Discount Pricing: Are You Slashing Prices or Profit? (+ Free Download and Scripts)
Discount pricing is an alluring way to close a deal fast, increase cash flow, and even build goodwill with some customers.
Maybe you have a customer who got a lower quote on a service. Offering just 10% off could make up the difference and win you the bid. No biggie, right?
For small business owners, that mentality can be dangerous. That’s because for the owner, discounts aren’t taken off the total price, they’re taken off of your profit.
For example, if you’re operating at a 20% margin, that 10% discount you offered represents a full half of your profit.
Free Download: Get our discount pricing matrix PDF to calculate discounts instantly.
Even worse, if used arbitrarily, discounts can show a lack of confidence, attract the wrong customers, and damage your brand.
That’s because discounting sends the message that your services aren’t actually worth their perceived value. It sends the message that you, the business owner, can’t stand behind the pricing you originally set. And if you can’t stand behind that, can you really stand behind your promise to deliver what the customer asked for?
In my work as a business coach, I see a lot of clients struggling with pricing strategies, without a clear understanding of what discounting does to already-thin profit margins.
In this article, I’ll take you through some discount strategies you can put to work in your home-based serviced business, and what you need to know when you get into the discounting game.
What are the risks of discount pricing?
Discount pricing, promotions, special offers, price drops—whatever you call them, it’s easy for small businesses to get almost addicted to the thrill of winning new jobs by reducing prices.
While discounting can drive revenue fast and attract new customers, it comes with some major disadvantages:
Pros of Discount Pricing
- Win more bids in a short period of time
- Increase cash flow
- Convert new customers faster
- Can increase customer loyalty if used well
- Can drive interest in new services
- Get rid of old stock
Cons of Discount Pricing
- Decreases margins and profitability
- Shifts conversation from value to price
- Lowers perceived value of services
- Shows a lack of confidence or knowledge
- Triggers a race to the bottom with competitors
- Sets a bad precedent (you may not be able to charge full price with the customer again)
- Attracts non-loyal or price-shopping customers
- Requires tracking to ensure you’re not losing money
Discounts can lower your perceived value
The price of a service often determines the level of service in your customer’s eyes. If your discount is so low that it seems too good to be true, then your customers will perceive your services to be low value, too.
Your price should convey the value of your services. If it doesn’t, you’re selling yourself short and your business will lose money (and customers).
FREE TOOL: Try our free service price calculator
Discounts cut into profits
Profit margins are razor thin for most service businesses, and discounting can make those margins even thinner.
If you’re consistently discounting services that should be sold at full price, you’re going to eat into your profits which can set your business back and exhaust your sales team.
Think about the example above. If you have a 20% margin, and offer a 10% discount, you’ll have to double your sales volume just to make up the loss.
To work this out on the fly, use the free Discounting Dangers Matrix below:
Understand how discounts impact your profit with this free tool.
Discounts sets an expectation
Finally, if you continue to discount your services, your clients will come to expect those low prices every time they book new work with you. Discounting sets a precedent for lower priced services, tying you to a price you might not be comfortable with.
Why do customers ask for discounts in the first place?
No matter how well or reasonably you price your services, customers will still ask for discounts.
Don’t get discouraged: asking for a discount is not an objection to booking a service with you. Often, customers ask just because they feel like they should.
However, if your customers persist in asking you for discounts, look at your business model to understand why.
Are you sending the right message?
If you’re getting the message that customers want to pay less for your services, change your message your sending to your customers.
When you show up to a job with old, beat-up trucks and no uniforms, your operation can look ad-hoc and unprofessional. Negative reviews can also impact your business’ perception. Your clients may end up thinking you don’t deserve to charge full price — however wrong that may be.
Your work is top dollar — show them that’s true by showing up on time to jobs, invest in uniforms, and finally get that new, branded truck you’ve been working for.
Are you trained to sell?
A lot of service businesses take sales training for granted.
Professional contractors feel that they’re not in sales — they might think “I’m a landscaper, not a sales expert.”
But that’s where you’re wrong. As much as you might consider yourself to be a technical contractor and a business owner, you’re also a salesperson. Your sales skills are just as important as your technical skills on the jobsite. No sales = no customers = no jobs.
The same goes for your technicians. As an owner, it’s your responsibility to train your team on sales or bring in a sales coach who can help.
READ MORE: Learn how to use good, better, best pricing on your quotes
How to do discounts the right way
Even with all of the pitfalls of discounting, you can still make them work for you. Here’s how:
1. Get ahead of the discounting conversation
Let your customers know exactly what you’re going to do for them, before they’re even able to ask for a discount. Lay out what you offer, your level of service, and your quality standards.
