Discounting is THE most common problem I am asked to solve with clients that I work with. Here’s some maths to explain why:
If I make something and it costs me £50 to make and my sell price is £100 that represents a 100% ‘mark up’ and my ‘profit margin’ is 50%. If I give a 10% discount off the sell price (£10) that money can only come from one place, my £50 profit. Therefore a 10% discount off my sell price costs me 20% of my profit! A 20% discount costs me nearly HALF of my profit margin.
A straight cash reduction is by far THE most expensive ‘discount’ that a business can offer but there are much better alternatives that I will cover later.
The term ‘win-win’ is used widely in ‘business to business’ sales these days when referring to negotiation. When I talk about the concept though, many people have the wrong impression of what it means. For example:
If a used car has a screen price of £15,000 and the buyer offers £10,000 and after wrangling a handshake is done at £12,500 that is probably NOT a win-win!
Imagine a children’s see saw, if the negotiation is heavily skewed in favour of the seller then the buyer will feel (in the air) cheated and won’t buy from you if they have options elsewhere. You and your organisation will appear arrogant and rude. If the see saw is heavily skewed in favour of the buyer then we risk selling at low profit margins. If we capitulate then we/our businesses are seen as weak and easily bullied.
A ‘win-win’ is therefore when the see saw is perfectly horizontal with both parties happy with the outcome and agree to proceed. It is important to remember that what balances the see saw is NOT ‘cash’, it is instead ‘perceived value’ in the mind of the buyer. In other words the seller could sell at their top price and achieve very high margins, but based on the ‘proven value’ (not false promises) they have built into the solution for the client it’s perceived as a ‘win-win’.
So lesson one in negotiation is:
Make sure you build enough value into your solution to justify your price in the mind of the client, before the negotiation starts!
However, even if you have done this, buyers will still ask for a discount! Why?
- In 90% of cases they will get one just by asking the question
- They are trained to ask
- They probably have an alternate supplier option
- They want to maximise their budget
- They will assume the seller has loaded the price prior to the negotiation
The number one rule for sellers in negotiations is don’t concede but trade instead. In other words, if the buyer asks for a discount, you want something back from them in return for giving them the discount. Tradable items might include:
- Shorter payment terms or pre-payment
- A larger order (up sell)
- Purchase of additional items (cross sell)
- You might reduce the length of warranty period
- You might remove free delivery option
- A contract for guaranteed future business
What you offer will obviously depend on what you sell and your businesses circumstances. When faced with your counter offer the client will either agree, say no, or counter your counter offer with one of their own.
Here are some of the disciplines & attitudes I teach:
- Never give a cash discount based on the size of order on the table, only on agreement of an increased size of order/additional items
- Offer alternatives to a cash discount that cost your business very little but have high value perception for the client
- Prepare for detailed negotiations beforehand and plan your strategy well
- Rather than say “NO” or “I can’t do that”, say what you CAN do instead
- Be prepared to walk away – not all business is good business
- If you don’t have confidence in the value of your products or services then don’t expect the client to feel any different
One final point: Never forget that ‘business to business’ buying is a cycle. They are likely to buy similar products/solutions again and again. If you have achieved a good margin by selling the value of your product/solution then ensure that value is delivered. Otherwise you may not even get the chance to negotiate next time around!
What are your negotiation tips? Please share & Thank you for reading.
Stuart Allen FInstSMM FCMI