For Sale, Not On Sale - The True Cost of Discounting and What to Do About It

By Mark Schlueter & Tom Pisello

More sales execs are revealing that discount pressures are at an all time high, and as a result, they
need more transactions than ever just to make the numbers.

There are several reasons why prospects are demanding higher discounts and making it harder for you to achieve your goals:
  • Buyers are more empowered, with on-line / social resources readily available to research your competition and obtain competitive pricing.
  • Procurement specialists’ incentive pay is now directly tied to the discounts they can extract from each vendor.
  • A lack of substantial differences in your solutions and sales / marketing approach are leading you and your competitors to make price the key differentiator.

So how bad has it become? IDC reports discounts of 20% are now commonplace, but most vendors wish that was all. We routinely see much more pressure, with one network provider recently admitting to discounts of 70% or more, while an enterprise software provider routinely gives 90% discounts to close deals.  Absolutely unacceptable, and potentially VERY costly for your business and career.

For every $10M in realized sales revenue, a 20% current discount rate means you actually could have achieved $12.5M in sales revenue if you were able to eliminate the discounting altogether. At a 60% discount rate, your $10M in realized revenue actually could have actually been 2.5 times higher ($25M). 

And the impacts don’t end there. Because the costs of the goods / sale are fixed, every dollar of discounting means you are giving up that equivalent amount on the bottom-line as well. For every $20M in discounts, you're also giving up that same $20M to the bottom-line. If your P/E ratio is 20, this yields a whopping $400M in additional market value you just left on the table – 20x the discount.

A friend of ours often says - “My products and services are FOR sale, not ON sale”, and for good reason.  Discounts result in less sales revenue and lower profits. For a company that is currently at $500M in sales revenue, moving the current average discount rate from 40% to 35% can add over $41 million in additional sales revenue and EBITDA. And discounting changes how buyers perceive your brand, conditioning buying at the end of your quarter when the sales reps offer up big discounts, and reinforcing a focus on price above all other decision criteria.

So how can you reduce the average discount your sales reps are surrendering by 10%, 15% or more?  It all comes down to the ability for your sales reps to communicate and quantify your unique value – earlier in buyer’s decision cycles, and reinforced often throughout the buyer’s journey:

 Why Change? - It’s important to engage with prospects as early as possible, helping your buyers identify hidden challenges and quantifying the cost of “do nothing”. The key at this stage is motivating buyer’s as to “Why Change?”. Your proposed investment likely pales in comparison to the cost of not solving the problem, so the key is quantifying this delta. Your ability to dramatize and quantify the contrast between status quo costs and your proposed solutions’ pricing can help motivate the decision and certainly reduce early price pressure.

Why Now? – In the middle of the buyer’s journey it is important to prove how your solution will help the prospect overcome their challenges, and deliver substantial business benefits as a result. Rather than focusing on the solution features/ price, it is important to spend as much time quantifying potential cost savings / avoidance, productivity / process improvements, risk avoidance and revenue growth your solution can deliver. Your sales reps ability to clearly communicate and quantify the tangible value your proposed solution can deliver, focusing on the benefits and returns versus the proposed investment, can help prioritize approval and reduce discounting.

Why You? – Later in the decision cycle, you are usually compared head-to-head against competitive offerings, and procurement gets much more involved. This is a critical time to not shy away – to further substantiate your proposed price and proactively go head to head with the competition. At this stage, again the key is to elevate beyond purchase /service price, and quantify the comparative total cost of ownership (TCO) and incremental benefits for your proposed solution. This includes tallying not just the initial purchase price or monthly service costs, but the entire costs for the proposed solution over the useful service life, including operating costs, support, administration, and evolution expenses. Fight back against procurement by justifying your proposed pricing versus reduced current costs, lower TCO compared to lower-priced competitors and your unique incremental benefits.

Why Renew? - And the value communication and quantification doesn't stop with the initial sale. Much more B2B revenue is now tied to on-going subscriptions, which also face price pressure each renewal period. Way before renewal time, your sales reps and customer success managers should be quantifying the realized ROI from the investment. This means having an initial baseline of the current costs and opportunities, and measuring the tangible improvements, then comparing against the initial investment to tally the payback and ROI. A quarterly or at least semi-annually tally of the cost savings, productivity / process improvements, risk avoidance and business growth you were able to actually deliver is key to assuring that your realized ROI is recognized and maintaining retention contract rates and levels. 

Don’t take our word for it.  Mark Arman former VP of Business Development from ShoreTel launched an Alinean-powered TCO tool several years ago to get sales reps, channel partners and customers all focused on better communicating and quantifying the unique value of ShoreTel’s unified communications solutions, especially compared to status quo legacy and the competition.

Mark is quick to highlight that the TCO tool delivered personalized calculations and communications as to each customer’s unique cost of “do nothing”, value of change and comparative competitive value. Often, the metrics proved ShoreTel was 50% lower TCO than the market leader and 20%-30% less than its competitors, making it vital that these results were not delivered by some home grown model, but via 3rd party tool with a substantial and credible pricing / research database.

Mark estimates that the TCO tool and associated guarantee program significantly boosted ShoreTel’s competitive win rate (from 62% without to over 90% with). And most importantly, due to less discounting, ShoreTel’s revenue was 10% higher each year than it would have been without the TCO tool and program, resulting in at least $30 million in incremental revenue each year.

So what is discounting costing you, and what are you doing to migrate your engagements from product / solution to value in order to reclaim this revenue that is rightly yours?

Read about more case studies leveraging value marketing and selling to improve your sales performance in The Frugalnomics Survival Guide (available on Amazon) - http://www.amazon.com/Frugalnomics-Survival-Guide-Unique-Market/dp/0692350926

See more client examples of reduced discounting - http://alinean.com/clients/

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