What To Discount?

I hate to discount.

We’ve all been confronted by a spreadsheet with multiple options for pricing the components of your bid.

When you tot up either what you want the client to take or their entire wishlist, it’s way over their budget or above what you know they’d sign up for.

Luckily, there are things you can play with. Even if you aren’t at a place where a magical corporate across-the-board 15% discount can suddenly appear from on high – provided the deal will come in by period end.

But how should you apply the pencil sharpener? In my early days I learned pretty quickly that to apply a blanket percentage off the bottom line was not the answer. Punters were sceptical of this approach. It comes across as arbitrary, with little reason nor transparency.

Better to attribute discount to specific elements with a highly defined explanation.

American marketing profs Rebecca Hamilton and Robert Smith have done some revealing work in this area.

They refer to this as partitioned prices. Typical examples include parts and labour, items and shipping, delivery and installation.

Buyers shy away from overall options when they veer towards two poles. Where any lesser-valued element appears to have a disproportionately high slice of the total price on one side, and at the other extreme where the lesser-valued amount is way under what they perceive to be market norms.

A key finding is;

consumers systematically prefer partitions that allocate a larger proportion of the total price to high-benefit components

So one one level, the clear lesson is; if your customer values it, charge for it. Their three top tips are;

  1. Understand customers’ goals. We’ve found, for instance, that someone who’s hungry for pizza would rather pay full price for it and get a significant discount on wings than get a slight break on both.
  2. Bundle low- and high-benefit components together, offering the low-benefit ones free only when market norms allow.
  3. Work on changing perceptions of value. When we cued customers to the benefits of, say, high-quality installation, willingness to pay more for normally low-benefit labor increased.

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