During October, we surveyed professional services advisers about how they would respond to the concept of “discounting” – pressure or a request from a new prospect to reduce fees before any business has been written.  We provided advisers with three generic types of prospects and five different response strategies:

• Agree - Agree in order to win the immediate business.
• Segment - Agree but for a lower value proposition.
• Volume - Agree but in exchange for more business.
• Future - Refuse now but agree to revisit based on future business.
• Refuse - Refuse any discount and reiterate your value proposition.

Summary of key results

The results from 61 professional service advisers are summarised below.  Not surprisingly, the lower the perceived value of the prospect, the more likely the discount will be refused.  Equally, high value prospects (“A” types) are clearly in hot demand with 68.6% of advisers willing to accept a discount or offer a negotiated discount position (segment or volume).  With that background, let’s examine the five scenarios to draw some conclusions.

Agree (to a discount)

• Pros:  It gets a new “A” type client on the books, which may bring prestige and help win other business;  Generates cashflow, experience, opportunity, war stories;  Possibility of referrals to other “A” types;  Engages resources which may otherwise be idle
• Cons:  Sets the scene for the future, so the discount is now and forever;  Small risk of knowledge of discounting spreading to other prospects and clients;  May leave you with a large, but unprofitable, client;  Establishes in mind of prospect a lower value perception of your services

While many commentators may argue that you should never discount, such as harsh position may not reflect the reality of competitive professional services.  From time to time, discounts may be a necessary evil...but there must be good reason.  Breaking into new markets, gaining experience with a trend-setting assignment, utilising the name recognition of the new prospect for referrals or testimonials are all valuable items which can “pay” for a discount.  Discounting purely to gain market share, however, is often a folly.  Too many professional services advisers end up committing many resources to large, unprofitable clients which is a recepie for failure.

Segment (to a lower value/service proposition)

• Pros:  Better aligns resources with revenue;  Prevents “discount contagion” among other prospects and clients;  Turns discussion of price to discussion of value;  Promotes depth in industry as allows servicing to wider client type/size
• Cons:  Requires ability to offer differing service standards/segments;  Requires process to maintain appropriate service levels;  Need to ensure all segments are attractive and promotes up-sell, not just down-sell

The Segmenting strategy (having different value propositions or service standards at different price points) was not as popular as we might have expected in this survey. In fact, advisers were just as like to offer volume discounts as service segmentation!  Segmentation can be a vital strategy for many service professionals, but particularly those who provide pure advice with no product.  More transactional service professionals (e.g. finance brokers) can struggle to utilise this strategy.  But for accounting, legal, financial or recruitment specialists – where services can be added or excluded for varying price points – a segmentation strategy drives the discussion back to value and makes the prospect an active participant in the decision to “discount”.

Volume (trade price for volume)

• Pros:  Can boost profits where there is leverage in service supply;  Can lock-in business and improve cashflow
• Cons:  Doesn’t work if higher volume requires higher resources...and now at a lower price

Volume discounts are a popular strategy, but one which needs to be carefully considered.  Volume discounting can only be utilised where there is leverage or utility in the adviser’s business – where more service can be provided without a matched increase in resource or expense.  As a result, accounting, legal and consulting professionals should approach this strategy with caution as their main point of leverage is their own time...which isn’t really a point of leverage.  Financial Planners, Finance Brokers or Real Estate Professionals have a better ability to leverage their advice or solutions in exchange for higher volume (and therefore higher overall revenue and profits).

Future (refuse now, but revisit in future)

• Pros:  Attempts to avoid the discussion;  Leaves discounts on the table as an incentive for repeat business;  Encourages cautious prospects to start small before a large commitment
• Cons:  Bluff can be called upfront so you need detail on what scenario would trigger future discounts;  Doesn’t solve the issue and may give prospect false hope or expectations

This strategy sounds great in theory and was very popular in the survey but I wonder about its ultimate effectiveness.  What is the purpose of delaying a decision on discounting into the future?  What will change to make you consider the discount?  If the decision will be made on future business, why not just offer a segmentation strategy so the prospect can clearly see the different pricing points immediately and self select or up-tier later?  If the prospect has the capacity for high volume (and you can offer volume discounts) why not just put that on the table straight away?  If I was a prospect and offer this strategy, I would immediately ask what the exact criteria for future discounts were...and I suspect that wont be an easy discussion.  This strategy can be a bit of no-mans land.

Refuse (any discount)

• Pros:   Establishes value in your offering;  Demonstrates self-belief and confidence in your offering;  Avoids competition with price-led alternatives;  Acts as a screening tool for prospects;  Should ensure profitability (as long as you have enough volume);  Tends to build a more reliable long-term client portfolio
• Cons:  Can lose market-share in competitive times;  May need to have long-term view;  Need to offer a clearly differentiated (non-commodity) service

Refusing to discount is a determined strategy and a very good one.  For businesses which have little ability to leverage resources or scale service delivery, discounting becomes almost impossible.  Advisers should know their cost to service, plus their margin, and that sets their minimum price.  For highly focused or niche businesses, discounting becomes irrelevant – you have 1-2 products suitable for 1-2 types of clients – which doesn’t leave much room for discussion.  This also means it’s highly beneficial to have a differentiated service offering.  All businesses need to compete on one of price, quality, speed or range – if not price, make sure it’s one of the others.