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.