Take the time to explain why you’re different from competitors, especially those who lowball their prices.
You can do this on your website when customers first book with you, or on your price estimate, taking advantage of custom line items and optional add-ons.
If your customer brings up a lowballing competitor, here’s something to remember, whether you insert it into your sales script or use it for inspiration in future discounting conversations:
“I never let other people’s price determine my level of service.”
2. Ask probing questions
When the discounting conversation does happen, use the opportunity to learn more about the situation. Then, guide the topic back to value, not price.
Here are a few scripts that can guide the conversation:
Client: Can you offer a deal on this price?
You: I appreciate you asking about a discount. Do you mind if I ask why you’re looking for a discount? It would be helpful for me to learn more about what you’re looking for and see if I can further explain the value of our services.
Or: I hear you. Before we get into numbers, let me walk you through our service process, warranties, and extended guarantees. That way you’ll see all of your options. I can even make recommendations on different levels of service.
It’s okay to ask “why.” The goal here is to learn more about their budget, their blockers—anything that might be stopping them from making a decision.
This also gives you another opportunity to reiterate your value, offer different service levels, and stand your ground on your pricing strategy.
Your customer could very well have a good reason for haggling a price. But you’ll often discover that customers will negotiate for the sake of it and end up paying full price in the end.
Client: This quote looks high compared to what I’ve seen. Can you bring it down for me?
You: I understand that other companies may quote lower, but we set our prices based on our value, not our competitors’. In addition, we are the only service provider in the region to provide a full service warranty and satisfaction guarantee. I’m proud to say we have over 500 5-star reviews to back that up.
There will always be someone offering a crappy $6 haircut. Your job is to be the company that fixes $6 haircuts, and stops clients from ever considering them again.
Client: Can you discount 20% off of that price?
You: Everything we’ve discussed with regards to the service we’ll provide is reflected in the quoted price. I’ll never ask you to discount your expectations of the quality of our work, which is why we don’t discount our services.
Your clients will understand this because subconsciously, discounts feel like sacrifices. Your clients may ask themselves what they are giving up just for a price decrease.
3. Negotiate
If the customer has made it clear that price is an obstacle, you can still win them over by negotiating a service level that works for both of you.
For example, you can offer to remove some smaller line items to bring the price down to something they are comfortable with.
An even better solution is to offer more value without increasing your costs. Can you add-on a small service to make the customer feel like they’re getting their money’s worth?
It’s not a discount if you adjust the offer and stay profitable.
Ask: “What would need to happen to make our quoted price work for you?”
Types of discounts and discount strategies to offer
Finally, here are the discount pricing strategies that work best for service-based businesses to stay profitable:
1. Free gift offer
Instead of offering a percentage discount, consider offering a free gift. This will depend on your industry. For example, if you’re a cleaning business, you can offer a free DIY cleaning guide, or a free branded duster on your next visit.
2. First-timer discount
When it comes to acquiring new customers, a small ‘first-time’ discount can help get them in the door.
Just make sure you impress them with a high level of service so that they book with you again and are willing to pay full price.
3. Limited time or promotional discount
Limited time discounts help create urgency, and can be helpful to boost sales in a short period of time.
A great discounting strategy is to offer “buy one, get one” which encourages your customer to book another service with you right away. This way you’re generating cash flow and creating recurring revenue.
You can also time discounts with events or holidays. For example, a Spring cleaning discount, or a ‘New Year, New You’ offer.
4. Customer loyalty or milestone discounts
Loyal customers are the lifeblood of service businesses. Create delight and goodwill by offering discounts on milestone dates, such as on a customer’s birthday, or their 10th service with you.
They’ll feel special and realize that they’re more than just a number to you.
Keep track of customer info in a CRM so you don’t miss important dates.
5. Referral discounts
This is the best type of discount pricing because it gives back to your business.
Customer referral programs are truly win-win — you get high-quality leads from loyal customers, and they get a kickback.
Check out these referral program ideas to see this discounting strategy in action.
The bottom line on small business discounts
You might have read a lot of advice from business writers about how discounts can give your business a boost. While that might be true in some cases, discount pricing requires thoughtful consideration.
Before you knock off even 15% off of your service price to win a job, think of your profit margin and refer to the Discounting Dangers Matrix.
That way, you get a complete understanding of what discounting is doing to your business and your profits.
About the Author: Kevin Simpson is an award-winning Certified Executive Business Coach with over 25 years of real-world coaching results. He’s owned several small to mid-size companies, and understands the key drivers to growing businesses and giving owners complete clarity on how to make their businesses profitable. Kevin is a raving fan of Jobber and the impact it has with the companies that rely on it. Learn more about his practice at Action Edge.