When Is It Okay To Discount?

With all the talk about the economy being so bad, companies are finding new ways to increase traffic and sales. During the Christmas season, we always see businesses offer discounts (sales) to attract buyers. They are willing to offer discounts in the hopes that it will drive more traffic to their location and sell other products that have not been discounted.

If you are selling a product or a service, the real question is, “How do you know when to discount?”

You might be talking to a customer that is trying to negotiate a better deal or you might be trying to set up a new promotion to drive new traffic.

So, how do you know when a discount is appropriate?

Let’s look at this from an hourly service perspective.

You might provide a service that requires your clients to pay a certain hourly rate. This might be an oil change service, a house cleaning service or, like in our case, design services.

The first thing that you will want to consider is why do you charge the hourly rate that you do? Do you have to charge that much to cover your costs or because you want a certain profit margin?

In most cases, you’ll find that you charge the rate more because you are trying to maintain a certain margin and not because you actually have costs. The reason you need the margins may be varied, but usually have to do with paying certain people certain salaries or commissions. You may have a sales rep that has a base pay, you may have been used to a certain level of pay as an owner or you may have certain positions that need some pay whether they are effective or not.

There are two primary situations where you might consider discounting.

1. When sales are down and you need something… this is a common reason to discount. It can’t be used haphazardly. If you discount because you think you can’t make a sale, then your customers will (not may) take advantage.
2. If you can score a long term contract, discounting makes a lot of sense. You can have someone that provides you with a steady stream of income, so you can better plan for what revenues you are generating

If sales are down, before you offer a discount, make sure that you know why sales are down. I never accept the answer from any of my sales staff that the economy is the cause. If people need the product, they will pay any price. If you don’t know how to sell your product, they will either not realize they need it or they won’t see the value. Most young sales reps (young in experience, not young in age) think that if a customer buys from a competitor it couldn’t possible be because the sales rep wasn’t a good sales person.

Even if the root reason is lack of budget, it makes far more sense to change the terms of the deal than it does to lower the price. You might offer extended payments at no interest. You might consider a free trial. You might even consider hiring a motivational speaker and have that speaker conduct some events for your client.

If you can score a long term contract, you should always consider offering a discount. You won’t want to call it a discount, but that is only because of marketing spin.

Consider this.

If I am a freelance graphic designer, writer, programmer (whatever) and I usually charge $75 per hour but can get a contract for a guaranteed 20 hours per week, I should be willing to cut my price in half. If I know that I don’t have to spend time continually selling and helping people see my value but can spend 100% of that 20 hours per week as billable time, then I should accept a lower price. I don’t have to worry about the time it takes to get the next gig. I don’t have to worry about added sales costs. I can focus that 20 hours on something productive, so my rate should be lower.