Increase Your Revenue with Renewal Discounts

Introduction

In this post, we’ll explain the reasoning behind using discounts to boost renewals, detail the underlying model, and walk through a simple JavaScript solution that processes a CSV file to determine optimal discount levels.

The Renewal Challenge

Businesses often struggle with renewals. Even when customers are satisfied, friction in the renewal process or a perceived high price can lead to churn. A well-calibrated discount strategy can:

• Encourage Renewals: A small, strategically applied discount can push customers over the “renewal decision” threshold.
• Boost Volume: Even if each individual renewal comes at a slightly lower price, increasing the number of renewals can drive higher overall revenue

The Logic Behind Pricing Discounts

The idea is simple: for each user, determine the maximum discount you can offer without hurting your baseline revenue expectations. Consider these inputs:

• User ID: A unique identifier for the customer.
• Base Renewal Probability (%): The likelihood the user will renew at full price.
• Standard Price: The list price of the product.

The Pricing Model

Expected Revenue Without Discount
If a customer has a base renewal probability of p%, then the expected revenue from that customer will be:
                                             Expected Revenue = (p/100) x Standard Price

Revenue With a Discount
Offering a discount d% reduces the price to:
                                            New Price = Standard Price x (1−d/100)

We assume that if the discount is sufficient to convert a customer (i.e., the customer renews), you at least want the discounted price to be in line with or better than the expected revenue.

Maximum Allowable Discount
To ensure that offering a discount is beneficial, the discount should be capped by the gap between a perfect renewal probability (100%) and the current probability p. In other words:
                                                                       d ≤ 100−p
 
If a user has a 90% chance to renew, you can offer at most a 10% discount. On the other hand, if a user has only a 40% chance, you can offer up to 60%, but in practice, you might choose a proposed discount (say, 30%) if that’s known to convert more renewals.

Applying the Model: A Practical Example

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As shown above, a customer with an 80% renewal probability can only be discounted by 20%, while a customer with a 40% chance can receive the full 30% discount, lowering the price accordingly.

If you want to test this out with your own file, use the file upload below—it will generate a new file with the calculations.

How It Works

• File Input and Button:
  ‍You can select a CSV file (with columns user_id, base_renewal_probability, and standard_price) and click the "Process CSV" button
• FileReader and Papaparse:
  ‍The file is read as text, then parsed by Papaparse into a JavaScript array of objects.
• Discount Calculation:
  ‍For each row, the script calculates the maximum discount, applies the proposed discount if possible, and computes the new price.
• Output CSV:
  ‍The updated data is converted back into CSV format and a download link is created for you.

Benefits of Using Pricing Discounts for Renewals

Using targeted discounts based on a customer’s renewal probability offers several benefits:

• Optimized Revenue - Instead of offering a flat discount to all, you provide the right discount to each customer. This means high-probability renewers get a minimal discount, protecting your margins, while low-probability renewers get a more substantial discount to incentivize renewal.
• Data-Driven Decisions - base your pricing strategy on data rather than guesswork.
• Customer Segmentation - You can segment customers by price sensitivity.

‍Note: You will need to build a renewal probability model beforehand to score your users and then apply the appropriate discounts.

Final Thoughts

A strategic pricing discount model can be a powerful tool to increase renewal rates without sacrificing overall revenue. By using data and a simple model, you can tailor discounts to individual customer segments, encouraging renewals and boosting long-term growth.