Discounting and Winston Churchill
Winston Churchill allegedly asked a high society dame if she’d sleep with him for a million pounds. “Well,” she blushed, “that is indeed a great deal of money.”
“How about for 100 pounds, then?” he asked.
“Sir Winston!” she huffed, “What do you take me for!”
“We’ve already determined that,” he said, “we’re just haggling about the price.”
In a nutshell, that’s the problem with discounting in complex businesses. It sends certain messages to the customer/client about how you view your business.
So why do we give discounts? Mostly because our clients ask us for price reductions, and—foolishly—we take those requests at face value. The truth is—it’s never really about price. Even when (especially when?) they say it is.
Here are four common requests for price reductions—none of which is about price.
- Great Expectations
The client believed the price would be X. It was 2X. The client is embarrassed and frustrated—and asks for a price cut.
But the problem wasn’t price—it was the very human self-annoyance when we find our expectations out of whack with reality. Your job is not to discount, but to sensitively educate the client without embarrassment.
- Budget Busting
The customer only has budget for X; you quoted 2X. The client is feels trapped, and—again—embarrassed. The reaction is to ask you for a price cut, hoping for a deus ex machina solution.
The problem is, if you discount, you encourage more manipulative behavior in future, and—again—you send Churchill’s lady’s message.
- Competitor Stalking Horse
You quote X; the client says your competitor quoted X minus 30%. Assuming your client is being truthful, one of two things is happening. Either the client is comparing apples and oranges in the product/service: or the competitor is trying to buy the job.If the former, get transparent and help the client compare proposal features. If the latter, have a heart to heart about your industry’s economics, and show why a 30% discount will have to be recouped in 6-12 months; therefore the client has a choice between a relationship supplier or a transactional supplier. If they choose the latter, be assured your competitor just lost money and you’ll probably see the client again in 6-12 months.
- Bazaar Behavior
Don’t underestimate the need of customers just to feel they got a fair deal. If they have no data, they often resort to bargaining as one does at a bazaar. You stop that behavior simply by being transparent about your pricing policies and behavior. Outside of Walmart, few buyers will insist on a better deal than you’ve ever given anyone else—if only you’ll let them know your real data.
These are the kinds of reasons clients ask for price breaks—and firms respond by giving discounts.
To paraphrase Ronald Reagan (whom I never thought I’d paraphrase):
Discounts aren’t the solution to the problem, discounts are the problem.
Charlie, right after I read your blog this morning I came across an HBS article about…negotiating with Wal-mart.
I thought you’d like this line particularly:
> "Built on proximity (…) and growing trust (…), the new relationship focused on establishing a joint vision and problem-solving process, information sharing, and generally moving away from the "lowest common denominator" pricing issues that had defined their interactions previously."
Gee, that sounds familiar. 🙂
While I do stop to wonder when I come across anything that seems vaguely glowing about Wal-mart if I’m actually seeing the nefarious invisible hand of Edelman’s PR efforts at work, the article has some interesting points on negotiating and (asymmetrical) business partnerships. I thought you might enjoy it.
Pretty interesting stuff, Shaula, thanks. I did not know WalMart was replacing contracts with Letters of Intent with P&G. When a company like Walmart makes a decision like that, it’s a good bet there’s profit behind the motivation. And I’m sure there is–trusting relationships are far more profitable than suspicion-based relationships–as long as the trust isn’t ill-conceived.