How many times have you heard or said these comments about discounts?
- “The firm across town does the same work for a lower rate.”
- “I can’t afford that much.”
- “We only do business with companies that give us a discount.”
- “Get twenty-five percent off the first project!”
- “We can’t charge that client so much, so we’ll write off 20% of the hours.”
Discounts Hurt Your Firm
Whether clients or prospects pressure you into giving them discounts, or you offer the discount yourself to keep a client happy, discounts only hurt your firm. See which of these you recognize.
Discounts Reduce Revenue and Worse
The obvious effect of discounts is to reduce revenue. Whatever you take off the invoice or ticket price never makes it to the top line.
You have a top line goal for many reasons: to cover costs, to contribute to profit, to form a foundation for the next month or year, to strengthen your financial condition. When you discount your fees, rates, or prices, you compromise every one of those reasons.
Cover costs: the most basic revenue goal is to cover expenses. Break even allows you to live another day. Your expenses aren’t reduced as revenue declines. Discounts threaten your existence in the near term. If you fail in the near term, there will be no long term.
Contribute to profit: Profit is the money that stays in the business after expenses are covered. You need profits to grow and to compensate the owner for their investment and risks. Even if the discounted fee still covers costs, if it reduces profit, the firm is at risk.
Form a foundation: Fees, prices, or rates today are the baseline or foundation for fees, prices, or rates tomorrow. As your firm grows in knowledge and expertise, and attracts clients with greater needs, you increase your fees, prices, or rates to reflect the greater value delivered. Discounts distort the base line until it is useless.
Strengthen your financial condition: Your firm’s financial condition is reflected in your income statement, balance sheet, and cash flow statement. When you discount your revenue, you create a cascading effect through these three financial statements. Just think about the cash flow statement; it illuminates the relationship between your incoming cash and your outgoing cash. The bigger the difference, the stronger the firm. Reduced revenue due to discounts hurts your ability to maintain a strong cash flow position.
Discounts Hurt Your Reputation
Reputation is your firm’s brand. Brand is what the firm stands for in the minds of clients and prospects. Whether you work at it or not, your firm’s reputation exists in your local, regional, or national market.
When you firm gets a reputation as discounter, you’re on a one way staircase down.
First step down is price. People don’t believe the price you offer and expect a discount.
Second step, integrity. When you discount, you’re saying that the original price was fake, or inflated. That your services were never worth the original price. And once that happens, people will never again believe your price is real.
Third step, growth stalls. Growth is built on two fundamentals: that your knowledge and expertise increase over time and that greater knowledge and expertise means you deliver more and more life changing value. When you discount, you say “here’s our new value for a lower price!” It’s one step forward and two steps back, and you will find growth impossible.
Fourth step, your services become commodities. A commodity is product or service that is indistinguishable from all other offers in that category. Without differentiation the seller isn’t entitled to any revenue beyond the cost of production. No marketing plan, sales campaign, or clever social media will elevate your firm from the others offering the same commodity.
This, to me, is the biggest shame of all!
Knowledge services have differentiation built into them. Your point of view, your intelligence, your power of analysis or creativity or brilliance cannot be commoditized! But when you discount and become viewed as a commodity, you’ve adulterated the very qualities that make knowledge work so important and impactful.
What Does it Take to Stop Discounting?
Far too many owners and executives wake up every day thinking about how they can increase their top line. They don’t differentiate between profitable and unprofitable revenue.
To stop discounting you need to take a good hard look at profitable revenue versus unprofitable revenue. Pick a recent, average sale, and follow that revenue all the way through from the top line to the bottom line, and onto your cash flow statement and balance sheet. Get help from your accountant if you need to.
When you see how that sale, which represents many of your sales, flows through your financials, you’ll have a gut-deep understanding of the impact of discounts.
Build Confidence in Your IMPACT
Once you’ve seen how discounts hit your financials, return to your roots: your knowledge and expertise, and how you deliver life changing impact to your clients. Need inspiration? Read examples of IMPACT here.
Speak about these IMPACTS every single day, with your associates and your clients; with other providers; and with influencers in your circle. The more you talk about IMPACT, the more confidence you will have to refuse discounts. And to never try to keep clients by offering discounts to them!
Get STARTED
Part of the Trivers Consulting Group brand and reputation is our complimentary STARTER Call. Owners and executives of knowledge services firms are invited to schedule a 45 minute call with me. The caller directs the conversation with important questions about their firms. I’ll answer to the best of my knowledge and give you several action steps so you can get STARTED working towards your next goal.
Hit REPLY or text STARTER to 703-801-0345 to get on my list of callers. We typically have openings within two weeks. Not to worry, if you can’t make the available slot, you’ll stay on the list until you can.
