We often encounter discounts in sales. Each discount reduces your margin, that is, deprives you of funds that you could use to expand your business, increase the company’s financial cushionpad or pay yourself a dividend. Improper dispensing of discounts may harm your business in the long-term, even if it helped gain a few additional customers and, subsequently, higher market shares. Therefore, you should make sure that you use them properly.
Calculate exactly how much discounts cost you.
Let’s look at an example:
- Version 1
In 2018 you gained 10 clients, the value of each contract was 100 PLN. The costs you pay for each cooperation amount to 80 PLN.
(100-80) * 10 = 200 PLN
Your profit for these projects was 200 PLN.
- Version 2
The current data does not change, but let’s assume that during the acquisition of each project there was an offer of -10% discount, so the revenue from a single project amounted to 90 PLN.
(100-10-80) * 10 = 100 PLN
Your profit was 100 PLN, so a 10% discount resulted in a 50% lower profit than in the first variant.
Of course, the example is very simplified, the structure of fixed and variable costs may change, as well as the scale of the discount. It is also possible that some potential customers would break the negotiations without it. However, when you offer a discount, you should calculate how much of your margin (and your profit) it absorbs. There is a great chance that it’s larger than you think.
Do not give enormous discounts
“I would like to start a cooperation, but I need a 50% discount” is a demand. Clear rules on the basis of which you give discounts are a policy that you should establish in your company. The lower price should not result from firm client demands, but rather be the result of working out mutually beneficial conditions. It is worth giving a discount “for something”, i.e. for payment in advance or a long-term contract, and, in some cases, also for making a decision about starting a cooperation. If you decide to give a discount, remember that your special offer should have its expiration date. It will protect you from the situation in which the potential client, whom you offered a discount, after a few months of silence, will resume the negotiations from a lowered price. Remember also that the leads for which price is the most important factor often become the most demanding customers.
How much should a good discount be?
The discount level you offer should result from three factors:
- your margin – if your margin is low, the discount field automatically becomes narrower. Only in rare cases can the realization of an unprofitable project be justified (e.g. very prestigious logo, first customer in a very difficult to penetrate category, first customer of a new service, product or technology or big potential for further projects realized for companies from the client’s group in a full price).
- a climate on financial markets – When interest rates are low, the cost of a discount for payment in advance will be correspondingly lower than in the climate of high interest rates. Similarly, in a situation of high optimism about the situation on the markets, many companies treat their suppliers much more generously than in difficult times, so we do not have to discount so much.
- the degree of a particular discount tactic being tested – the more data you have about the fact that the use of a particular tactic translates to a higher conversion, the more often you can use it. A systematic discount resulting from feelings or beliefs that “discounts work” is not enough concrete evidence. Perhaps their absence would translate to a similar number of clients, but the project margins would be higher.
Is it better to give a discount at the beginning or the end of a relation?
It is more important for what the discount can be given, that is specific criteria justifying the possibility of using it. The ideal scenario is one in which the potential customer understands the value of the service, its impact on their company, and knows the rules shaping the price. A significant risk of giving discounts at the beginning is shaping the impression that it went easily with the first one, so maybe you should ask for another. On the other hand, in some cases a transparent discount policy communicated in the initial stages of the sales process can also be a very good idea (if you stick to it).
What to do when the customer asks for an additional discount just before signing the contract? Long negotiations are coming to an end, conditions have been established, the willingness to cooperate has been verbally confirmed, but just before signing the contract, a potential customer is asking for a discount, for example: “I found out that the budget for this month is not 8,000 PLN, but 7. I should have 8,000 at my disposal next month, but part of the formalities will have to start from the beginning.” The key in this situation is the ability to communicate your position diplomatically – the more so that the conversation concerns money and, indirectly, also emotions and prestige. Especially if the situation happens just before the end of the month/quarter. In concluding a contract under the pre-established conditions, it may help to clarify that cooperation must be undertaken on terms that you have recently confirmed together.
What to do when the client offers additional benefits in the future for us making concessions today?
In negotiations, we should strive for a situation in which both sides are satisfied with the agreement. At the same time, you need to distinguish between factors that give you some benefits now from those that have a chance to appear in the future. For example, when a potential customer expects a discount for recommending you (if they are satisfied with the cooperation and someone from their friends is interested) to his friends, the safest option is the one in which you are recommended to specific companies, and the “bonus for recommendation” is paid once a particular company signs a contract with you. But do not condition the today’s discount from a double conditioned benefit in the future.
How to test discounts when the sales cycle is long?
In a situation where the sales cycle is long and you sign several contracts during the year, generating a large amount of data will take a lot of time. Therefore, you need to look faster for signals indicating whether the tactic works or not, eg. extreme reactions (the first few customers, who are offered a lower discount than in the previous weeks, react negatively) or no reaction (customers receive a lower discount than in previous weeks and it does not cause any friction).
Discount is not the only way to meet customer expectations
When a potential customer expects the same value at a lower price, you can make them an offer that will be the same, but the value will be higher. Depending on the industry, this may be an additional copy of the product, a free hour of consultation or free implementation of the service.
“I know someone who will do it X% cheaper”
First of all, you can feel ok if you lose a potential customer because you do not agree to the discount they offer – nobody has a 100% conversion, and unprofitable projects hinder the company’s development. To create such a feeling in you, it will be helpful to determine the fixed amount below which you are terminating negotiations. As a rule, a lower price results from something. You, as a specialist in your industry, are probably able to predict why the price is lower. It is worth helping the client reach similar conclusions since they may not have such a large knowledge of a given industry. For example, it is worth writing down all the risks that your offer addresses (a potential customer may not know about the existence of some of them) and advise the client to check if the cheaper proposal includes them. An offer cheaper by X% may in effect be much more expensive, if, for example because of a lower quality of implementation, your online store will not work on Black Friday.
Beware of purchasing departments
One of the main tasks of purchase departments is negotiating the lowest prices possible. That is, to get their work done, its employees should get a discount. If you are talking to a company that has such a division, you should consider this when preparing an offer, and ensure that a necessary discount in such situation does not make the cooperation unprofitable.
Have your BATNA
BATNA, or “Best alternative to a negotiated agreement“, is an alternative scenario in which cooperation doesn’t come to life. It is worth making the client aware of the cost of not cooperating, ie. what impact the website will have on their revenue if they don’t improve it, and how many potential customers may be discouraged by its current state. Remember that your client can also prepare for negotiations and, for example, use the argument of a cheaper supplier. That is why it is so important to examine their needs – the more you know about their situation, the more accurate solution you can propose. Remember both the things you cannot agree to and the factors that affect how the potential customer approaches conversations – what are their duties and goals in the company, the length of their work, previous successes and failures. ZOPA (Zone of the possible agreement) will help you properly understand the context of specific negotiations.
Create clear discount policy
Clear, calculated, and based on specific rules, discount policy should optimize costs that are associated with them. Remember the long-term costs of discounts, not only those connected to finances. Are you able to indicate among your clients those who you would rather give away to the competition? Compare also the Louis Vuitton and Walmart brands. Which one is associated with prestige and quality? The lower price should not be the main element of negotiations, because in the long term the quality of the service will be more important for the client (even if they are not aware of it). If you agree to a lower price, you must be aware of the impact it will have on the profitability of your company.