Why Offering Discounts Hurts Your Business

If you are a small business owner or entrepreneur, you are likely asked frequently to provide a discount on your rates. This is especially tempting during an economic recession where your sales levels are lower than usual. Although some people will tell you to lower your prices or provide discounts to increase business, I believe doing so actually hurts your business financially and non-financially. Let's examine why.

First - What is Your Offering Worth?

Let's assume for the sake of simplicity that your prices are set reasonably. By reasonably I don't mean cheap; I mean reasonable for the level of value, perceived value, or quality you are delivering. Your offering is worth no less than this – and you should be confident in your pricing and what you are delivering. So will giving a discount hurt your business?

Next – Understand What Discounting Says About Your Business

If you provide this customer a discount, you are communicating a lot of negative things about your business that you may not have considered.

1. I'm not worth my own rates
   If you are providing a level of value that matches your initial pricing, a discount shouldn't be necessary. If you are willing to give one, your offering may be overpriced from the client's perspective.
2. I NEED your business desperately
   The client knows that you are offering a discount because you need his/her business. This puts the client in a position to negotiate further with you without giving anything up himself. Desperation lets a client know business is slow. The less in demand your products and services are, the less people want them. You never want to let a prospective client know that you NEED their business.
3. You are more important to me as a client than my other clients
   Perhaps you are offering the discount because this client is more important to you than others. They may be well-known and will boost your reputation by having them on your client list. What's the problem with this? This is exactly how Wal-Mart gets the best pricing and terms available from their suppliers. This can lead to being bullied by the client – you can expect a greater chance of them paying late and requesting greater discounts when your invoice arrives.
4. If you ask for a discount, I'll give you one
   Offering a discount sets a precedent. This customer will forever ask for a discount every time you work together. And you'll feel obligated to give it if you want to earn the client's business again.
5. "Talk to John Doe – He'll give you a good rate"
   The discount doesn't end with this client. Expect any referrals sent from this client to come expecting a discount. And you'll still be expected to provide exceptional work.
6. "Why Would I refer John Doe?"
   If you want good referrals, you have just created doubt in this client's mind. They don't want to put their reputation on the line to refer someone who isn't the absolute best and confident with their own product or service offering. If you are offering a discount and communicating that you aren't worth your rates, are you really worth the referral? Just because you gave a discount doesn't mean you should expect additional referrals – it's usually the opposite.

Next – Is Giving a Discount Acceptable in This Circumstance?

There are some circumstances where giving discounts is acceptable.

1. You compete based on price
2. You have zero reputation in your industry
3.  Insert special circumstance here

If you compete based on price, then by all means offer discounts. But for the rest of us who can't possibly be the lowest priced provider – we need to compete on value. If you compete based on value…read on.

If you have zero reputation in your industry, or this is your first job, you may have no other alternative. Get the job and ensure you get a great letter of recommendation and someone who is willing to act as a reference. Next job you won't need to give the discount – you can back up your work with a satisfied customer.

Some special circumstance goes here. I can't possibly think up every instance where giving discounts is acceptable, but if you think you have a special circumstance – look carefully at the six points above. Tune out the customer — especially if he/she is an aggressive or smooth talker — and think clearly. If you really have a special circumstance, go for it. Small non-profits are great ways to give back to the community — just make sure they actually can't afford it. Just because they are a non-profit doesn't mean they don't have any money.

So What Do You Do When a Client Asks for a Discount?

Okay – so you've decided you don't want to offer this client a discount. But the client is aggressive/demanding/awaiting a response. What do you do?

I found a great post by Robert Gerrish that does an excellent job of outlining how to handle this exact situation. I'll summarize the author's ideas, as well as add in a few suggestions of my own.

1. Don't panic!
   This can be a very intimidating question – don't blurt out an answer. Throughout this you'll want to remain assertive (yet polite) and confident.
2. Why does the client want the discount?
   Does the client feel you aren't worth the rate? Does he not understand the value you are providing? Are you priced higher than other quotes he's received? Is he just asking to see if you'll budge? Identify what the source of the request is first so you can properly address it.
3. Based on the client's response above, provide a reason why you won't
   1. If the price is too high, offer to go through the quote and shave off functionality or features. NEVER reduce your hourly rate. 
   2. If the client says he can bring you a lot of business, tell him you appreciate referrals and will gladly provide him with a nice referral fee instead. 
   3. If the client doesn't have the budget for it, see if you can break down the engagement into multiple phases with phase I being just the core functionality.

You can also emphasize the value you provide and show the client why your rate is reasonable. This is where letters of recommendation, client testimonials, and satisfied clients who will act as references are of enormous value.

If this whole concept makes you nervous, spend some time thinking about the value you provide and how great your product/service is so you are prepared when requested to offer a discount. If you don't believe in your business and the pricing you are handing out, customers won't either. Make sure you have letters of recommendations and clients who are willing to provide a strong recommendation.

Just because someone asks for a discount doesn't mean you are obligated to give one.