January 29, 2015

The Myth Of The One-Time Discount

hourglass-to-dollarsTime is not forever. But discounts are.

Everyone has been in this situation: the end of the month is fast approaching and you don’t quite have your numbers in hand. It is not panic time yet, but the big deal you forecasted to close this month has lost momentum and it is threatening to carry over into next month.

You call Larry, your primary point of contact and chief internal advocate at your prospect, ABS, Inc. He says the deal has gone to Purchasing. He conferences in Ed, the Purchasing manager, who says the paperwork is making the rounds to get signed off. You had offered ABS a 3% discount contingent on their placing the order this month, before 4pm on the 31st. It is now the 29th, and you still haven’t received the order from the ABS purchasing department.

You can hear the tick-tock ticking of the clock on the wall. Actually, it’s a digital clock, so maybe that noise is just your elevated blood pressure pulsating in your temples.

Uncertain about what to do next, you confer with your boss, Brian. Brian agrees, “We really need this order this month. Let’s offer ABS another 2% off if they get the order in by tomorrow.” You relay the news to Larry at ABS. “Hey, I can give you another 2% off the price. But, only if I absolutely, positively receive your order before our month end, which is at 4pm Friday.” Larry seems excited by the news and says he’ll check with Ed to see if that will move things along.

Well, it does. But not how you would like. And you have just unleashed a cascade of unintended consequences that will have an lasting impact on the future profitability of your business with ABS.

First, you just guaranteed that the order won’t be received on time. After you hang up with Larry he calls Ed in Purchasing and brags about being a hero because he just renegotiated the deal and extracted an extra 2% discount from you. Ed heaves a deep heavy sigh because now he has to re-do the purchase docs to reflect the lower price. “I thought they needed the order by tomorrow.” Larry shrugs and says “Don’t worry about it. They seem pretty anxious to get our business. So, I’m sure they’ll accept our order no matter when we give it to them.” Sure enough, you get the order from ABS on the first business day of the next month.

There Is No Expiration Date For Discounts
This leads to the second unintended, but certainly not unforeseen, consequence in that even though the order came in on the 1st day of the next sales month it still had the original 3% and the extra 2% discounts included. My experience over the years has been that approximately 95% of all companies (and 100% of all salespeople) will not challenge the customer for taking the extra discounts even though the order was submitted late. Here is how that situation plays out.

You bring the order to your boss. Brian challenges you on the discount. “Dude, we’re not giving this stuff away. The order didn’t come in before the end of the month so the discounts are no good. Go back and get a corrected order for the right price.” In fact, Brian doesn’t really care that the customer took the discounts, he just doesn’t want to appear weak in the eyes of his boss, Stan, the VP of Sales. So he is going to reject the order and send you back to confront the customer, knowing full well that it runs the risk of further delaying the order. Or making it go away. But, whatever happens, it won’t be his fault.

Except that before you can get back to ABS, Stan, your VP of Sales, walks into Brian’s office while you’re standing there and asks why the order from ABS Inc last month hasn’t been entered into the system yet. Brian doesn’t want to deal with this so he motions to you to explain to Stan why the order was not received on time. Stan’s definitely not happy when you explain about the discounts and not receiving the order on time. But, then you launch into your song and dance about how it would endanger the great relationship you have built up with this strategic customer if Stan and Brian were to reject the order. In addition, it would embarrass your primary internal advocate Larry inside ABS. So, Stan relents and agrees to accept the discounted order.

One Time Discounts Become Permanent Price Reductions
Now you run head-on into the third unintended consequence which is that your base price to ABS is now 5% lower than it was last month. Salespeople suffer from situational amnesia. Customers don’t. A salesperson only sees a discount as a tactic to close orders. He or she only remembers the times that it worked and not the 95% of the times that it didn’t. But as far as your customers are concerned your discount was not a one-time event but a permanent reduction in your price.

Once you use discounts as an incentive to customers to close an order they’ll remember that they can wait until the last week or even last day of the month to extort an additional discount from you. All the customer has to say is that “The order’s in Purchasing. Trust me. I’m trying really hard everyday to push it along but I just don’t know when it will see the light of day…” Empty silence fills the phone line while the customer waits as you furiously try to calculate how big a discount it will take to dislodge the order from Purchasing….

Don’t be blind to the unintended consequences of the one-time discount. If you hand out discounts like candy at Halloween, just to accelerate orders that you’re going to receive anyway, it will come back to bite you in the form of reduced margins over the long run.