Discounting gets a bad rap. Critics consider it an act of desperation, a last-ditch knee-jerk tactic vendors try when prospects get nervous and jittery about buying. Discounting is a Sure Sign of Sales Failure, proclaims one recent headline. Other titles are similarly dismissive: Salespeople Who Give Discounts Are Not Salespeople.
It’s easy to get cowed into feeling that only an idiot would attempt to multiply a list price by a factor less than one. Tell that to Theo Albrecht, co-founder of discount grocery retailer ALDI, who in 2010 was listed by Forbes as the 31st richest person in the world. Net worth: $16.7 billion. Oh, smack!
Vendors discount their selling prices for many reasons, and sweetening their offer to buyers are among them. Sometimes discounting signals failure, but it can also signal vitality, for example, when a company executes a high-growth strategy to grab market share in a nascent market.
Done right, discounting is hardly a mark of shame. Every marketer needs it in his or her tool kit. Discounting is as essential for marketers as a jig saw is to a carpenter. What gives the discount naysayers a shred of credibility is that marketers often misuse discounting. But they’re wrong to trash it altogether. Like any tool, good results depend on two things:
1) the tool must be used for the right purpose, and
2) It should be used skillfully
Heck, on YouTube, you can see plenty of videos of people doing stupid things with portable jig saws, but it seems dumb to ban them.
Discounting offers many strategic and tactical benefits for sellers:
- Discounts can exert time pressure on proposals and quotes. Discount offers can be effective when vendors put teeth into them by attaching contingencies. Discounting helps close the gap between buyer motivation and buyer action.
- Discounts help vendors adjust rapidly to changing market conditions. Sometimes, you just can’t stick with legacy pricing. Look at the decline of once-great companies—Sony, Blockbuster, Sun Microsystems, Sears, Motorola—and you’ll find ossified pricing in the rubble.
- Discounts are instrumental for acquiring customers in new markets. If your product unproven in a new market, discounting can facilitate equitable risk distribution between vendors and buyers.
- Discounts move obsolete, off-standard, or hard-to-sell products. When companies prepare to introduce next-generation products, it’s often advantageous to discount items that will become more difficult to sell in the near future.
- Discounts create perceptions of high value. Prospects and customers often anchor on list prices, and discounts represent a tangible value benefit. One B2B software company I worked for always presented small-to-medium business (SMB) pricing as discounted from the large-system list price. While the discounts varied, prospects anchored on the list price which the company charged its larger clients for the same software.
- Discounts pass savings to customers as conditions change. Commenting on the Chevy Volt, Don Johnson, GM’s US Vice President for Chevrolet Sales and Service said, “we have made great strides in reducing costs as we gain experience with electric vehicles and their components. We want to pass those cost savings back to consumers.” The same applies for companies that lower anticipate reduced support costs when clients have in-house expertise.
- Discounts reward loyal customers, invite membership, and incentivize larger-volume purchases. To create these outcomes, discount prices are often juxtaposed to list prices for marketing appeal.
- Discounts keep competitors off-balance. As Nate Silver points out in his book, The Signal and the Noise, when competitors aren’t sure how you will play your hand, you have a powerful advantage. He used poker as an example, but the same holds for sales. Maintaining an option to discount can create difficult challenges for competitors.
In 2013, Charles Green commented on my article on this topic, writing, “Part of a pricing strategy is to offer a coherent statement of your value proposition, and of your approach to pricing with customers.” I agree. Many of the valid complaints cited by discounting critics support his point. When there’s no strategy for doing it, discounting does little more than corrode profits. “Since we can’t seem to close the deal, let’s just cut our price.” If that was the only reason executives provided for discounting, I’d consider joining the Never Discount chorus, too.
When discounting, here are some traps to avoid:
- Overuse. Constant, indiscriminate discounting makes it meaningless to customers and salespeople.
- Not assigning contingencies or “strings.”Offering discounts without strings like expiration dates removes time pressure for buying.
- Showing desperation. For buyers deep into purchase process, discount offers often signal vendor desperation. The unintentional message vendors often send: “the more you delay your purchase, the more we’ll reduce our price.”
- Not explaining the reasons for the discount. Customers should understand the reasons the discount was offered, including why they might – or might not – expect similar discounting in the future.
- No alternatives have ever been figured out. Some companies flat out don’t know how to motivate buyers s any other way. To buyers, that makes your sales rep look like a marionette puppet, to be manipulated for a price concession at the most advantageous time. If your company relies too heavily on discounting – consider different approaches, like keeping your list price, but adding low-cost services that appeal to customers. Or, reduce your prices, but only by reducing other services or features that they might later buy a-la-carte.
I’ve successfully used discounts in selling. I’ve used it to “take some orders off the street” when further delay posed increasing risks. I’ve used them to outmaneuver competitors. I’ve also lost more than a few opportunities at the last minute when I’ve failed to anticipate that the same thing could be done to me.
One thing I’ve learned: a sales manager hellbent on prohibiting or restricting price adjustments has deprived his or her sales reps a crucial competitive weapon. Don’t ban discounting. Use it the right way!