As a deal moves through the sales pipeline, buyers often ask for discounts because they see it as an obvious issue. The temptation for sales professionals is to quickly agree to a discount in the hope that the buyer will say “yes.” But this is an expensive mistake.
Discounting in sales drains profit faster than nearly any other selling habit, and the damage compounds because every discounted deal teaches the customer that more discounts are available for the asking.
Consider the math of discounting. A 10% discount may sound modest, but it has a much larger impact on profitability than many sellers realize. For a company with 40% gross margins, a $100 sale generates $40 of gross profit. If the seller offers a 10% discount, the price drops to $90, but the cost remains $60, reducing gross profit from $40 to $30. That means a 10% discount reduces gross profit dollars by 25% ($10 discount ÷ $40 original gross profit = 25% reduction). Put another way, at a 40% gross margin, every 1% discount reduces gross profit by 2.5% (1% discount ÷ 40% gross margin = 2.5% reduction).
To offset a 10% discount, the seller would need to increase sales volume by roughly 33% just to generate the same total gross profit ($40 original gross profit ÷ $30 discounted gross profit = 1.33x). This is why discounting should be treated as a strategic decision, not a routine concession.
A 10% discount on a deal with 40% gross margins decreases profitability by 25%, not 10%.
Buyers rank price lower on their priority list than most salespeople assume; price decides the deal mainly when every option looks the same.
Strategic trading protects margin in the same situations where conceding gives it away.
Discounts raise the cost of future deals by teaching customers that prices are negotiable.
The margin math is the first problem discounting creates, and it is not the only one. Discounting signals that more concessions are available. Agreeing to a discount, particularly early in the negotiation process, encourages the buyer to ask for even more concessions. A buyer who gets 10% off the first ask will reasonably wonder what else is available, and customers who receive a discount once tend to expect one on every renewal and any subsequent expansion. Once you set the expectation that discounts are available, it’s hard to change the customer’s behavior.
Discounting also damages your credibility by undercutting your value claims; after all, if the original price you quoted isn’t a firm price, then maybe the buyer thinks you can discount further.
More importantly, in research on how buying decisions are made, price typically ranks low among the factors considered by buyers. The higher you go in organizations, the less important price becomes. Senior executives are more concerned with factors such as return on investment, reputation, and quality. The person asking for the discount may not be the ultimate decision maker.
The habits behind the discounting problem are correctable. Here are the five reasons salespeople offer discounts, along with how to coach your team to counter each.
Some sellers discount because a previous manager taught them to, or because every deal they have ever closed included one. The discount is offered at the slightest sign of buyer hesitation, as a matter of routine, with no awareness of the margin it destroys.
Work with the salesperson to formulate your pricing posture before the conversation starts. Know the trading range on every negotiable issue in the deal (i.e., terms, scope, timing) and walk in with options that can satisfy the buyer without touching price. A seller who has prepared a few creative alternatives in advance rarely needs to resort to discounting.
It also helps to clearly explain your pricing position to the customer: "Our pricing reflects the value we deliver, so let's focus on the terms that matter most to you." This will help the salesperson anchor the negotiation appropriately.
When a deal stalls at the finish line, salespeople often believe that a price cut will get the deal back on track. A late discount, though, cannot compensate for value the buyer never saw in your solution. If the buyer is hesitating, the unresolved question is almost always about value, fit, or the risk of change, not price. Please see here to learn why most price objections aren't about price.
In these situations, coach your sales team to revisit the buyer's stated priorities, restate how the solution addresses each one, and confirm that the salesperson can quantify the value of solving the buyer’s business problems. This discussion will help the salesperson uncover gaps in their knowledge and may point to the reality that more selling is needed before discussing price.
For a more in-depth discussion of sales coaching, see this whitepaper.
Negotiating takes preparation and requires the seller to tolerate a little friction. Discounting right off the bat avoids both, which is why sellers who doubt their negotiating skills resort to it.
Oftentimes, your sales team may not understand the nuance of a sales negotiation. It’s important to explain to them the distinction between trades and concessions. A concession gives something away; a trade gets something of equal or greater value back. A lower price might be exchanged for a longer contract term, a broader scope, adjusted payment timing, a referenceable case study, or an introduction to another business unit. That preparation is most of the battle; here are six things you need before entering a sales negotiation.
In research on buyer behavior, price consistently ranks lower on buyers' priority lists than salespeople expect. Solving the business problem, reducing risk, and working with a capable partner routinely rank above it. Price becomes decisive mainly when the buyer believes all the available options are about equal.
In addition to coaching the salesperson on how to make a compelling value presentation, you will also want to help the seller differentiate. When a buyer says a competitor offered the solution for 20% less, the word to address is "same," not the discount. Walk back through what the buyer told you matters, show where the solutions genuinely differ on those points, and let the comparison justify the premium. This will help reframe the conversation with the seller.
Some sellers discount to seem flexible, likable, and easy to work with, a relationship investment, in their minds. Goodwill bought with a discount is not a great long-term foundation for a sales relationship.
To learn more about how to establish rapport with customers and other techniques for building relationships in sales, read our Complete Guide to Building Sales Relationships.
A discount costs three to four times its face value once the margin math is run, and the five reasons sellers offer one anyway are all correctable habits. Establish value early, prepare trades instead of concessions, differentiate when buyers compare, and let your delivered results carry the relationship. The sellers who hold their pricing close more profitable deals — without closing fewer of them.
How much margin did your team concede last quarter on deals that could have closed at full price? SBI's Value-Driven Negotiating™ program trains sales teams to establish and prove value, prepare trades instead of concessions, and defend pricing without putting agreements at risk. Schedule a consultation to learn how we can help your team protect margin in every negotiation.