I want to offer my best clients price cuts, but how much of a discount is too much?
I know that offering discounts is a great way to ensure loyalty, but I also want to make sure that I'm not losing money on my best customers. How do you tow the line between encouraging loyalty and offering too much of a discount?
Why do you want to give away money? Low prices don't create or ensure loyalty, good value and excellent service do.
Customers who buy from you because of your low price will go to the next low price that comes along.
Keep in mind that every dollar you give away comes out of your profits, not your costs, and it's your profits that keeps the business running.
Live by price, die by price.
Unless you're in a totally commodity market, create customer loyalty by creating value for your customers. Be so good that they don't want to go elsewhere at any cost.
My general rule of discounting is: "Don't give away money without getting something in return."
One of the WORST things i did when I first started working for myself was trying to match prices of others and coming in lower than I should just to get work.
WHAT IS YOUR TIME WORTH? Figure out what you are worth, what your time is worth, and why it is worth that. Build value, don't cut your prices.
Grat question Rob. A lot of my clients are wondering the same thing. There are 3 things to consider when offering discounts to your clients:
1) Profit Margin - You need to look at what your profit margin is without the discount and how much is there when you offer a discount at various percentages or dollar amounts. You are in business to make a profit so make sure you are making enough to earn a decent profit with the discount. That will vary from different industries and possibly product to product within a business.
2) Frequency of Business - Take a close look at how many times these clients are using your services or buying product from you. Use monthly, quarterly or yearly amounts to calculate how much revenue they bring you. If it is substantial it may still be worth it to offer a discount. The more volume they bring the deeper the discount can potentially be. But remember to look at Profit Margin.
3) Does the discount help you keep the client or get new ones? - Discounts are essentially spending money. You should only spend money to keep clients or get new ones. If you can keep your clients without offering a discount then that is best. If you offer a discount and that keeps them as a client and you are making profit, then okay. Also look at if the discount helps get you more clients through referrals. Discounts based on number of referrals is a great way to offer discounts but still receive great value.
(Edited to correct the language)
Simple answer - Do your price research. Check what your competition is offering. Anything lower then that is good provided you don't kill your profits just to win a business unless you can improve upon your cost base.
Sometimes, I have made sale to win the continuity of the orders - just to get entry. That is something you would need to consider.
Focus on value generation, not discounts. If you fall into the game of discounts, you haven't developed the niche and status where your customers will consider retaining you as a valued partner. Anyone with better price can overtake your then.
Hope this helps!
I would avoid offering discounts, especially to current clients - you already did the hard work to earn their business. I might approach some kind of referral based incentive program so your best clients sing your praises and get a little thank you bonus for doing so...I cannot recall the source but I once heard something to the effect of eight or nine times out of ten that a discount is given, none was needed to win/keep the business
You've gotten some pretty good advice from the others.
1. Selling on price alone is a failed strategy because there will always be someone willing to sell a product for less than you. And as Brian Jeffrey stated consumers who buy based on price have no loyalty to a retailer or brand.
2. Developing a loyalty program, like anything else in your marketing mix, it comes down to what you are attempting to achieve.
3. Are you selling a service or product? There's a big difference on how to approach loyalty and 'discounting' between the two. With a service its all about how much do you value your time because it is the only resource you have and it is finite. Once you sell those hours at a lower price they are gone and can't be made up.
With products is comes down to profit margin and how much of it are you willing to give up. For example, a restaurant may give you a free sandwich after buying "X" number of sandwiches or a free desert for referring "Y" customers. They can do that based on the cost of product versus the amount of profit earned from the previous sales.
More companies, especially in the retail space, are going to a rewards programs that earns a consumer points based on the amount of money they spend at the retailer.
4. You have to think in terms of the customer lifetime value and how you can maximize there value.
I think it depends a lot on what business you are in. If you have competition from folks that are Price focused, then it may be a way to go. There are a lot of variables on this one:
1. Type of Business
2. Level of Price Sensitivity
3. Repeat Business possibilty
4. Desired Growth
In working with businesses on Strategic Planning, I focus on 3 factors:
1. Relationship Managemement
3. Customer Satisfaction
All 3 of these are part of the answer to this question. Check out my blog for more info info and Ideas - www.dailysalesthoughts.com
Interesting question. I agree with Brian that discounts may not be the answer to customer loyalty.
In my practice I find that the perception of value for money is better than discounts. In fact, I have two clients that increased client conversion and client loyalty by increasing prices! The problem was that by discounting their prospects perceived that their offer was sub-standard. Thus, raising prices increased the perception of quality, even though there was no change in either product.
Rather than discount to ensure loyalty, I'd suggest speaking with your clients to find out why they buy from you and what they value about your offer compared with the competition. These insights should give you direction on your offer and by inference your pricing policy.
