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The Revenue Opportunity in Managing Negotiated Discounts
by Jim Geisman

The Conflict: Lower Prices vs. Higher Growth and Profits

Technology vendors are facing reduced IT budgets and severe price competition by traditional, on-premise software vendors or companies offering on-demand solutions. For those companies having less constrained IT budgets, they see as a buyer's market and want lower prices. The buyer's-market mentality has persuaded some sales reps that they can only make quota if they give away more product or give deep discounts.

While customers and the sales force press for lower prices or deeper discounts, investors are pressing for stable or growing revenues while maintaining profit margins. Companies wanting to survive or see their valuations rise need to take action. Some of the action will likely involve stabilizing pricing and discounting.

Is Pricing or Discounting the Problem?

Some companies deal with hard times with across-the-board, ad hoc price reductions. If you are considering this tactic, we have one word: DON'T.

Price cuts undermine the value proposition, devalue the brand, and are, by definition, indiscriminate. Instead of providing short-term relief, price cuts can take as long as 60-180 days for their effect to be felt. And, worse yet, price cutting can lead to a longer-term downward financial spiral that can be difficult, if not impossible, to reverse.

Instead of indiscriminate price cuts, consider managing the outflow of discount dollars especially negotiated discounts that often account for 50% of the spread between list price and net price. Applying discipline when managing discount dollar outflow can be an effective way to deal with customer demands for lower prices while maintaining revenues.

Bring More Discipline to Discounting

The following example illustrates how a disciplined approach to discounting might work. Consider two accounts wanting discounts on equally large six-figure deals. The first company is a price buyer and is likely a one time customer. The second company has the potential to be a repeat customer. Even though the deal sizes are the same, the second company deserves more favorable treatment since future sales are possible.

Clearly negotiated discounts should be based on something more than deal size...

Information about the negotiated discounts in previous orders can be used to find and plug discount dollar "leaks." If discounting is widespread, one can develop negotiation guidelines—by product line, customer segment, or deal size. If discounting is localized—by rep or product—more specific action can be taken by training specific reps or selectively adjusting prices. Sometimes more discounting can be more disciplined by just giving sales reps information about the discounts associated with comparably sized deals.

When management looks into how negotiated discounts were spread around, they gain a new way to understand and respond to discount pressures. Management can make conscious decisions about how to allocate or invest these discount dollars strategically. Sales teams can be empowered to withstand customer pressure for discounts.

A disciplined approach to allocating negotiated discounts can be used to support product value, shorten sales cycles and improve revenue and profits without affecting customer satisfaction. And the results can be seen very quickly.

Next Steps

While the principles of disciplined discounting are easy to understand, developing the information and insights takes a little more effort. How much effort depends on how well a company understands the interaction between pricing, packaging, discounting and value delivery.

It takes experience to determine quickly and precisely where discounts are going and what to do about it. Experience coupled with a distinct methodology is all it takes to help management and their sales teams use discounts more effectively—in good times, and bad.

This brief article summarizes the benefits of discount containment. Click here for the White Paper on this topic.

About the Author

Jim Geisman is President of MarketShare Inc. The firm was started in 1982 and, since 1987, has focused solely on software pricing. Jim has helped emerging and established software companies solve some of their thorniest pricing problems including how to transition to the on-demand (SaaS) pricing model. He has written extensively on software pricing and is widely quoted in the trade press. He is a frequent speaker at seminars and trade conferences and has consulted internationally on issues of software pricing and deal structuring. Jim has been a co-founder, director, advisor or mentor to early stage companies. He sits on the Board of the Professional Pricing Society and is an advisor to the Entrepreneurial Leadership Program at Tufts University. You can contact Jim by email at jimg@softwarepricing.com or by telephone at 508-647-0330.