Many companies base their sales strategy in one-time and recurring discounts that make their offer more attractive to indecisive clients and give them a chance to play with the product at a reduced priced. For how often businesses employ a “discount strategy,” many companies do not properly document their discounts.
We’re here to tell you today that how you record discounts matters! Proper discount management and documentation is important for two major reasons:
- GAAP Accounting — Your accountants want to accurately record your revenue and discounting on your Income Statement. If you do not obviously include discounts on invoices, they will not know that one was ever given.
- Proper Reporting — Many organizations are interested in the answers to questions like “What was our ratio of discounting to revenue in Q1?” Proper discounting practices allow you to easily answer this question.
Best Practices For Discounting
1. Standardize your discounting.
The first thing to do is to come to an company-wide agreement on what types of discounting you will allow. Paid recommends keeping a finite, well-published list of discounts available for offer so that it can be properly accounted for in every part of the organization.
Sales departments tend to dislike lack of flexibility on discounting, but one-off discounts can quickly lead to a nightmare when it comes time for closing the books or reporting to C-level execs. It is a much better practice to standardize your discounting, ideally something that works for Sales while also being easily recorded and accounted for by everyone in the organization.
2. Record discounts as separate transactions.
Whenever you apply a discount, always use a separate, negative line item to show the discount. For example, if you have a monthly subscription for $1k per month and you want to give a customer 50% off for the first month, you may be tempted to just bill them $500. Your invoice would look something like this:
- $500 Monthly Fee
But the correct way would be to bill $1000 and -$500. This difference, while trivial to implement, will make everyone’s life easier down the line.
- $1000 Monthly Fee
- -$500 Monthly Fee 50% Discount
Similarly, even if you intend to fully discount a billing period (i.e. first month free), have two transactions on an invoice. One for the full amount and one for a negative full amount. It’s OK for the balance of the invoice to be 0 as it will keep your Income Statement GAAP compliant.
3. Discount each “type” of revenue accordingly.
If you are charging for different types of revenue (i.e. one-time set up fee and ongoing platform fees), you should separate them out on your invoices. Likewise, you should separate out your discounts. Let’s say you have a $1500 setup fee that you want to waive along with a 50% discount on your $1000 monthly platform fee. That would result in four line items:
- $1500 Setup Fee
- -$1500 Setup Fee Discount
- $1000 Platform Fee
- -$500 Platform Fee 50% Discount
This level of detail will translate into clean books and clean reporting!
4. Leverage metadata for better reporting and analysis.
Finally, where available leverage metadata. Paid offers a metadata table for every transaction and invoice. You can later export this metadata through the API or our reporting tool. With this metadata, you can accurately segment analytics and reporting. It becomes trivial to show analysis like discounts against revenue over time.
When used correctly, discounts can be a powerful incentive to attract new users, playing into a very successful growth strategy. Just be sure to properly document them so they don’t become a nightmare down the line!