and making sure that when we gave discounts that we got something valuable in return was an extremely important part of optimizing the outcomes. We talked in another episode about the best salespeople being relatively lazy. They're also wired to find the path of least resistance to close a deal, which then includes, “is there anything that my prospect is asking for that I can say yes to,” to allow us to move forward. And those are not just discounts by the way, right? It could be certain terms, payment terms around... you know, financial terms, intellectual property exceptions, who owns what type of intellectual property that may get developed during an engagement, risk and liability terms, right? To either limit those or to expand on those, to have a certain level of insurance.

All those things can be part of the sales negotiation, and thus the sales team will have, sometimes, a desire to be empowered to be flexible in those areas. And some of those things are important to be able to do, but it's good to be thoughtful about what those are, especially when you're a services organization, a SaaS company, software as a service. You don't want to, for example, treat concessions on your terms, or your pricing, for the ongoing service, the same way as you treat things that are one time, right? A one time discount is of course very different on a perpetual license for example, than a discount on your ongoing SaaS feed that will have impact for the next 5, 10, 15 years, right? During the lifetime of your customer.

So what I like to do when you think of B2B SaaS companies needing to optimize ARPU, average revenue per unit, per customer, per user, to drive T2D3 growth, to be able to do exponential growth, you need to have an empowerment matrix in place. An empowerment matrix being a model that stands between all the different roles in my commercial organization, whether it's a marketing team member who wants to run a certain promotion, or it's a sales team member who wants to give a certain discount, or maybe provide special payment terms, or it's a customer success manager who wants to maybe be flexible on when a certain price increase gets enforced on a renewal.

All those things have to be defined in that empowerment matrix that clearly lays out which roles can approve discounts, term exceptions, up to what level. Right? And if they don't have the empowerment to make that decision who is then the next in the approval sequence who needs to be included, up to maybe the CEO of the company, or even the board maybe for certain exceptions when it comes to for example, intellectual property. Or an OEM agreement where maybe you're giving up exclusivity for a full part of the world, a whole market, then maybe the CEO is not even empowered to do it, it has to go to the board.

So that's what the empowerment matrix is, Mike. And just to maybe take one step back on why is this so critical for what we like to call the T2D3 growth path, is that because if you want to grow your revenue exponentially, you need to do three things at the same time, you need to grow your customer acquisition capabilities, so get more new customers faster, reduce funnel friction, optimize conversion rates, things like that. At the same time, you need to get your churn under control, improve customer retention, right? So that all these new customers that you're adding are not walking out the back door. You need to do those two things, but then you need to do a third thing, which is ARPU expansion. You need to improve the amount of revenue that you get per unit, per customer, per user, per device. And the empowerment matrix is an important instrument to do so, especially when your sales team and your customer success team is growing, and your marketing team who are maybe doing certain promotions. That's why this is such a critical topic.

Mike:

So you listed a couple of things earlier about the things that you can negotiate on, or give as an exception. So you have unique payment terms, you've got discounts on a few different things, you can discount on services, so like implementation services and things like that. You can discount on the actual SaaS fee. I know a lot of larger companies will bake in an escalator to account for inflation, and also things like product improvements because obviously software as a service, the product is always improving, so larger enterprise deals will bake in an escalator to account for that product. 

Stijn:

It’s like your rent goes up every year.

Mike:

Right. So you can waive some of those, you can reduce them. You can give discounts on licenses or thresholds. Anything else? I know that there's one that I've used in the past which is, in return for a discount on the first year, we required that the customer measure a certain number of metrics that they got, so like results, time to process something before implementing, and then time to process after, so that we could build a case study around it. And they agreed to give us permission to use their story as a case study, so that's one that I've used in the past. Are there any other examples that you can think of on things that could be, I guess, used as negotiation tools?

Stijn:

Well, yeah, things that come up that the customers ask for, I think you listed the most important ones, right? What do I pay for the service today, and ideally ongoing? How do I limit your ability to increase those fees over time? Or, get some kind of lock-in or price guarantee. A discount on professional services to get going or to do customizations? Which of course, as a SaaS company, we always want to limit that, right? You want to make products that are usable by all your clients, instead of doing one-offs, but sometimes that's needed, and those then could be part of your negotiation to discount those. Better to discount professional services then discount your product. And then there's all these exceptions around intellectual property payment terms, or risk and liability terms in either your EULA, your end-user license agreement, or your SaaS license agreement, your user agreement that are more about who pays for what if something bad happens, right?

Mike:

Mm-hmm (affirmative). 

Stijn:

Who pays for... whether it's outages, service level agreements, whether it's the risk of the indemnification of infringing on other parties intellectual property. There's so many terms and conditions that could come to that negotiation table, so that all falls under the terms and conditions in your typical EULA or user agreement. Intellectual property is usually only an issue when the product is sold as a platform, and your customers are building capabilities on top of that, they want to make sure that they own that. Or, at least there's joint ownership, so no party is limited in how they keep innovating their own products. So those are key things that I don't think can ever be negotiated by an individual sales rep, it has to go up to probably the chief revenue officer or even CEO. So those are kind of the three buckets… payment terms.

