discounting guidelines in a recession

Best practices for a sales organization usually include having a defined product list, by sku, that includes a list price in multiple currencies (e.g. USD, CAD, Euro’s, GBP, etc.).  Discounting guidelines should be provided for the products in order to empower each sales representative so that they know how much they can discount when they head into an opportunity as well as to provide some pricing discipline for the organization to support revenue recognition.  So, you have all this in place, right?

Uhm, ya, what kind of standard discounts should I consider?

The most common discounts are based on volume purchases - the premise being if you buy more up front then you should be rewarded with a discount.  Depending on the nature of your user base, discounts can start to kick in as low as 5 licenses for software or after 2 server purchases or 1000 units if included in an OEM arrangement, for example.  By analyzing your existing sales (full price and how much was discounted) and market you’ll be able to identify the appropriate tiers for which discounting should occur.  For example, if you are a software company you may want to discount 5% on the first 10 licenses, 10% if more than 25 licenses, 15% if more than 50 licenses, you get the idea.  Don’t have a lot of tiers (e.g. more than 5) as the customer just gets confused and so will your sales rep.  Also, if you provide services or support pay particularly close attention to discounting as the revenue recognition rules are quite sticky here.

What if I want to discount deeper outside of the existing tiers I’ve set up?

Fair enough.  Some times you need to offer a deeper discount because there is a competitive threat, or it is quarter end and you just ‘have to close the deal’, or it is a marquis brand that is willing to be a reference.  But the one you are most likely to hear in 2009 is: “you’ve won the technical decision but it is a recession and we just can’t afford your product.” These are all very valid reasons to provide a deeper discount but before you do have you considered:

• sometimes the buyer will compare your price to a competitor, which is offering a lower price.  You need to talk about the benefits of your product and company authoritatively (and the ability to more closely tie to the buyer’s needs and and the suitability to their style of doing business).
• you really need to know your customer’s pain points, how they are going to use the product after install and the challenges they are facing internally.  By knowing this upfront you can head off attempts to secure a deeper discount by highlighting customer service/usage advantages that align to their long term strategies.
• negotiation tactics - are they truly unhappy with the price or are the merely angling for a discount because it is a sport?  Yes, many customers just negotiate to test your mettle and will respect you for standing your ground but you need to be able to test this without losing the deal.
• understand your industry dynamics well.  Some customers don’t get out of bed if maintenance and support on your software is higher than 18%.  If you know that, set your price guidelines fairly closely so that this is not an issue during negotiations.

Alright, you can’t expect to be able to provide discounting guidelines for every scenario so how can you empower the sales representative today?

Typically, on a five tier volume discounting model, I like to document the following discounting discipline for a small tech company:

• on their own, once the appropriate volume tier has been identified, a sales representative can then offer a one tier “bump” (e.g. from 5% to 10%) at their own discretion but must be able to articulate why (e.g. the examples above: competitive, recession, reference, etc.);
• the VP of sales can give approval for a two tier bump at their own discretion.
• anything over a two tier bump must be approved by the CEO and/or CFO.

Certainly you can go higher than a two tier bump but by giving visibility to these practices to your CEO, they get to decide how much margin they are willing to give up during a recession (or walk altogether) which will reassure your board and investors.

During a recession the temptation to discount to win the deal is so strong.  Stick to your discipline, know when to walk, know when to negotiate hard and finesse the fine line.

So, to recap, get your sales operations folks to publish on your intranet: a product list which has list prices and volume discounts, and update your approval matrix to include sales discounts that are above the standard volume discounts.