Real Startups Never, Ever Discount Their Prices

Retail Sales Drop For Third Consecutive Month

A version of this article previously appeared in the Wall Street Journal.

Avoid a simple pricing mistake which could sink your startup. The “D” word - Discounts.

I buy my cars in December. Why? Because I am cheap and I know that car dealers are incentivized by the manufacturer to hit quarterly and annual sales goals. The rewards are in the form of co-marketing dollars and commission spiffs. Thus, the value of a sale at the end of a quarter can be significant, if the sale contributes to obtaining a manufacturer's incentive.

Individual salespeople are commissioned in a similar manner, based on attaining monthly and quarterly goals. If selling one more car at the end of a quarter will earn a sales rep a trip to Hawaii, they may be willing to forgo most or all of their commission to get the sale.

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Avoid The End-Of-The-Quarter Trou Drop

Technology buyers long ago learned this game and routinely stall their purchases until the end of the quarter. Vendors often respond by discounting their prices at the 11th hour, in the hopes a lower price will spur a purchase. End-of-quarter discounting is a rational tactic for public companies that are slavishly bound to quarterly financial objectives. However, habitual discounting at a startup is self-defeating, as it reinforces your customers' proclivity to delay their purchases, patiently waiting for you to reduce your prices.

Discounting is a slippery slope. However, if you never offer price discounts to anyone, you can resist all such requests by deferring to your company “policy.” You can also mitigate end-of-quarter price erosion by firmly communicating, early in the sales process, that your company is not subject to quarterly sales pressures.

Eliminating price reductions also denies mediocre salespeople their favorite crutch, while encouraging creative salespeople team to craft non-price incentives to spur purchases. Some of these tactics include:

Total Cost Of Ownership – Price is only one element that determines the total cost incurred by customers to deploy your solution. In many cases, you can stand firm on price by demonstrating that your overall cost is lower than the competition.

This point is nicely illustrated by Albert Oaten, VP Market Development at SecureDocs. "When I was at Citrix, we pitched a Fortune 100 company as our first multimillion dollar deal. I was aware that they had a relationship with a major competitor and worried that the client would try to create a bidding war.

Instead of guessing what the competitor's discounted price might be, I looked at our client's total cost of ownership for each service. Typical cost for call center reps was around 40 cents per minute at that time. I determined that our competitor's huge download would take one to two minutes longer per customer session, versus GoToAssist. I multiplied the per minute agent cost that our client was likely paying by the number of estimated GoToAssist calls they would handle a year.

Back of the envelope, it looked like our competitor could offer the service to our client for FREE, and our solution would still be a much better economic value, even if we charged $750,000 a year when you considered the total cost of using the two services. This deal reinforced to me the importance of identifying, and communicating the full differentiated value to customers, rather than reflexively focusing on just price.  The question isn't which price is more or less, it's which option provides the greatest economic value to the client and price is just one component of that conversation."

Support – If you provide various tiers of support, offer an enhanced level at no additional charge. For instance, offer phone support to a demanding customer, rather than lower-touch and less-timely email or chat.

Volume – It may make sense to deviate from the "never discount" rule when a per unit price reduction is offset by a large purchase commitment. For instance, if you are selling ten seats of a SaaS solution, consider reducing the price per user if the customer purchases enough seats to generate a substantially larger sale than would otherwise have been possible without the per-seat discount. This strategy obviously is most effective when distribution of your product entails low variable costs.

Cash – If you offer a SaaS product or a similar solution that is paid for over time, require customers requesting a discount to pre-pay a substantial portion of the fees upfront.

Duration – Offset a discount with an extension of the duration of the agreement's term, such that the overall revenue generated exceeds that of a shorter, undiscounted sale. For instance, require a customer to agree to a longer-term commitment in exchange for a lower per-year or per-month price.

Protection – Consider offering “pricing protection” to users who are particularly price-conscious. Rather than reducing your price upfront, contractually limit future price increases in exchange for an extended contract term. Caution must be deployed when utilizing this tactic, especially if your costs could unexpectedly increase during the term of the agreement.

Transparency – Some prospects will value the ability to influence your product roadmap, in lieu of a discount. Invite such prospective customers to join your Product Advisory Council.

Professional Services – Compensate your Professional Services team to drive incremental revenue by solving customers' problems beyond the scope of the initial deployment. Generously discount implementation and training services, rather than reducing your core offering's price, in order to embed your solution more deeply into your customers’ organizations.

Valuable Chits

Never discounting is an ideal strategy. However, if for strategic reasons you decide to grant price allowances, tie them to one or more non-price deal points, such as:

  • PR Goodies – Secure the use of key customer’s logo, testimonials, and a quote for inclusion in a joint press release.
  • Referenceable – Obtain your customers' consent to field a reasonable number of reference calls from future, prospective customers. Note: As a buyer, I usually agreed to this provision, as it ensured that the seller would do everything in its power to make and keep me happy.
  • White Paper – Secure your customers' participation in the drafting of a white paper detailing the successful deployment of your solution, highlighting the cost savings and productivity enhancements which generate a quantifiable return on your customers' investments.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about that killer burrito I just ate.

Photo: Spencer Platt/Getty Images

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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