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Estd 4.22.2023
Below is a concise explanation based on the principles outlined in our pricing strategy book, Price to Scale:
• The key is to design a structure that rewards customers for committing to a longer term without eroding the value of your monthly pricing. One recommended approach is to offer a modest discount when customers opt for an annual commitment. In our book, we suggest that discounts should come with “strings” – meaning that rather than a unilateral cut in price, the discount is tied to a commitment (for instance, a guaranteed term or acceptance of add-on conditions).
• Instead of simply lowering the price per month on an annual plan, consider packaging additional benefits (such as an upgrade option or premium support) alongside the discount. This holistic approach not only encourages the switch to annual payment but also reinforces the overall value proposition.
• Importantly, the discount should be carefully calibrated. For example, our guidance indicates that while discounting for smaller deals might be around 20%, the incentive for an annual commitment should be enough to drive long-term revenue predictability without sacrificing the perceived value of your product. In some instances, a discount in the range of 10–20% on the monthly rate (when calculated on an annual basis) is common practice, but it’s crucial to customize this percentage based on the segment’s price sensitivity and usage pattern.
• Also note that by clearly segmenting your customer base and understanding their usage—much like we detail in Chapter 7 of Price to Scale—you can tailor these annual discounts so that they are attractive to the customers who value long-term benefits without granting unnecessary concessions to those less likely to commit.
In summary, the optimal discount structure for encouraging annual commitments involves offering a modest, strategically paired discount (or alternative value-add) that rewards longer-term commitment while keeping your pricing structure both competitive and sustainable.