How do you calculate the impact of offering discounts on metrics like customer LTV and brand perception? I’m worried that frequent discounts could train customers to wait for a sale instead of paying full price.

Below is a concise answer based on the insights in our SaaS pricing book, Price to Scale:

Direct Calculation of Impact

To assess the impact on customer Lifetime Value (LTV), you’ll need to compare the revenue and retention differences between customers who purchase at full price versus those who use discounts. This involves tracking:
- Average revenue per user (ARPU)
- Churn rates (or, as we refer to in the book, a churn propensity score)
- Contract length and renewal rates
By segmenting customers (as discussed on page 245) and then measuring their LTV before and after discount interventions, you can determine if the discount offers are eroding or, in some cases, enhancing overall customer value.

Linking Discounts to Brand Perception

Frequent discounts risk training customers to wait for sales rather than buying at full price, which can lower perceived value and damage your brand image.
Our book recommends balancing offering price reductions with adding value. For example:
- Instead of a straight discount, consider offering an upgrade or bonus add-on with longer contract commitments (pages 245 and 287). This maintains the brand’s premium positioning while still addressing price sensitivity.
- Use a clearly defined discounting matrix (see Figure 31 in Price to Scale) so that any discount is part of a structured strategy rather than an ad hoc tactic.

Continuous Monitoring and Analysis

Develop a routine performance analysis—tracking metrics like average selling price (ASP), churn propensity, and LTV—on a quarterly basis (page 117). This helps you identify when discounts begin to undercut your full-price sales and brand strength.
Adjust your strategy based on clear thresholds where the benefits of a discount (like increased retention) start to be outweighed by lower margins or customer price sensitivity.

Practical Steps

Segment your base and apply differentiated discount strategies instead of blanket discounts to maintain perceived product value.
Communicate clearly about the reasons behind any discount (as a gesture of loyalty or in exchange for a longer-term commitment) so that customers understand the value proposition and don’t start expecting discounts as the norm.
Use performance metrics to refine your discount thresholds over time, ensuring that any reduction in price is strategically offset by enhanced retention or increased contract value.

In summary, calculating the impact of discounts involves a careful measurement of LTV differences, churn changes, and shifts in ASP while keeping an eye on brand perception. By segmenting your customer base, structuring discount strategies carefully, and continuously monitoring performance, you minimize the risk of devaluing your offering and training customers to wait for sales.