Price discounting is a fact of life in business, how do you handle it?
Price discounting is a fact of life in business. No one likes to do it, but sometimes it’s the only way to move product.
When you have to offer discounts, make sure there’s something in it for you too! Here are fantastic tips to make sure price discounting doesn’t kill your profits.
“If you’re going to make your numbers in today’s market, you’ve got to be prepared to do much deeper discounting than you ever did during the good times. I’ve never seen such carnage – sometimes you need to take off as much as 80%-90% of the list price, and you still may not win the deal.”
This is a fair paraphrase of recent statements I have heard from three different VPs of sales, all of whom are familiar these days with the need, as they see it, to agree to significant discounts to have a chance of winning business.
If this is true, I can only imagine how enterprise software and systems companies, anxious to reverse the current trend-line of flat or shrinking revenues, must want to find a way to avoid – or minimize – the frequency and impact of discounting in today’s stingy marketplace for IT investments.
To achieve this, I shall look at some of the real reasons that customers force the price issue (besides the obvious ones), as well as some of the options vendors, should explore before concluding that they need to concede a discount to increase their chances of closing deals.
Finally, I think it makes sense to consider if there are situations where price discounts are warranted – much as, frankly, I detest the very thought for a number of reasons which will become apparent as you see my arguments unfold below.
What is discount pricing strategy?
A discount pricing strategy is a way of pricing a product or service at a lower price than usual in order to incentivize customers to buy it. This can be done as a way to increase sales or to build customer loyalty. Promotional pricing may be used in channels as well as direct-to-customer omnichannel environments.
There are a few risks associated with discount pricing, such as customers becoming accustomed to receiving discounts and competitors matching or beating the discounted price.
However, businesses can avoid these risks by being careful about how often they offer discounts and making sure that the discounts are reasonable.
To begin with, I want to offer two potentially provocative suggestions that are nonetheless valid in all situations, including the current tight-budget downturn, which many seasoned sales executives say is the worst they have seen in 2001 or 2008. The labor shortage and supply chain issues are causing pain in organizations but at the consumer level as well.
My assertions are based on a career in systems, software sales, and marketing, including being schooled in IBM. (IBM still stands head and shoulders above every other technology company)
- No enterprise software or systems sales manager in their right mind should need to concede any more than a token price discount for any business proposal unless the proposal has not been thoroughly thought through. This is particularly true concerning emerging products and only slightly less so concerning mature products. The only permissible exceptions are those where reducing the price buys you some real goodwill, either because it helps your customer speed up the decision process by remaining within a strict sign-off limit or by other means. Thinking that discounts accelerate deal closure is, in most cases, an illusion not borne out by reality; worse still, it usually weakens a vendor’s position (see point two below).
- Every time a systems or software vendor responds to a real or perceived objection from a prospect about the price of their proposed products and services by immediately making a financial concession, they are almost certainly (a) failing to understand what the customer is really saying and thus ‘answering the wrong question,’ so to speak, besides (b) losing precious ‘power’ in the relationship, because (c) they are sending a signal to their customer that they lack confidence in the value of what they are proposing to deliver, or (d) there is not, in the customer’s mind, a compelling reason to acquire the proposed solution. This last item is perhaps the most crucial of all: whenever pricing is in dispute, the most likely (first) cause to look for will be the lack of clarity of a ‘compelling reason to buy.’
Adopting a holistic approach
Adopting a holistic approach to these things is the root cause you must flush out and address before renewing the closing pitch. If, on the other hand, you take it at face value as a straight pricing objection, you are more likely to spin your wheels as you try to overcome it.
Moreover, rather than accelerating the close, the noise level generated by such reactive behavior (often abetted by management in its desperation to close quarterly quotas and/or meet earnings expectations) is likely to either delay or defer the closing of the deal indefinitely.
This is because, despite all efforts to respond to the customer’s concerns, price discounting – perhaps paradoxically – tends to give customers more cause for worry than for celebration.
What if you knew where all the bottlenecks were in the pipeline and had them all fixed?
