Lowering Your Price: When to Drop It, and How
Few things in business so dramatically affect customer perception as how you handle pricing – particularly when and how you offer discounts.
People may evaluate your products or your service by averaging out multiple experiences. But drop your price just once – and see how hard it is to recover. For one large-scale example, recall Bill Ackman’s painful failure to revamp the image of JC Penney – away from frequent discounts to everyday low prices as a strategy.
And yet, in professional services and complex businesses, we play with offering discounts all the time. Shouldn’t we have a strategy behind it?
Don’t Just Stand There: Stand for Something!
There is no one “right” approach to offering discounts – I’m convinced that your approach will vary with your business, your objectives, and your markets. But there are some things every approach should do:
- You should have a rule for when to discount
- That rule should be easily explainable to clients
- You have to be willing to live by the rule.
That may sound obvious. But how often have you heard things like, “Don’t tell Bill that Joe got that price – it’ll only encourage him to want it,” or “Those guys’ll do anything to get the business.” Those statements indicate a lack of policy, and a lack of policy is a reputation-killer.
What to Stand For
Your business will vary. Here’s what I decided for mine. I run a high-end professional services business, offering speaking, training, coaching and related services. I want to be known for high quality, professionalism and subject matter expertise. In my own special case, because the subject matter is trust, I need to be seen as completely above suspicion.
It’s clear, then, that I need to articulate and live by some rules about when to discount. Here’s what I came up with over the years.
- Frequency. I want to be at the opposite end of the spectrum from a JC Penney strategy of frequent discounting. I don’t want clients looking to find bargains; if they’re looking to price-shop, I want to send a not-subtle-at-all message that they’re in the wrong place.
- Exceptions. To help that message, I need to be very clear about where discounts are appropriate. In my business, I can clearly state three such situations.
Volume. For most consultative organizations, the biggest cost of all is cost of sales (the time, expense and investment it takes to generate professional fees). It stands to reason that if someone can reduce my cost of sales, I have room to pass some of those savings along in lower prices.
The biggest example of that is simply volume discounts. The economics of selling one training session to ten clients vs. selling ten training sessions to one client are pretty clear. I am happy to receive multiple orders, and happy to offer volume discounts to reflect it.
For me, volume discounts are easy to explain, and easy to justify. Are they for you as well?
Special Situations – For Me. Sometimes I want to work in a new industry, or with a novel offering. Those are as important for me as for the client. In those cases, I will offer a significant discount. I don’t want to shave nickels, I want to send a message about what is important to me and what isn’t, and in those cases it’s about the learning. Those kinds of discounts are very infrequent.
Special Situations – For the Client. Non-profits never have the kind of money that corporations do; most associations are limited as well. I don’t say yes to all those requests, but when I do, it’s only reasonable to price “off-label.” (Government is a special case, one I won’t go into here).
- Non-Exceptions. That’s about it. That leaves a lot of other situations where I choose not to discount. It’s worth pointing them out.
Pleas for budget. Sorry – I’ve already got a list of charities, and corporations with a squeezed budget this year are not on the list. Make that “never” if you’re in the pharmaceutical or financial services industries, or if you have office space in midtown Manhattan; I have convinced myself that I need your money more than you do.
(An exception: if you insist on driving my price down, then I am convinced that you need my business worse than I need yours – because what’s at stake for me is my integrity of pricing with all my other clients – present and future! I can’t afford to say yes to such situations.)
Bargaining. I have a simple way of declaring that this is not a bazaar – it’s transparency. I explain my business model, explain when and how I give discounts, and – that’s it. I recall one client who, after our initial phone call, suggested, “I assume that if we go ahead, you’ll grant us our customary 20% discount.” He assumed wrongly.
The Positive Alternative. ‘Just say no’ may (or may not) be a good strategy for drug usage, but it’s not a very satisfactory answer to a client on the receiving end. None of us like to be told ‘no,’ even with a great explanation.
Over the years, I developed another business practice which turned out to have a great side benefit – making people appreciate my saying ‘no’ to discount requests. Yes, that’s right. That practice is to simply take a few minutes extra to talk with them about their situation, and refer them to someone else who can help them.
I am a very small player in all the markets I play in. I am far from the only one providing great service. If someone doesn’t happen to fit my business model, they may be caviar and champagne for someone else’s model.
It costs nothing to spend a little time thinking about alternatives for clients who don’t quite fit with my needs, and it generates huge amounts of goodwill. It’s a small investment with a big marketing return – they may come back when they have a need that is a fit with me, and they may speak well of me to others. And – they’re no longer complaining about me not discounting.
Again, my model is not the only one. You have to decide what’s right for you. But whatever it is, it should be clear, explainable, and you have to be willing to live by it.
An earlier version of this blogpost appeared in RainToday.com