Discounting and Value-Add
Should you offer discounts or toss in a free value-added program to customers? In the old days, the right answer was, “Yes, customers expect it.”
Today, depending on the sophistication of the revenue organization in the business, the answer ranges from “it depends,” to “only in very select cases.” While discounts still play a role in negotiation and driving up close/win rates, it is crucial to eliminate value-add from the narrative. More on that below.
“If you have a 30% margin, and you give a 10% discount, you have to sell 50% more business to make the same profits.”
Media and event businesses must strive to grow the top-line by leveraging existing resources or, more ambitiously, by maximizing productivity while minimizing costs. Couple that with cost inflation from materials, technology, labor, travel, shipping, food & beverage, A/V, and venues, discounting and value-add are not friends of the business.
In fact, a new more urgent discussion is taking place at forward-thinking events and media companies: how to gain pricing power, not how to erode it.
The friction between commanding higher prices for what we sell and discounting so we can close a deal creates a pretty interesting conundrum.
So how do you create more value and command higher prices while also managing discounting? How do you ensure that the old strategy won’t cannibalize the new one?
- Strict Governance
- Monitoring, Analysis and Measurement Using Data
- Management using Predictive Analytics
Governance & Data
In a well-governed revenue organization, discounting programs are carefully structured, documented, and transparent to both customers and sales teams. Smart sales and finance leadership teams monitor these programs closely using data. It is acknowledged that every dollar lost to discounts is a dollar that is subtracted from the margin. Moreover, the discounted amount still demands resources and cash be delivered to deliver the value promised to the customer.
"Well-governed revenue organizations understand that mismanaged discounting destroys profits more than anything else." - Every CFO on the Planet
Before I go into an example of governance and how to use data to monitor and measure, I need to make a personal plea.
Discounting can be a viable strategy if managed and monitored well. I hold an entirely different opinion about value-add. The value-add provision is a malevolence that must be expunged from all contracts as it unfailingly leads to unsatisfactory outcomes, reduces unit-level profitability and in some cases, materializes in a loss. I believe that anything given for free holds no value to the receiver of the value and as such, should not even be used to help drive demand for new products and solutions. Let’s ban value-add forever.
“Value-add is the contract nuisance of the media and events industry. It destroys value and never delivers what it promises.”
An Example Of Discounting Governance & Data
For the sake of brevity (am I ever brief?), I will give one example of discounting governance and how to use data to manage, monitor, measure and assess.
Scaled Contract Size
Customers could be offered discounts based on contract size.I am 50-50 on this and I imagine that it depends on the market you operate in. If value has truly been sold to me, am I really going to increase my spend because you are offering me a spend threshold discount? Not sure. But if the discounting program is offered, have strict governance around:
- Spend threshold levels
- What happens if the discount is offered and the spend level goes down at the 11th hour
- What happens if the spend level goes down via a partial cancellation after signed deal takes place
- What happens if the salesperson offers the discount and the threshold was not met via the initial contract aka maverick discounting
The word “scaled” is also important and should mean two things:
- You scale the discounts based on spend levels
- The discounts kick-in once the spend levels are met.
For example, if you offer discounts once a company hits 100K in spend, you would not discount the first 100K, OR the discount on the first 100K is minimal while the attractive part of the discount hits on the 101,000 spend mark. Why? Because in many cases in media and events, contracts can be canceled at any time and you wind up holding the revenue slippage.
What this means for your CRM, Order Systems, Financial Systems, Reporting, and Data Strategy
From a data perspective, this means your CRM, order systems and financial systems need to allow for discounting types and you need to have the ability to have an historical look-back across pipeline stages and changes in dollar levels and discounting types offered throughout the selling period. In the latter case, your CRM can’t help you and most business intelligence platforms can’t either. I am inserting a shameless plug here- Insightify by H2K Labs Ping me if you want to chat about it.
Using data analytics with predictive insights, create dashboards that tell you:
- Which salespeople are most effective at using the discount to grow initial deal size to what ends up in “closed/won”?
- Is discounting helping or hurting salespeople and quota attainment?
- How is discounting impacting sales profitability?
- Which salespeople are abusing the program so you can quickly contain it? Use predictive alerts so you can stop this dead in its tracks.
- Is the discounting program doing what you want it to do: grow deal size, improve upsell, cross-sell and expansion, and speed up sales cycles?
- At what rate do customers who receive the initial discount in contract 1, renew?
- At which point in the sales cycle does the discounting program have the most effect?
- For renewing customers who received the discounting program, do they continue to grow their spend? Do they renew faster?
- Which type of customer cohorts are most favorably responsive to the discounting program?
The Net Net
I have lots of opinions about discounting and value-add. Kill value-add once and for all and create a highly governed discounting program that can be managed, evaluated, and measured using data.
Challenge the old school status quo and get rid of frequency discounts especially on digital advertising. Don’t discount lead generation programs because this is where pricing power lies. If you are not selling monthly subscriptions, don’t offer “pre-pay” discounts either. And, for the love of all things heavenly, do NOT let sales reps offer discounts “just because.” It’s killing your business.
And of course, please use data. All the time.
Schedule some time with me if you want to chat more about improving your discounting strategy using data, and how we can help you grow revenues and reduce costs.
Other blogs in this series: 10 Recession-Proof Ways to Improve EBITDA.
- Increasing Expansion and Cross-Sell
- Identifying and Eliminating Revenue Leakage
- Tightening up Sales Cycles
- Aligning Revenue Critical Teams
- Developing Leading KPIs for Growth
- Using Predictive Analytics to Control the Business