I adore bargaining and according to me, if there are suitable conditions for making a deal, discounts play the key role in defining the outcome of the negotiating process. It doesn’t matter whether you are involved in difficult sales negotiations, market haggling, or family conversations, discounts are an important leverage for bringing the haggling viewpoints closer except for the cases when the seller is a monopolist or doesn’t care about the sale (remember all the saleswomen from the socialist past, who made you feel as uninvited visitors).
By discount I mean all the exceptional extras (not only the financial ones) which the seller offers to the buyer, apart from the officially announced sale parameters. In this sense, the officially announced “price discount” and “sale” campaigns represent different sales tools and shouldn’t be regarded as discounts.
Generally, discounts fall in two major groups:
I. “ON INVOICE” – at the moment of buying (even if you don’t issue an invoice):
1. For amount of products or services purchased
They are suitable when the buyer wants to purchase a considerable amount (according to your criteria, not to his) of the product or service, which will provide you with a quick cash flow and less money tied up in stocks, more free storage space, a lower production cost due to the economy of scale, an opportunity to reach a supplier’s purchasing target etc.
2. For way of payment
– For an advance payment of the whole sum of money (or the larger part of it);
– For a payment in cash and not by credit card, vouchers or other paying methods by which you’ll receive the money after some time, i.e. you won’t have it immediately after the deal;
– For a payment in the currency you prefer (especially at times of hyper inflation – some of you might remember the year of 1997 in Bulgaria).
3. For delivery
Sometimes the product delivery cost represents a serious part of the deal’s cost – capacious goods which need large (and expensive) means of transportation; dangerous freight which requires a specialized transport; non-standard freight which needs non-standard means of transportation; international express delivery by air; (international) long distance delivery of large packages etc. In these cases, if the client organizes and pays for the transport by himself, he might also get a price discount.
4. For providing an immediate “close” of the deal
When the client has to make an immediate buying decision but is seemingly hesitating, an extra discount (not necessarily monetary) might tip the scales in your favor so that you get the deal. The client is allowed to get the discount only if he buys immediately – pays the sum of money (or at least an advance sum) or signs a binding contract.
II. “BACK MARGIN” – after a preliminary arranged agreement is fulfilled
Such discounts are widely used in business (business-to-business or b2b). With wholesales, for example, suppliers are often interested in selling (quickly) a certain amount of an item because:
– a new version is soon to be launched and there would be old stock if the two versions are sold at the same time;
– they need to reach a certain purchasing target set by their supplier;
– they need to quickly establish a new brand etc.
In cases like the above, it is usual that wholesalers offer special agreements like: “If you buy until [date] the amount of XXX of item YYY, you would get an additional rebate of ZZZ% for each unit bought.”
Another similar agreement might concern an additional budget for marketing expenses – “If you buy until [date] the amount of XXX of item YYY, you would get extra marketing rebate ZZZ% of the turnover realized.”
The same principle is used in creating retail loyalty programs – if you buy more and for a long period of time from a certain supplier (a supermarket, a bank etc.), it gives you some extras post hoc, according to a pre-defined scheme.
Here are some basic tips for offering discounts:
NB! Never make a discount without asking for something in return! Point out that the discounts you offer would cost you (a lot) and insist on receiving the corresponding (but in fact ask for more) discounts by the other party.
I suggest some tried and trusted ideas (ordered in no special way) about what to ask from clients in return of a discount, and you can decide how to use them:
1. Change in the scope of work.
Here is an illustration of the idea: if your business is building houses and the standard apartments you offer are ready-to-move-in but the client wants a discount, offer him an apartment with pasted walls and ceilings and tiled service rooms only. If the client asks for more discounts, offer him a building completed only to the stage of fundamental construction.
2. Choice of a different product configuration or model which satisfies the client’s needs but doesn’t provide all product advantages. This is highly used with technological products – computers, software, automobiles, electronic appliances etc. It could also be used by media companies when providing advertising space – part of the announcements to be placed on less attractive pages, aired outside the prime-time period, black-and-white instead of colored etc. This idea could also be used with grocery stores – if customers want to pay less for fruit and vegetables, you could offer them the small, the unripe, the less fresh ones…
3. If the client wants to get low price and promises to buy a lot during a certain period, you could offer him a scheme according to which he buys at standard prices until he achieves the promised amount and time period and then you would take out the difference between the standard and the lower price from his next purchases.
