Manage Sales Discounting with a Strategy & Policy
- A sales discount strategy shifts the granting of customer discounts from unplanned and inconsistent giveaways to a disciplined choice of when and how to grant price concessions for reciprocal value.
- When a discount is viewed as an investment and measured by its cost and value, the strategy becomes measurable and constructive.
- A sales discounting strategy defines the financial goals and sales guidance to reduce revenue leakage and deliver substantial profit improvements.
Fixing this Age-Old Problem Starts with a Discount Strategy
Sure, sometimes discounts are needed to get sale opportunities across the finish line. But when this practice becomes the modus operandi, and granting them is just another step in the sales process, an event that warrants scrutiny is replaced with a culture of unmanaged giveaways. When sales discounts become habit, you have an addiction.
Granting financial concessions lessens the perceived value of your brand and solution and sets an expectation for future business. And unfortunately, there's no way to discount your way to profitable growth. Every dollar discounted reduces company profit by at least the same amount.
Price concessions are only one part of revenue leakage. Other contributors that are equally draining but less noticeable include off invoice discounts such as rebates, shipping or generous payment terms. Plugging these leaks holistically is part of the company's discount strategy.
A sales discount strategy is often a part of the company's price strategy. Reducing price erosion through unmanaged discounts and off-invoice price reductions quite often yields 20 to 30 percent of the financial impact for a pricing transformation.
In fact, according to management consultancy BCG, "companies that apply value-based discounting can increase EBIT by between 1 and 4 percentage points within 18 months. When paired with other pricing improvements, these gains can be doubled."
Sales discount strategies must be supported with prescriptive guidance. This guidance creates clear expectations between salespeople and their managers and smoother conversations between salespeople and customers.
The three essential steps to guidance are sales messaging, policies and reinforcement.
Effective Sales Messaging
Customers are trained to ask for discounts. Sellers are less trained in their responses.
Without messaging guidance and periodic refreshers, the sellers value proposition will become clouded or diluted. Or worse, many salespeople will revert from selling on value to selling on price.
There are four ways to win a deal. You can have the best brand, the best solution, the best customer relationship or the best price. However, for most companies being the low price is not sustainable and not really winning. That means sellers must find a winning combination using the other three factors.
To maximize their win probability, they must perfect their brand messaging, prove their unique value proposition (UVP) and apply a strategic sale methodology that systemically earns the customer's respect and then the customer relationship.
Delivering succinct brand and UVP messaging throughout the sales cycle, and supporting that UVP with a sale methodology, is the most effective deterrent to price reductions. However, these things don't occur by happenstance. They are the result of periodic training, the use of Sales Playbooks and sales coaching.
Sales Discount Policies
Salespeople want clear and simple rules. Their managers need to advise when discounts are permissible and when they are not. That's best done with a sales discount policy that bring clarity and removes subjectivity to price concessions.
I personally build these policies on three pillars.
First, I identify good and bad discount requests. A good request may be a per unit price reduction based on a large volume purchase. Or perhaps the customer wants a form of risk reduction until they see the vendor can deliver as promised.
A bad request is a cost-based demand that ignores value or is without justification or poor justification. It's most often some sort of generic statement such as "your price is too high." This request can identify other problems such as the customer isn't really in your Ideal Customer Profile (ICP) or the seller didn't do a good enough job in conveying differentiation and value.
Second, I ask what the company is getting in return for a discount. Maybe the customer will agree to a case study or make payment in advance. Or maybe they will accelerate their purchase decision to make the sellers quarter-end goal.
And third, I make the discount rules crystal clear and set the expectation that they are not just suggestions, they are the rules. Below are some examples.
- Any proposed discounts or concessions above a threshold level must be approved by a sales manager before sharing with a prospect.
- Discount amounts are predetermined based on the type of deal, size of deal and what the seller is getting in return. Advance payments may get a 3 percent discount or volume discounts may be based on a tiered model.
- Sometimes I suggest creating a discount pool for each salesperson. That means each rep manages a maximum amount of allowable concessions that must be rationed across all customers over a period of time (usually a quarter). The size of the pool may be based on their quota or prior period revenue results, and the discount rules still apply.
- Discounts do not stack and are not cumulative.
Even the best guidance and policy require operational reinforcement through a combination of technology, governance and compensation management.
Discount rules and approval processes must first be defined and then automated with CRM software. Workflow processes can streamline multi-approval processes and CRM dashboards can bring visibility to price exceptions or unauthorized discounts.
For larger companies with larger deals, governance is often achieved with a 'deal desk' staffed by managers that review and approve discounts on a case by case basis. They compare each deal to the policies and guidelines, offer advice or recommendations, and have the final authority for price concessions decisions.
And finally, its essential to align behaviors with incentives.
Compensation management is the tool to align incentives with the success of the discount strategy and the company's financial result. Many times, this means realigning incentives based on margins instead of revenues or providing higher incentives to avoid or minimize sales discounts.