September 11, 2015

Stop Discounting in 5% Increments—When K.I.S.S. Doesn’t Work

Remember when KISS took off their makeup1 … and we wished they hadn’t? Sometimes K.I.S.S. (keep it simple, stupid) just doesn’t work. This is particularly true when it comes to lazy discounting—discounting in 5 or 10% increments.

The Math
The point I’m about to make is that a 1% decrease in average discount for an enterprise software company can yield a 7+% increase in operating profit! (Your mileage may vary.) If you are already sold and want to avoid math drool, skip to the next section.

Say you work for a $723M in sales company with an average discount of 51.8%. If operating costs are 73.9% (in the ballpark for the software & programming industry2), then operating profit is $189M. If average discount is reduced by 1% (to 50.8%), then net sales goes up by $15M. Take out a piece for commission (I used 6.1%) and the rest goes right to operating profit, increasing it by 7.5%. Note that I resisted the urge to use round numbers in this example ;-). The point in this simple example is that reduced discount is almost pure margin and has a tremendous impact on the bottom line. See table below if you actually prefer to see the math.

The math

Strategic Discounting
If higher sales, greater associated commission, and increased shareholder value through greater operating profit (do you have stock?) is not enough, at least consider the following:
• If you discount in 5% to 10% increments, your prospect is likely to believe that the next 5% to 10% discount is readily available with some additional negotiating.
• Increasing discount in smaller increments signals that the discounting party is coming to an end—heck, go crazy and throw a decimal point in there! How might your prospect react to, “I was able to get management to approve an additional 2.2% off list.”
• Build out a business case and associated financial analysis to show that the multi-year value of the solution is far greater than the multi-year cost at list price and negotiate from that place of strength.
• Apply any incremental discount percentages to the net price, then if you forget yourself and give an extra 5%, the impact is less. Illustratively, 5% off of a net price of $696k is a lot less discount than 5% off of a list price of $1.2M, right?

Who knows, maybe KISS got lazy about putting on their makeup, but let’s not get lazy or stupid with our pricing. Let’s do the hard work—position the value and hold the line with a more strategic discounting conversation—so that when the prospect says, “Gimme More” you can respond with already being at “Rock Bottom.”

1KISS photo by Source. Licensed under Fair use via Wikipedia – https://en.wikipedia.org/wiki/File:Lick_it_up_cover.jpg#/media/File:Lick_it_up_cover.jpg

2CSIMarket.com. http://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=1011

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