Contact me if you think I can help.
Rob. Offering a lower price or discounts is not really something you should do unless your competition is knocking on your door and stealing your clients. What your focus should really be is getting new customers. Find out what your competition is doing and find a unique offering that they are not offering. Promote your brand authority. This will attract new customers. Your current customers will be loyal if you give them the best customer service and product offering over your competition. Be smart. Don't give money away, Put together a game plan on your marketing and attract customers that will continue to buy.
This is such a great question -- and age old...@Brian Jeffrey (below) is spot on. When the focus is on cost,..you are a Vendor haggling price (even if your intent is to keep loyalty alive).
Value wins every day.
When you find the ideal clients (and I'm sure you do) they care about your company for very different reasons with respect to their loyalty.
Ask them your best customers why their are loyal. The Voice of your Customer (VOC) is very revealing..
There is a reason I don't go to the chain hair cut salons for my hair cuts...there is also a reason I don't pay $250 to get my hair cut! Figure out and BE the compelling reason for why your customers can't get the same experience (service, value, product) at a lesser price.
Rob, you have some great advise.
the standard rule is do not give anything away without getting something back in return.
If someone is asking for a discount, always get an increase in quantity to off set the loss.
Without knowing your business, it is hard to be specific, however there are other ways to enhance the level of loyalty, while at the same time making the loyal customer feel special.
In most business there are 4 main pillars. Price, Product, Supply, Service.
Usually he customer wants all 4 Price the lowers, Product the best quality , Supply always in stock, service, delivered the same day. This is very difficult to achieve, in fact it's just about impossible.
But what I have found is for your best customers, you should talk to them, to see which aspect other than price and product (unless you are manufacturing) has the greatest impact on then if not delivered.
Tell them that you are considering implementing a higher level of service in recognition of our top tier customers. In light of this, what is it we could do to make your experience with us easier or better.
Have them tell you. it maybe something simple like having a dedicated internal contact, ensuring you keep enough stock on hand. (you could ask for forward orders to cover that) or some other simple thing.
Remember if they are buying from you and have been for some time, you must be doing something right.
Don't give price cuts! This cheapens your services and makes you look unprofessional. Offer your customers more perceived value instead. Offer additional services that are cheap to you and pass them on. Never give a discount and expect to seriously increase your loyalty. They will only be sticking with you because they think they will get more deals out of your and it will become one big revenue draining spiral. Increase customer value!
You have received great advice below...so I will just add a question to your question...who ever told you that offering discounts ensures loyalty? Yes, I am being direct here.
What it does ensure is consistent discount requests...which will only ensure your current customers not accepting rate increases.
Instead of price cuts, have you considered offering something extra to them for their recommendation to others? If they have been loyal customers, that probably means that they like your product/service. While they may have mentioned it to friends, many times people do not do so unless there is just a bit of a nudge or incentive. Or, you could offer price cuts if they have a few friends that actually buy your product/service. Then, technically you wouldn't be losing money since you're also gaining new customers.
Loyalty to a product, service or company always comes down to value. Each of your best clients sees value in your product and you need to identify what that value is for them as your way of ensuring their longer term loyalty. Unless you're in a highly commoditized market, discounts are only sometimes the answer to keeping your happiest clients happy.
- Ask or find out what your best clients love about your offering
- If it's service: ensure that they work with your best support team members, offer free trainings or simply send a card and gift saying thank you for being a great customer from their service rep
- If it's the quality of your product: keep them informed of new offerings coming down the pipelien, give them an offer to be a beta tester for new features
- If it's price: discount with caution, >30% can indicate that your pricing is inflated to begin with, when you discount be sure to attach it to a why and set a time limit for the length of the discount
What you propose will not have the result your expect. Many here are telling you are giving away money. They're right. The psychology of price suggests that discounts give the market the impression you offers are worthless. If you want to ensure loyalty, deliver exceptional customer service. Call them up personally and thank them for doing business you. Ask how you can improve because you value their insight as a customer. You will get closer to loyalty with an approach like that or something similar to it rather than discounting. Trust us. Do not give money away.
Remember, discounts do not necessarily guarantee loyalty. Great service, perceived value and trust, do. If you are feeling as though you want to give back to the customers that are loyal to you, that is one thing and there are several creative ways to do so. Its the little things that count. If you are struggling with obtaining loyal customers that is entirely different and you could take a look at your existing business and explore the reasons why that is. As a rule, it all connects back to beginning, people want to feel they are getting value for their money, they want to trust who they are doing business with and want service that goes out of the way to fill their needs.
a loyalty or reward program(or gift from coopertaing business) would be best as opposed to offering a discount