Allow me to provide some context for these views.
First, let’s recognize that when a customer questions a vendor’s price, beneath it all, they are probably questioning the value of what is being proposed.
In some cases, they are looking for additional information to support their case; in other cases, they are genuinely unsure about the value they will realize from the investment, or they feel that some important aspects may not be being addressed sufficiently to ensure success.
Price-focused objections discussions arising out of misaligned perceptions of value should only be ‘answered’ with questions and arguments based on the value being delivered, not with an immediate price lowering.
Thus, if the promised value turns out not to be demonstrably there, the customer should receive a discount – or, better still, a revised proposal that reflects new expectations and conditions.
Even if the customer agrees that the proposed solution will address the identified problem and, in doing so, will generate eventual cost savings or additional revenues, they may still present some resistance to buying based on the unavailability of financial resources.
In this case, discussing this resource scarcity issue in detail is essential. If they are reluctant to do so, it may be a sign that they are at too low a level in the organization to make a decision.
They are still worried about something else, or even that they are not acting in good faith. Having said this, straightforward customers will generally be happy to share the details of their predicament.
Complex solutions are ‘funded’ out of recovered costs or discovered revenues.
Vendors should not be surprised when budgets are alleged to be ‘tight’ for product categories that have not yet firmly established themselves as ‘investable” – such as product lifecycle management, workgroup collaboration, or knowledge management are in this boat.
This is because there may not be a budget for these categories, except for the one named “misc.”, since corporate budgets only come into being around well-known and established categories – SaaS ERP or CRM systems, for example – two or three years after the categories have first appeared on the market as tangible applications or tools.
Where there are no established budgets and if the prospect has determined that they need the solution, funds must be found from elsewhere in the organization.
Possible sources may include other existing budgets, but the best source is often the anticipated cost recoveries or revenue discoveries to be realized as a result of the implementation of the proposed solution. In contrast, the budgets for acquiring established products are often set yearly unless they are not deemed necessary. Unfortunately, in tough times, these are the budgets that can dry up fastest.
Suppose this happens, as with the newer categories. In that case, Product A may need to be funded out of Budget B – unless it is considered part of a complete solution to a high-priority problem, in which case the company should be willing and able to find the funds from somewhere else.
If all of this foraging – conducted transparently between customer and vendor – still leaves the customer short of the required funding, before the vendor considers granting any financial concessions, there are several options to look at, starting with alternative pricing options (such as risk-reward sharing).
Beyond this option are these: hosting the application in return for monthly/annual subscription fees, leasing, bank or finance company financing, or even the practice of ‘vendor-financed sales,’ which is more feasible for asset-backed systems companies to offer than asset-thin software companies.
This practice has had various outings in other industries (notably in automotive, heavy equipment, and computers) during recent times, more recently (and spectacularly) in the telecom market, with companies such as Microsoft and Cisco financing purchases by carriers and enterprise customers.
The problem with this tactic is that it can rapidly get out of control and, at the first sign of a downturn, just as rapidly bite the holders of the financing paper (in this case, the tech vendors) in the posterior.
The last resort of all is discounting itself, pure and simple. This is because, as we all know, giving a product or service away for free in business is generally a bad thing because your customer will not attribute value to it, and, worse, it creates a precedent in that customer’s mind for repeating the practice in all future deals.
Especially in such situations, vendors must extract a legitimate quid pro quo. Here is a short list of ‘mutual’ quid pro quos (‘QPQs) that can deliver compensatory value to the vendor in return for their readiness to be malleable in their financial dealings with the customer:
- Certainty of winning the business: I am constantly amazed at the willingness of sales teams to offer discounts unconditionally. My reasoning here is that if you are going to reluctantly offer a discount that by definition affects your company’s profitability, it can only be in exchange for a commitment from your customer that the deal is yours as a result of the concession. Any discount offered without this QPQ just makes no sense.