Don’t be fooled by the old trick: “Give me price for 1000 units” and then: “The price is good. I’ll buy now 50 and the rest – during the next 3 months”. And of course, he never buys them…
4. The client provides assistance in organizing a meeting between you and important representatives of some of his client or supply companies in which you might be interested as potential customers of yours but which you could hardly contact by yourself.
5. The client agrees to write a recommendation letter (following a form provided by you) to praise you as a supplier so that you could present the recommendation to other customers of yours.
6. Stretching the range of products for purchase and setting minimum amounts for each group/item that the client should buy during an agreed period of time.
7. The client agrees to advertise your products to his partners and customers.
The opportunities here are enormous – the client’s web sites, point-of-sale (POS) displays at the client’s trade areas, presence in advertising materials and campaigns, presentation slots during events etc.
NB! Clients usually don’t have a well-structured advertising offer for its suppliers (the international supermarket chains have the best organized system for the moment). If you know well your client’s business model, you could get quite favorable advertising channels, because your client doesn’t have a definite price setting process and usually agrees to what you propose.
8. Immediate order – the special price is valid only if an order is made within 1-3 days.
In this way you make sure (as much as you can) that the client will really make a purchase. Examples of such discounts are the special price cuts during exhibitions and trade fairs.
9. Increase of the amount of order.
10. Increase of the delivery time.
This is especially useful with international delivery, since it allows for optimizing the freight and finding cheaper transportation offers, which would compensate the discount.
11. Change in packaging
– use of thinner, less attractive, less … material than the standard one;
– change of the “colorful” retail package with a simpler one;
– use of a bulk package for a number of products instead of individual packaging
12. Signing a term fixed price contract.
‘You get a low price but you have to buy minimum X amount during Y months”. You could get this offer by all telecommunication companies, cable TV and internet providers etc.
13. … and whatever other creative solutions you find good for you and your company and could accept in return of a certain discount!
When selling to a store you could use some additional opportunities to exchange discounts:
– better shelf placement of your product – where it should be situated, at which shelf (at eye level or somewhere else), how many “faces” it should have, is there secondary placement etc;
– what assortment the store will keep on stock;
– special training for the store sales consultants about how to sell your products;
– special incentives for the sales consultants when reaching the sale of X amount of your product;
– how many of your products will be included in the advertising brochures and at which positions;
NB! Be careful when calculating cumulative discounts!
Let us consider an example in which you have to estimate several discounts. It is better for you to apply them one after the other instead of summarizing them in advance, because if you take them one after the other, the basis for the next discount will be a smaller number.
Example: If the standard price is 1000 EUR and you have to estimate several discounts: 15% for a VIP client, 2% for an advance payment and 10 % for large purchase amount, the calculations look like this:
Option 1: 1000 – (15%+2%+10%) = 1000 – 27% = 730 EUR
Option 2: 1000 – 15% = 850 – 2% = 833 – 10% = 749.70 EUR, i.e. the client will pay 19.70 EUR more than in Option 1.
I suggest that you explain at first stage how you would calculate such cumulative discounts but it is not at all necessary that you always do it
NB! Always make clear in return of what you offer a discount and never lower the price “just like this, to make some business”! I can’t stop feeling amazed by sellers who start the price discussion with:” We’ll make a discount of X% especially for you”. Who exactly am I to deserve the discount even before I have asked for it?
If you expect to continue selling to a certain client and you lower the price for no clear reason, the next sales negotiations will start from the lower price!
Once you lower the price by excessive and unreasonable discounts, it would be almost impossible to go back to the higher price because clients would stop buying immediately.
NB! If you offer discounts you’d better start with “more at the same price”. This might mean either better functionality or more products in a set. For example, in the automobile industry you could often get better equipment at the same price. If you buy a portable computer you’ll be offered a bag. If you want flowers you’ll have them packaged free of charge etc. In this way the price level remains the same and the next negotiations will start form the “standard” price.
And finally – the better you communicate your product’s advantages compared to that of your competitors, convincingly present the clients’ benefits and provoke their positive emotions, the fewer REGULAR (i.e. for no special reason) discount requests you’ll get!
PS I offer you a good article about discounts – “Discountitus, the Disease That’s Sweeping the Marketing Community” by Al Ries, published in the “Blogs” section of the magazine “Advertising Age”.