When I first started my practice, someone reached out to me about taking on their accounts for two limited companies they held. This was quite a big ticket for me back then, so I excitedly paid him a visit one evening. Perched on the edge of the sofa whilst he sat in a lavish armchair drinking a glass of red wine (I was offered one, but politely declined), he described everything to me. We covered a lot over the hour, from his lifestyle (talking about the copious amounts of golf he could play), to how one of his companies was “simple” and a “few invoices a year” job.
He “did me a favour” and “transparently” told me what he was paying his existing accountant. I decided at the time, the best thing to do was undercut them (by quite some bit). I just re-read that follow-up email I sent whilst writing this blog to remind myself. Yikes!
Despite my generous offer, I never heard from him again.
I mention this not because I have sour grapes, or issues with people playing golf. On the contrary. If my clients can find the time to do these sorts of things it makes me very happy! It is because I learned a very important lesson about self-worth and discounting. I would even go so far as to say I was very grateful for that encounter even if I never won the business.
Remembering your self-worth
To this day, I’m not sure what exactly happened, but I suspect it was one of two things.
My first suspicion was that he was simply using me to get a quote to provide his existing accountant and hin turn push their fees down. For quite some time, I thought that this must be the reason. That made sense to me.
More recently though, I suspected something different. You see, by blindly undercutting his current accountant, I undermined myself, my self-worth, and my credibility. I thought about what it might look like in his shoes. Is he desperate? Is he skilled enough? Why is it so cheap? How is he making a profit in this? What’s the catch?
When you try to find a service, the price is only one dimension. I simply don’t look for the ‘cheapest’ electrician or plumber. Rather I want the one who is going to do the job right. I want a high-quality finish, from someone offering great customer service, knows what they are doing, is certified, and cares. Most of these points are difficult to assess until they’ve finished the job. You can get an idea through their website and socials, referrals, and reviews. But the main things I go by before I say “yes” to the work are how they present themselves and what they charge.
If one quote comes at half the price of the rest, it’s never a stand-out winner for me. It actually raises suspicion and curiosity. I ask the question “why so cheap?”. When I see a quote like this, I conclude, rightly or wrongly, that it’s cheap because they have sacrificed all those other important qualities, which mean more to me than the price.
My fiancé passed on to me some fantastic advice to me around this. In providing a service, people are not paying you based on how long it takes you to do something, but rather for the years of experience and training that got you to the position you currently are in today. Really remember that and reflect on how far you’ve come to get to where you are today before you bring your prices down.
One more aspect to this. Undercharging is not good. Resentment can easily build, as you work hours for little return. The quality of your work will drop through corner-cutting and that lack of appreciation. In turn, you have an unhappy client, all because the price wasn’t right.
The disaster of discounting
Discounting hurts. In many ways.
When you’re discounting, you’re doing a few things.
You’re telling your customer your work is worth less than what you would normally charge
This just isn’t great. Aside from undermining your own worth, those customers who you did charge full price could feel aggrieved if they feel they never received a discount in the first place, should they ever find out.
Beyond this, you’re now setting expectations that your work is worthless and the spiral continues.
You’re squeezing your margins
Big discounts will eat at your margin. For those industries where you require materials or subcontractors, it could mean the job is delivering a gross loss and leaving you out of pocket.
For service-related jobs, I argue it’s worse. It is eating at the margin of your time. Less time with family, friends, growing your business, and more time working at a low effective hourly rate.
You’re complicating your pricing structure
Pricing is very rarely easy. It’s an art and something that always needs work and can rarely be perfected.
Discounting is simply muddying the waters and making that job even more difficult for you.
You may weaken your perception as a differentiator
Put simply, a differentiator in marketing is a business that offers an edge over the competition. Think Apple, Mercedes, and Waitrose.
Discounting could undermine that message. You are effectively saying “we don’t really offer anything that stands out, so instead we’ll compete on price”. This is one of the reasons you’ll very rarely see Apple discount their phones unless they become outdated by a newer model … and that’s in part why they have a market capitalisation of over two trillion dollars.
Is all discounting bad? Not necessarily.
One of my clients runs a fast-food chain and discounting and deals remains a huge part of their strategy. But it’s done very, very deftly.
They know their margins like the back of their hands. They know to the pence the food cost of every single item they prepare and sell. With that, they are completely aware of how discounting affects their gross margin.
In fact, such a strong understanding of their margins has helped define their strategy. It has given them clarity on how to squeeze their overheads to lower their sales prices and remain competitive. It’s creating social media hysteria for their deals and it has helped them develop a very strong regional following. That knowledge of margin means they haven’t had to lower their quality and has meant they consistently receive positive reviews.
Discounting is a huge part of their business model, but they certainly are not bullied into it. Instead, they are using it tactically to drive demand.
The psychology of a discount is notable. If you feel you’ve managed to get a good deal, it persuades you to sign up. My advice is if you really wish to discount and don’t offer something like fast food to consumers, why not raise your standard prices. That way when you discount you are simply charging what you would have normally charged anyway. Your margins will thank you if you do that.
The only other concept worth thinking about is early bird discounts. It might help your cash flow considerably if you were to entice people to buy now and give you the cash upfront. This is what I call a tactical use of a discount. You’re not undermining your worth, you’re enticing a sale to protect your cash flow with a carefully structured discount.
Nonetheless, I’m still not a huge fan of discounts. Instead, consider how you can build brand loyalty. Everything from the ‘free coffee on your sixth visit’ loyalty cards to referral incentives or subscription-driven discounts in exchange for regular cash flow are much better alternatives that build brand loyalty. This would have a much richer impact on your business and not undermine your offering as unsophisticated discounting could.
My views on discounting
Signing off on this, I personally have a strong attitude on discounting and how I approach other businesses with it.
When dealing with huge companies, haggling here to me feels perfectly acceptable. It counters the bad practices they undertake, when they leave you unattended on egregious contracts, as your deals quietly expire, and they raise your costs by inflation. I wish it wasn’t the case, but until I know they price fairly, transparently, and consistently, I’ll keep making those “I’m going to leave” phone calls when my digital tv package runs out, or my car insurance needs renewing. That’s the game, sadly. This may be not for much longer though. UK watchdogs are actually looking to clamp down on what is known as loyalty penalties.
But for small businesses, local businesses, run by an individual, or partnership, discounting hurts. In pushing for discounts, you are eating right at their bottom line and, ultimately, the pay in their pocket. The ‘10%’ you may have negotiated will hurt them a lot more. The way I see it is their price is their price. If it’s too high for me, I’ll find something else. I won’t argue it down because I know what the repercussions are for them personally.
The other real lesson is to be all over your margins. Even if you’re offering a service, look at the margin of your time. Make sure you are earning your worth and using your time profitably.
I never discount. My price is my price. I price fairly and consistently, using GoProposal, purpose-built pricing software for accountants. It makes it clearer for the client and fairer for us both. Know your worth, be proud of it and charge for it.
Pricing have you in a pinch? Not sure what your gross margins are, or should be? Get in touch to see how we can strengthen your profits today.