- Accelerated payment schedule of the license, service, maintenance, and/or other fees due as part of the contract (the effect of this QPQ is to enhance the vendor’s cash flow and even profits);
- Additional resources contributed by the customer to accelerate or facilitate the implementation (the effect of this QPQ might be to reduce the vendor’s cost of implementation services, as well as accelerate the payment schedule and referenceability of the customer’s implementation);
- Agreement to go above the call of duty as a spokesperson and reference site for prospects and other customers. This might mean agreeing to place customer executives at the disposition of the vendor to make speeches at industry and user conferences, as well as to host a significant number of reference visits from neighboring companies interested in buying the vendor’s products and/or services.
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There are two important caveats to consider before agreeing to these price concessions:
- It is a corrosive precedent to give away services for free. To begin with, service margins are almost invariably lower than product margins. Furthermore, it is important to attribute chargeable value to the implementation consulting or support work they perform for customers.
- The vendor’s sales team should document what each side will concede or contribute in an addendum to the contract. Authorized individuals on both sides signing up for the special conditions should be named, as they must be accountable for specific results. Where appropriate, resources should be quantified and deadlines documented.
- Finally, the team should make sure there is a closed-loop process in which progress can be check-pointed on a periodic basis, and one person on each side should be appointed as the coordinator of each organization’s commitments. Such an approach signals to the customer that important commitments will not be taken lightly.
There are contrasting theories and practices regarding the elasticity of enterprise software pricing during tough times. Some would say that all things being equal, there is no reason for software license fees to be reduced just because sales are harder to come by.
You can argue that the savings and productivity benefits that are still the main promise of many software products have even more value during a recession – when cost reduction comes into its own – rather than during boom times when corporations focus more on increasing the top line. In any event, vendors must maintain clear and consistent practices in this area of pricing.
Here are some companies that used discount pricing strategies with results
Let’s review the discount pricing example.
Here is a company that used discount pricing strategies
A software company that used discount pricing strategies in order to increase sales. The results were mixed. While the company did see an increase in sales, it also saw a decrease in profits. As a result, the company is now re-evaluating its pricing strategy.
One thing is for sure: the abuses of the past several years of boom times are not a reliable guide to managing deals in today’s market. The creativity gap is everything. For without relationships, technology is worthless.
Adopt to Endure: Your Crucible Moment. Sustainable Revenue Models
It is important for businesses to remember that, when it comes to discounts, there should be a quid pro quo involved.
This means that the vendor should offer something in return for the discount, such as an accelerated payment schedule or additional resources from the customer.
If both sides are clear on what is being offered and what is expected in return, then the discount can be a win-win situation for both parties. If you must find a price discount calculator.
FAQs about Price Discounting
1. What is price discounting?
Price discounting is the process of offering a lower price for a product or service than what is normally charged. This can be done as a way to incentivize customers to buy a product or service, or to encourage them to purchase more than they originally planned.
2. Why do businesses offer price discounts?
There are a few reasons why businesses might offer price discounts. First, it could be a way to increase sales of a product or service. This is often the case when a business is trying to get rid of inventory that is about to expire, or when they are introducing a new product or service. Second, businesses may offer price discounts as a way to build customer loyalty. This could be done by offering a discount to customers who purchase a certain amount of products or services, or by offering a discount to customers who are part of a loyalty program. Finally, businesses may offer price discounts as a way to compete with other businesses in the same industry.
3. What are some of the risks associated with price discounting?
There are a few risks associated with price discounting. First, it can lead to customers becoming accustomed to receiving discounts, which could then lead to them expecting discounts all the time. Second, other businesses in the same industry may match or beat the discounted price, leading to a price war. Finally, price discounting can eat into profits if not done carefully.
4. How can businesses avoid the risks associated with price discounting?
There are a few ways businesses can avoid the risks associated with price discounting. First, they should be careful about how often they offer discounts and make sure not to offer them too often. Second, they should make sure that the discounts they offer are reasonable, and that they don’t go too low and eat into profits. Finally, businesses should keep an eye on their competitors, and only offer discounts if they are confident that they can still make a profit.