Discounting by Subtraction

May 5, 2006

By: Matt Michel

If you have $30,000 to spend on a new car, it would be foolish for a car salesperson to show you a new luxury car. Ignoring the potential for financing, $30,000 won’t buy one. Knowing your budget, the salesperson will steer you towards vehicles you can afford. This is true for anyone in the world of sales.

A product salesperson has limited negotiating room. The cost of the product, plus overhead and commissions, provides a floor. If a buyer can’t afford the product, the salesperson switches to a different product, which the buyer can afford.

Fear of Overpaying
It’s tougher selling intangibles where pricing can be all over the map. When I sold marketing consulting services, before I offered any type of quote or proposal, I tried to discover the client’s budget. If the client could only spend $30,000, I didn’t want to propose a $100,000 solution. Yet, the fear of every client was that I would propose a $29,000 solution when a $20,000 solution might serve if I knew what they were willing to spend (or worse, I would offer a $20,000 solution for a $29,000 price).

The Problem With Ballparks
Clients would often request a ballpark figure. My problem was I didn’t know which ballpark would appeal to them. Did they want a Little League park or Yankee Stadium? I would give them the full range from four figures at the low end to a healthy six figures at the top and through questioning and listening, try to determine what they needed and what they could afford, which were not always the same.

Some clients knew what they wanted, but had no idea what it would cost. If they would not or could not give me a budget range, I would make a quick, vague estimate of the cost of a solution, based on their needs and see how they reacted. If they didn’t start choking, I would build a formal proposal.

Inevitably, there were times when I would prepare a proposal that would meet a client’s needs but not his budget. The client would then, sadly, tell me I had to come down on my price.

Can You Cut an Honest Price?
If I priced the project correctly and fairly, how could I come down on my price? I couldn’t. Even if I could, I wouldn’t. Arbitrarily cutting a proposed price is an admission that you overcharged in the first place. I felt my very integrity was at stake.

If the buyer is sincere, can only spend X, and you’re at X + 1, what do you do? The solution is to reduce the price by taking something out. For example, I’ve reduced the cost of a direct mail survey by foisting the cost of printing and mailing onto the client. This allowed me to reduce the project by the direct cost of the postage, printing, and associated labor.

Profit Doesn’t Change
If I was reducing my direct expenses, I did not reduce the budgeted profit. The profit was a function of the project risk and my time. Pulling out a few thousand dollars of cost, didn’t change my time commitment or reduce the project management requirements. Thus, the profit stayed fixed and the margin increased.

The Bottom Line
If you quote a price and the customer wants a discount, do not cut the price. Instead, take something out of the project. Discount by subtraction. It demonstrates a willingness to work with the buyer, without harming your integrity.

Buyers who want to buy from you and truly cannot afford to spend more will accept the compromise. Those who want to buy and can find the money may well conclude it’s not worth giving something up and find a way to pay a little more than they wanted or expected to spend.

Source: Comanche Marketing. Reprinted by permission.
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Copyright © 2004 Matt Michel

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