Building on my earlier article on your alternatives to cutting price, this week we’re taking on the related but distinct topic of price discounts. The difference between cutting price and offering a discount is a discount is seen by both parties as a rare event, usually merited by special circumstances.
Like cutting price, discounts can be dangerous but are not without place in a mutually respectful relationship. My overarching rule is you should never discount, but when you do, do it right.
Here are five guidelines for discounting properly.
1. Don’t Discount to Win Business
This is a big one. Negotiating the final price is a legitimate sales activity in which you may have to give up some margin to get the deal. Just don’t delude yourself or others on your team into thinking you are offering a one-time discounted price when what you are really doing is cutting price to win the business knowing full well that you are establishing the profit margin for this client moving forward.
A price buyer – someone motivated solely by price and who demonstrates no loyalty or appreciation for your many value-added services – will not suddenly become a value buyer after the first project. Margin, like power in the engagement, only ever goes down over time, so if you’re cutting price to win business you need to be comfortable with that lower price and margin moving forward. That is the benchmark from which you will only slide, not climb.
2. Discounts are for Loyal Clients
If discounts aren’t appropriate for winning new clients then when do you use them, if at all? The answer is discounts are reserved for good, loyal clients when they need a break, like a pet project that is underfunded. You know who your good clients are – among loyalty and other characteristics, they understand and support your need for healthy profit. They treat you well, they pay you well. Discounts are opportunities for you to give back a deserved reward to these people.
It’s best to think of discounts as favours. We grant favours to our friends and family and others deserving of favours when they need them. They might ask or we might offer first. Someone who is always asking is probably neither a true friend nor a good client.
To ensure discounts don’t become a habit, apply Robert Cialdini’s rule of reciprocity when extending them. Rather than replying to the client’s expression of gratitude with the dismissive, “It’s nothing,” try the words, “I’m happy to help. I know you would do the same for me.”
Such a statement reminds the client of the symbiotic nature of the relationship and plants the seed to allow her to return the favour one day and thus feel like she is holding up her end of the relationship. It’s important you tie your gift to the invitation to reciprocate at the moment the client thanks you, otherwise the gesture might go “unaccounted for” in the balance of trade. There’s no requirement to ask the client to repay the debt in the future. You’re simply preventing what is a positive relationship from deteriorating to one where one party increasingly asks (or commands) and the other acquiesces, with increasing resentment. These principles of reciprocity are soundly backed by research from Cialdini and others.
3. Document All Discounts
Perhaps the largest mistake with discounts is the failure to document them properly. If you don’t document your discounts then the discounted price becomes the new standard moving forward. Be sure to show any discounts on your estimates and your invoices. Show the real amount first, followed by the discount, labelled “courtesy discount,” and then the final discounted price.
If your accounting department can’t figure out how to show a discount on an estimate or invoice then you need a new accounting department. It’s that important. That piece of paper is your powerful last defence in the almost certain future battle where the client “forgets” that the most recent price was a discounted price. It’s saved my bacon many times.
4. Ask the Client to Name the Discount
We all know we should’t negotiate against ourselves. What this means in practical terms is if the client hasn’t mentioned a specific price she’s looking for you to come in at, don’t guess but ask. You might say, “Okay, I understand your circumstance and I might be able to do a one-time discount on this to help you out. What amount would be helpful?”
Sometimes the client will ask for significantly more than you are able or willing to give – and you can still counter with something lower, but just as often the discount isn’t as deep as you guessed she might be looking for. Ask.
5. What About Free?
A final thought on discounts for your very best clients – those that are good partners, allow you to do your best work, they’re respectful and appreciative of you, and they’re profitable. Consider going beyond the requested discount and doing the whole project for free. It might be their Christmas card, their United Way campaign, a charity that is dear to your client or any other project or cause that you find worthy or personally important to the client. Giving back beyond what was asked builds meaningful bonds on both sides and pride for everyone on your team. Gestures like this can build loyalty that will carry you through some rocky times. Keep an eye out for opportunities to surprise and delight your very best clients this way once this year.