SaaS: Should You Offer a Discount at Cancellation?

I have done a wide range of SaaS financial models. One interesting aspect that such companies may be looking into or looking to optimize is retention rate. Retention rate just means the users that stay with your services over a period of time. The higher the retention rate, the better (meaning lower churn rate). One way to increase retention is by offering pricing discounts at the point of cancellation. Also, check out this SaaS Rolling Revenue Forecast.

Watch Me Struggle Figuring All this Out for Over 1.5 Hours...

If you have ever called your cable provider and said you are going to cancel, it is likely they will offer you a discount on the monthly price. Many startup SaaS companies may not be utilizing such a tactic or may not even know where to start when thinking about offering a discount to users that are looking to discontinue their service.

So, I tried to build a calculator in excel to help analyze the effect of offering various discounts. I am open to suggestions on improving this template and as of right now it is a free template that you can play with. This was actually really difficult as you can see me working through the process in the video.

Template: (just hit File > Make a Copy in order to use it for yourself)

At first, I thought the best way to figure out how much of a discount to give should be based on a comparison between the Customer Acquisition Cost (CaC) and the present value of lost money from offering a price discount. This was wrong, but I didn't really see it until I actually tried to build the calculation and analyze it. This is why financial modeling is so useful, as you can really think through the logic of things.

So, initially my thesis was that you can offer a discount percentage as long as the present value of the money lost by offering a discount was less than the cost to acquire a new customer. This didn't make sense because no matter what, if you retain an existing customer that wanted to cancel by offering them a lower monthly price, that is going to be a positive as long as the gross profit earned is still above 0 on average for a user. That really doesn't have anything to do with acquiring a new customer.

What I ended up showing was two scenarios 1) A customer that received a discount at the point of cancellation and then stayed longer and 2) A customer that didn't receive a discount and had a shorter life span. I then started comparing the resulting SaaS metrics of each scenario so the user of this template can see the effects of a price discount as it relates to customer lifetime value and average retention rate.

The biggest input here is the amount of months a user will stay after the discount is offered. That number will take some research, but you can input various values for that and see the effects.

The next biggest input would be the discount percentage. That will then take effect after the last month of the average user and the cash flow from an average user will then continue for the amount of months defined at a lower value (per the discount).

The main output variable to look at would be the ratio of customer lifetime value relative to customer acquisition cost. I also added the IRR (internal rate of return) for each type of customer (discount vs. no discount) as that will take into account the timing of the cash flows from an average customer.

There is a separate tab showing the margin analysis. It will take the resulting variable costs based on a defined gross margin and apply that to the discounted price. As long as the resulting margin is greater than 0, then it makes sense to retain the customer and give them a discount. On this part, it is important to try and include all variable costs (this may not just be cost of goods sold) but it depends on how your costs are structured. Basically, you want to try and boil down the variable cost per user when looking at all the costs it takes to service a given account, whatever that may be.

I am open to suggestions on this, so let me know. e-mail: