Scenario A: We quote $5,000 to a customer for a list of products or services. Customer says we need to be at $4,500 to win the business. We agree to discount the deal by $500.
In Scenario A, the customer gave up nothing to get a discount. We changed the price without changing the offering, which I call an “unearned discount.” Of course this kills our profit. But equally importantly unearned discounts hurt trust. When the customer is able to get us to reduce the discount without reducing the offering, we have communicated to them that there was extra margin in the deal that we were trying to sneak by them, and they caught us in the act.
We think we make the customer feel good when we discount, but in fact unearned discounts hurt trust. We destroy price integrity between us and the customer. (I’m using integrity in a structural sense here, not a moral one.) This integrity rests on a rigorous exchange of value, and we’ve cracked it by discounting over nothing. We also open the wild, wild west of discounting and train the customer how to do business with us forever.
By contrast, consider Scenario B: We quote $5,000 to a customer for a list of products or services. Customer says we need to be at $4,500 to win the business. We agree to discount the deal by $500 but we must move from best stainless steel to midgrade, or we can’t have two people onsite but instead one, or we can’t start the project until August 1, or they have to pay 100% up front, or…, or…, or…
We provide the customer with options to allow them to opt into their own price sensitivity bucket. If they can’t afford our $10 chocolate cake, we are happy to make them an $8 cake, but it doesn’t come with sprinkles and candles. How important is that budget limitation they quoted? Or was that just a negotiation tactic? Optioning our offering 1) improves profitability, 2) separates negotiating tactics from true price sensitivity, and 3) protects price integrity. The customer doesn’t walk away wondering if you just fleeced them.
Hi, I understand the principle, but how does one compete with competitors whom ALWAYS discount without gaining anything in return? Our competitors have similar quality and delivery, and constantly give away value. Our customers often say they have trouble giving business to us when they get payment terms, on time delivery and similar quality, from the competitors. No easy answer ( I don’t believe the customer actually gets it all, as we continue to get a share , but they certainly state that they get it all)
Russell, thanks for your comment. I understand the frustration of competing with competitors who want to throw in everything but the kitchen sink to buy business. I think you have addressed your own question with wisdom: “I don’t believe the customer actually gets it all, as we continue to get a share , but they certainly state that they get it all.” Customers present information to us which is polluted with their own self interest. In plain terms, with full respect to our customers, buyers are liars. It doesn’t make them bad people. They are just trying to hold onto their resources. You continue to win business in the face of the competition giving away terms, shipping, discounts, etc. This tells me they don’t have the same quality and delivery that you do, despite what the customer says. That doesn’t give us unlimited pricing power, but it gives us some. It gives us enough. Here are a couple of other blog posts about customer fibs: here and here.