Often, when someone can’t afford to buy the whole thing, we break it up into phases, hoping to sell the long range vision, but signing up for just phase 1 with an eye on future phases. On the purchasing side, a similar strategy is common – “There’s more to come…”
Especially for big accounts, the promise of more to come is a common ploy. You have no guarantees here, but I’ve often had companies offer this in one form or another. In the first case, you propose several items; product, support, services, or perhaps a volume discount. When volume discounts are offered, you in a sense give away your margin secrets, letting the client know how much profit you have in the deal. If I offer to cut my price 30% for volumes of a given product, let’s say I am selling books, the buyer knows I must still have margin in the deal, so why not ask for the 30% on just one book? The purchasing agent is unwilling to buy the entire deal, but looks to receive the same discount. Another version of this approach is to promise future business – “Discount now, if you win this deal and do a great job, there is more to come.” In a third version, the agent looks for a discount for this initial deal. “We’re giving you an opportunity,” they say, “So make this first deal attractive, and we’ll pay more next time.”
1. First, in the third strategy, don’t believe it. If you discount the first deal, hoping to raises your rates on future deals, you’ve lost. There are some creative alternatives that can be used. For instance, charge full price on the deal, but offer to perform a one time complementary service along with it to make the deal more attractive. Once you cut price, you have established a precedent. I see phone companies waving their install fee all the time, but keeping the recurring revenue stream whole. I’m convinced the install fee is just there for negotiation purposes. I did the same with my son’s braces. I asked to get a discount on the monthly fee, but they offered to wave the first office visit – xrays, etc. If you paid full price, you might want to go back and complain.
2. On the volume discount issue, the only thing to do here is to show economies of scale before discounting. For instance, if I can group travel or do something with a resource already onsite, I can justify my discount. If not, the purchasing agent is watching your margin. Be careful with this one.
3. On the promise of business – simply don’t do it. Offer #2 as a way to bring the price down, or go to a POC (Proof of concept). Anything else is simply a discount for no reason.
© 2011, David Stelzl