Yeah, those are not very different from getting discounts on the service... pay a little bit later, or pay in multiple instances. So I think there, you can give your sales team a little bit of empowerment, or your customer success managers. When it comes to risk liability exceptions. I would limit it, but you may be able to do a little bit to give your commercial team some flexibility in taking on a little more risk, or allowing for example, the legal proceedings take place in the home state of the customer instead of in your home state. Those are not that big of a deal, right? So you can list what you allow your commercial team to do. Intellectual property I don't think we should ever be delegated to anybody other than the CEO.

But then let's talk about a couple that are more fringe that I've seen Mike, but early stage SaaS companies might encounter these actually sooner than later. One is OEM agreements, or white label agreements. So if you have someone on your team doing business development, that includes relatively custom partnerships with parties who would white label your product and go to market in a certain vertical on your behalf, where they brand it, or they do the marketing, and the sales, and even the services. That of course constitutes very specific agreements that will require a lot of empowerment trade offs, like how much does your business development VP for example, how much empowerment does he or she have to negotiate exclusivity with parties like OEMs, or white label partners.

Another one is, I call it true up terms. Certain customers would benefit and would actually really like to have an ability to use your product more than they initially envision. Let's say they buy the product for 10 users, but they want to be able to add 20, 30, 40 users over time without any friction, without having to go to you and actually find money to pay for that, or have budgets. And there might be a reason for you to allow for that because you're incented to get your customer to use your product as much as possible, right? So if they want to add more users, or devices, whatever your payment foundation is for your pricing model, might be in your interest, even if they don't pay right away.

And then a term could be that at the end of the year, at the end of the billing period, you true-up, you go to your customer, say, "Hey, you're paying for 10 users right now. You've actually had 15 users on our system. And we've allowed you to do that so that you can experience the value, you can test it, but now we have a choice to make you either have to start paying for 15 in the next billing cycle, or you have to take those users off the platform." So that would be a true-up licensing model that for some SaaS companies is actually very beneficial. This is something we used at Microsoft with what's called enterprise agreements, where there was an estimated usage that the customers would pay for. And then if they would go over it, that's fine, we wouldn't block them from doing that. But then of course, at the end of the billing period, we would have to settle and say, "Hey, do you actually need all these users?" And what terms do we then start paying for those?

Yeah, there's a lot here in this topic, Mike, there's so many complexities on pricing and terms and conditions. That's why it's important to think about it, to make sure your sales, marketing, and customer success team know what they can do.

Mike:

Yeah, I'm a big fan of also leveraging agreements to do customer testimonials and things like that. Especially important early on when you don't have many testimonials, or you're trying to build on top of a beachhead, so you have a few existing customers, maybe you're increasing prices, and maybe you want to give them access to the previous pricing model. But in exchange they write you a testimonial, or they give you a case study. I think that, that, especially if you're in the MVP, or early… you're just trying to start to find product market fit, I think that those can be extremely beneficial. Especially, if you're... We always talk about niching down, but having customer stories and testimonials from people who look like your prospects is super important because people want to be able to go into your site, or wherever, and see that someone else who is in their same position, has the same concerns, pains, has gone through that process. They've eliminated the variability, the risk, so to speak. So I think those are also one that I really like to throw in when you can.

Stijn:

You bring up a very important point. If you give something away, you should try to get something in return. And in all these concessions, whether it's a price concession, or on your terms and conditions, if you can get in return at testimonial, a quote, the willingness to be a reference, a video, to be a launch customer, to pilot something new and learn from that and they provide you feedback. And those things to your point will be different depending on where you are in your maturity, right? If you're trying to get from MVP to product market fit, then getting a couple of case studies, references, is invaluable, right? You might even give away everything for free just to get that.

Mike:

Sure. Yeah, just to get good feedback, and to get somebody to say some good stuff about you.

Stijn:

Yeah. And then when you're mature, and you're in T2D3 mode, then maybe you don't want to do that because now if you give away discounts just to get a case study that might set a precedent for all your clients to want the same, right? So maybe you don't want to do it, but then you want something else in return.

Mike:

Sure.

Stijn:

Maybe it's a lock in for a commitment for the next few years, right? Or, maybe a customer in a new segment where you haven't gotten your beachhead yet, and product market fit. That's where you do some more liberal discounting, but not for the parts of the market where you're holding a strong position. So I think, what are those gives and gets, they change based on how mature you are in the market. But it's really important to think about that balance. By the way, I never ask for a testimonial, I ask for time to allow us to interview them. Because I think you don't want to make it sound like I'm asking you to say good things.

Mike:

Sure, yeah. No, that's fair.

Stijn:

But I'm asking you to invest some time to give us feedback.

Mike:

Absolutely. So at the end of the day, you need to have some type of documentation around what flexibility your sales, customer success teams actually have to make decisions around discounts and concessions for selling the product. Is there any specific point where you would install something like this? I mean, I'm assuming that most early stage companies probably don't have this until they have a foundational sales customer success team. But have you seen a pattern for where, at what point, you would put something like this in a place?

Stijn:

Yeah. I think when you as the CEO don't know exactly what's happening anymore, then it's the right time to do this. I also like to call it the empowerment model, or empowerment matrix. It's not about restricting. It's about empowering the right people in the organization to do what's needed to do their jobs, right? And some of these things you actually want them to be able to do if that reduces friction, improves speed of the funnel. So yeah, whenever you feel that you cannot count the exceptions on one hand anymore, the exceptions within the same quarter or a year, it's probably time to go think about this.

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