• by Jack Loechner , Staff Writer, June 26, 2018

Building advanced analytics such as dynamic deal scoring into the core commercial process helps software sales organizations price smarter, streamline the approval process, and win more deals.

 According to a new report from McKinsey, written by By Walter Baker, Michael Kiermaier, Paul Roche, and Veronika Vyushina, discount management is returning to the center stage of commercial management in enterprise software. Vendors migrating to subscription models, or to software as a service (SaaS,) find that discounts in initial deals are the main determinant of future customer lifetime value.

 Traditional software players face increasing discount pressure as they compete with disruptive next-generation players, says the report. Loose discounting practices are hard to rein in: 

• Sales representatives are often motivated purely on bookings 
• The low marginal cost of software drives an “every dollar is a good dollar” mentality 
• The common and myopic quarterly management approach of closing deals at any price, at the end of the quarter, all drive average software discounts to levels not seen in the past

 Sales reps often argue that higher discounts are necessary to win deals, but McKinsey research across companies consistently shows the opposite to be true: successful deals almost always have lower average discounts than deals that were lost.

 Management usually responds in one of two ways to counter excessive discounting: 

• The first is by tightening the approval process. However, this slows the system down without significantly changing behavior; typically, more than 90% of deals that get escalated for more scrutiny get approved anyway, and the discounting continues, says the report. 
• The second is by increasing list prices. But this tends to perpetuate the spiral of higher and higher discounts, leading to the 60 to 80% average discounts that we often see for perpetual licenses for on-premises software 

 The root of the problem is a lack of insight into objective comparison points. Although sales reps have a good feel for the market, they don’t have much information about how their colleagues price similar deals. And to managers, every deal can look unique, forcing them to make approvals based more on gut, or accept the sales reps’ argument that the proposed discount is what it takes to win the deal, instead of an actual objective fact base. 

 Concluding, the report says that, in software, as in other B2B industries, the pricing challenge is not so much how to deal with big data, it’s how to get valuable insights out of limited data sets.

For additional insights and information, please visit McKinsey here.