SOP 75 — Apply a continuity discount and the three-plus-twelve rule

1. One case

One owner had sold a waste-management company. Starting out, he had maxed out his credit cards for a year and asked his whole family for money, and none of them gave him any. He went to large apartment buildings and offered a year of service free if they switched to him and signed a five-year agreement: in effect a six-year agreement, one year free and five paid. It meant delivering for a year before being paid — a very hard cash cycle — but he took a large share of the market and later sold the company to a national group. In effect he gave 20 percent away.

2. What it is

A continuity discount gives products or services free if the customer commits to buying more over time. It attracts a lot of potential customers and is an easy sale that anyone can close. It shows up in many industries: internet service, pool cleaning, gym memberships, landscaping, anything rented, storage and leases: the first two months free if you sign for a year.

It works in any business as long as you know two things before you offer it: how you will apply the discount, and what your cancellation policy is, because not everybody keeps a commitment. The first is this page. The second is SOP 76 — Design cancellation terms and the waived-fee offer.

3. Where the free time goes

At the front. Give the free time first and push the term out, so the paid term starts when the free time ends: one year free and five paid, or three months free and twelve paid. This works best in industries with a history of enforcing contracts: phone carriers can cut the service off, storage has your things, landlords can evict, and car lenders can take the car back. Anything with collateral tends to work well this way. If your churn has historically been high, skip it; you have little enforcement and this is probably not the way for you. It does not get customers profitably — the owner in section 1 lost money for a year and made it afterward — but it gets customers and delays the cash. If you want to protect cash up front, give the time as a discount instead: the year free could be spread over five years, the way a rollover credit is spread, but used to attract a new customer.

At the end. Give the whole discount at the end, extending the term, provided every payment arrives on time. Three free months when you sign up for a year still draws people in; you explain that they get the months once all twelve are paid on time. They earn the free time, and it rewards paying on schedule.

Spread across the term. Divide the discount over the payments. Three months free on a year at $200 a month is $600 of discount; spread over the twelve months, that is a quarter off every payment. You still advertise the $600 of credit, or the three months free — they are the same offer stated differently — and when the customer comes in you spread it. When the term ends the price goes back to full.

Flag: $650 a month. The spread payment is given as "$650 per month." $600 spread over 12 months is $50 off each payment, so the inputs give $150 a month. This page does not settle which reading is right.

In between. Take one or two payments up front, then give the free time, then start the contract. The way preferred is to present it as paying the first and last month: two months of cash before the free period, to offset the cost of getting the customer and pay commissions, and the customer has something at stake. Variations: the last month only, or an onboarding or setup fee with the free months starting at once; you could also do the last month plus a fee, or first and last plus a fee. It is up to you. All of them let you advertise large blocks of free time and still recover what the customer cost, and they prove the payment method works, which matters more than it sounds. This middle placement is probably the best of both worlds.

Those are the four ways to place the free time: at the front, at the end, spread across the term, and in between.

4. The three-plus-twelve rule

When the offer is three months free for signing a year, make it three free and twelve paid — a 15-month agreement. Do not make it three free and nine paid. The free months are there to get past how hard a one-year sale is; if they come out of the year, you have given the discount and lost the full year of payments. Twelve paid months against nine is 33 percent more money. Extend the term with the discount; never let the discount eat into it.

5. Four ways to state the same discount

A $1,000-a-month service with three free months can be advertised as:

What is free: three free months.
The absolute amount off: $3,000 off.
The percentage off: 25 percent off.
A comparison: the example given is a discount on your mortgage.

6. Where it is used

Business	Free time	Commitment
Real estate	Two months of the lease	A 12-month lease
Storage	A free month	12 months
Gym	Two months	12 months
Cleaners	Three free cleanings	A six-month contract
Massage	Two months, at two sessions a month, spread over the term so they still pay up front	Not established on this page

Spreading the free time over the duration works like the rollover upsell, except the credit is cash off each payment.

7. The gift-card version

Give the free time as a physical gift card, mailed to them if they are out of the area. The card can be redeemed whenever the customer likes after their first three payments, or given to a friend if they want. Whatever happens next is good for the business:

They redeem it later. You already have several payments, the card on file works, and they are a real customer.
They give it to a friend. The friend is a customer you did not pay to get, and you might give them the free time in whichever form suits you.
They never use it. Many people simply forget, and you have a full-price sign-up.

A card used this way is in effect a rebate.

8. A lifetime discount at the churn point

Advertise a lifetime discount that customers earn by staying past the month when the average customer leaves. A large online retailer's subscription for rice packets gave 5 percent off for subscribing and 15 percent off for staying past five months at the same address; the inference drawn, with confidence, is that it knew people stopped paying at about the four-month point, and hung the reward just after.

If customers stay four months on average, tell everyone up front that the rate drops for life after month four. Two things follow: a lot of the time people will pay a higher rate at the start because they know it goes down, and they stay longer because they know when. As the month approaches, remind them — two months to go, one month to go — so the coming discount keeps them paying.

Flag: a rate that drops for life. The rules for raising prices rule out lifetime deals and say not to lock in a price where that can be avoided; that is SOP 83, section 2. Read that way, a rate that drops for life caps what you can later charge everyone who earns it; read this section's way, the drop is what keeps them past the churn point. This page does not settle which reading is right.

9. Choosing a placement

Front-loaded free time converts more customers, but they churn more.
Back-loaded free time converts fewer, but they churn less.
Spreading the discount keeps the cash coming in while still giving the full discount, which is one reason it is favored.

The aim throughout is to make more money, not to give more away.

10. What this page does not decide for you

How much time to give. One year on five, three months on twelve and two months on twelve are all used; none is ranked.
Which placement suits your business. It turns on whether you can enforce the contract and how much cash you need up front.
The churn month. This page gives no figure for your average stay; measure it.

11. The checklist

Question	The answer
Know before you offer it	How the discount applies; the cancellation policy
Placements	Front, end, spread, in between
Front works when	You can enforce the contract; skip it with high churn
End rewards	Paying on time
In between collects	First and last month, or a fee, before the free time
The rule	Three free, then twelve paid; never three and nine
How to state it	Free months, amount off, percentage off, comparison
Gift card	Redeemable after three payments; can go to a friend
Lifetime discount	Starts just after the average churn month; remind them as it nears

12. What this page does not cover

The cancellation policy that must be settled first, and the waived-fee offer, are SOP 76 — Design cancellation terms and the waived-fee offer. A bonus given for joining, rather than free time, and the ratios that set how many take continuity, are SOP 74 — Price continuity against upfront cash. Free units given for buying units is SOP 63 — Design a buy-X-get-Y-free offer, and crediting what a customer already paid is SOP 69 — Run the rollover upsell. Billing every four weeks and collecting a second form of payment are SOP 78 — Switch to twenty-eight-day billing and collect a second card.

Contract enforceability and consumer-credit rules are not covered on this page.