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Discounting is rampant in tech companies, and often offered with no clear reasoning.. In a recent case we looked at discounting across a firm’s sales territories. Price capture in the best territory was 50% greater than in the worst territory. Imagine for a second the profit consequences! In the typical tech company a 1% price change represents up to a 7% change in profit. The tragedy in that case is that there was no rationale for the difference, it was simply a matter of governance: in one territory pricing control was tight, in another it was loose. After seeing these findings the firms set a target 4% revenue increase from pricing alone in the next fiscal year. Unfortunately, discretionary discounting practices at tech firms yield pricing practices that look like this.
The light green line represents Year 1 average discounting by deal size. The dark green line represents Year 2 average discounting after improved price management practices were implemented. Annual practice revenues were roughly $150M. Net improvement: 5% increase revenues, or $7.5M with few associated incremental costs.
Discretionary discounting is the crack cocaine of tech. It hooks salespeople and customers alike into extended negotiations where the focus is on price instead of outcomes. It teaches customers that they win by being tough negotiators. Discretionary discounting is based on 3 mistaken assumptions.
- Higher discounting leads to higher close rates.
- All competing companies discount.
- There is an average level of discount that all competitors give.
In our experience working with dozens of companies, none of these is true. Rather, we have found that maintaining effective discounting strategy and pricing integrity leads to happier customers and higher margins. That integrity can be maintained by better aligning list prices with value and having an explicit discount pricing strategy. In other words, price incentives are set as policies, and offered to drive specific behaviors. Those incentives are reviewed regularly for efficacy and compliance.