It has been observed in one form or another that the only store in which people will run screaming when a sale starts is the “stock market.” Yet, despite the strange inclination of consumers to flee deep discounts when they present themselves in the world of investments and to only be tempted to buy when prices go up, today we are discussing a different form of irrationality. Or rather, a different type of discounting. For many of us, we grew up in a time when coupon clipping and sale shopping was a fairly regular part of life. After all, if the store is willing to sell us two for one, or a restaurant is offering a free entre, why not take it?
Yet, such promotions would fall into a category called “negotiating against yourself” in the context of negotiations. For those unfamiliar with the term, negotiating against yourself is when you offer a lower price or a discount without being pushed or prompted to do so, often out of a nervousness that the other side of the negotiation is otherwise about to say “no.” Today, we’re discussing the problem with discounting in its many forms, and why anyone with a skill, service, or good to sell, should probably forgo the temptation to discount.
Never Discount Your Skill
You’re sitting in an unfamiliar conference room as a recruiter or manager sits across the table with a laptop and a smile. “So, what are your salary expectations for the role?” You live in a state where they had to post the range, and it said “$80,000-$160,000 depending on experience.” You’re only making $70,000 at your current position, so you say: “80 would be great.” The manager smiles and types in your answer. Good news, two weeks later, you get an email saying you’ve got the job for $80,000.
Or is that good news? Generally speaking, companies may have a target wage in mind for the hires they’re looking to make, and a budget in place. While some companies may incentivize keeping costs lower by managers, thus presenting them with a incentive to simply hire the cheapest “bid” for a position, in our particular example the range was anywhere from 80-160. Did it make sense for you to simply ask for the bottom of the range, removing price as an objection at the expense of potentially being grossly underpaid?
Remember recently that we wrote about avoiding career bottlenecks, particularly in the context of not advocating for your own career. It was observed in that piece that many careers advance by making lateral or diagonal moves into other organizations, particularly when it comes to compensation, because external hires fundamentally need to be offered market rate rather than potentially lower organizational caps or inflation adjustments. While our hypothetical candidate simply offered the discount rate, research via resources such as the Bureau of Labor Statistics, Salary.com, or Glassdoor.com could have yielded information on benchmark wages (BLS and Salary) and information on the common rates and wages paid to employees at the company you’re applying for (Glassdoor), and consequently, might have shown that asking for $110,000-$120,000 would have been in line with the compensation at the company for others in the same role with similar experience.
Never Discount Your Services
By extension, those who are self-employed or who work in a service-based business should be disinclined to offer a discount. You might wonder why we’re so firm on this, given that services can be a bit squishier in their sales and delivery, and by extension, that it can be more competitive. Simply put, you have to eat your own cooking as a service provider. When you work with clients, particularly over long terms or on an ongoing subscription basis, you are put in the very human position of comparing clients to each other. A great exercise for this purpose is the “high enjoyment, high profit” matrix, in which you rank order your clients from favorite to least favorite on an X axis and highest revenue to lowest revenue on the Y axis. While you probably won’t end up with a perfectly linear X=Y sort of trend line, you will likely notice that there are more clusters of “least favorites, lowest profits” and “most favorite, most profits” than there are in the awkward “high profit low enjoyment” or “high enjoyment low profit” categories. This goes to our simple sense of fairness, in which generally speaking, professionals will feel good about being well rewarded for working on complex or challenging cases, and are recognized for doing so.
When a customer or prospect asks for a discount, they may do so with good reason or simply because they’re the type to haggle. However, offering that discount puts a professional service provider in a number of challenging positions:
- Their service is fundamentally tied to the time they have, and as such, they are devaluing their time and expertise.
- Because their available time is finite, they not only get paid less by this particular client, but also have an opportunity cost in which they could be serving a “full rate” client.
- Inevitably, all service providers must raise prices to keep up with assorted business expenses and inflation. Those who are already paying below “rack rate” run the risk of either being “fired” via price increase or otherwise being the hardest to raise rates on, despite the fact that they are already paying the least.
- Too many “low revenue” relationships can cap the growth of what would otherwise be a growing professional practice, and as a professional practice matures, it is much easier to move up market than it is to increase the amount of down market clients it takes on. Quality over quantity, so to say.
Never Discount Your Products
Recently, a major service provider in the financial services industry made a deal with a mega-custodian to offer a 20% discount to new customers who onboarded through that custodian. This discount represented thousands of dollars for those customers, presenting a rather enticing offering… much to the chagrin of existing customers, who reasonably might ask: “Why do the new customers get a better deal than the old loyal customers?”
The problem with discounting more transactional or otherwise homogenous products is that the customer, not the seller, can put themselves in a position to complain about the comparison. “The table next to me brought a coupon so they get free margaritas. Why can’t I get a free margarita?” Despite the fact that coupons, groupons, and other assorted “limited time offers” can get people in the door, there are a multitude of issues with discounting, regardless of the products in question.
First, customers can reasonably infer that no business is going to offer such a discount or deal that they will lose money offering it. It happens, but it’s not a common practice (or the businesses doing it would be out of a job!) Second, it can present a perception that the sticker price is actually a bit of a rip-off (see: Wayfair Class Action Lawsuit.) After all, if something is perpetually on sale, is it really on sale? Third, win by price and lose by price. While I would never complain about a free chips and guac promotion at Jefes or Teocalli, the incentive to dine at the restaurants based on that promotion alone means that the incentive to dine there evaporates when the deal is no longer available. While many businesses offer such promos to help build customer and brand loyalty, no business can thrive on discounts alone indefinitely.