Reps discount to make their number. Sometimes they discount because they believe it is the only way to close a deal, sometimes they discount because it is the fastest way to close a deal, but either way they do so in order to make their number (not because they like to leave money on the table). In order to stop discounting you must educate your reps on the cost of discounting and provide them the right training and tools to quote the right price.
There is no one size fits all answer to stop discounting. A SAAS company discounts for a different reason than a transportation company. Likewise, the recommended training and tools to stop discounting are different for a $25M business with 15 reps, than for a $250M company with 150 reps. However, concerning discounting, every company is capable of sizing the cost, identifying the root causes, and developing the right solution to stop discounting.
Sizing the Cost
How much additional revenue would be gained by achieving optimal pricing? It is important to figure out how much additional revenue/margin would have been gained had we priced optimally for the deals that we won. It is equally important to understand how much additional revenue/margin would have been gained had we priced optimally for the deals that we lost, i.e., how many additional deals could have been won. Depending on the size and nature of your company, the complexity of this exercise varies. An emerging best practice is to incorporate a Monte Carlo simulation into the analysis. However, most companies gain the greatest benefit from conducting a robust account/buyer segmentation analysis that defines willingness-to-pay by segment and comparing proposed price to wining price. Ultimately, sizing the cost is going to tell you how big of an opportunity you have, and will guide solution development.
Identifying the root causes
Identifying the root causes of discounting is necessary to ensure that the discounting is both non-strategic and correctable. Reps discount for a wide variety of reasons, some are strategic, e.g., segmenting customers by willingness-to-pay, and others are not e.g., rep compensation heavily favors quantity of deals/units over average selling price. In addition, it is important to know why the reps are discounting in order to develop the right solution. Finding out that the majority of discounts happen at the end of the quarter is a different problem with a different solution than finding out that majority of discounts are provided by reps with less than 1 year of experience. Conducting root cause analysis will help you better understand if the discounting is strategic or not, and if not, why it is happening at all. Likely you will have a mix of causes, but after the analysis you will be able to attribute the size of the opportunity to specific causes – e.g. 50% due to strategic price segmentation, 50% due to mis-guided product bundling strategy. This will help to inform the solution design.
Developing the right solution to stop discounting
This piece is a function of the size of the opportunity and the root causes. Typically based on the size and breadth of the problem, one of three approaches will correct the issue:
- Rep Training
- Sales Enablement / Deal Desk
- Configure, Price, Quote (CPQ) Solution
Rep Training works best when discounting is a relatively small issue (less than $1M) and is contained to only a portion of reps. A best practice is to ensure that the rep is creating a business case for each potential sale that aligns the seller’s value proposition with the customer’s needs, thus moving the conversation away from price towards value. Often times the simplest way to correct for rep discounting is by providing business case development training to all new reps and one-on-one coaching as needed. For a sample business case template, see the Seller Business Case link at the bottom of this article. The Seller Business Case highlights buyer pain points, seller differentiators, and emphasizes the financial benefit of the sale. To ensure this approach provides benefit, measure improvement by modifying an existing win/loss interview guide to highlight discounting.
Sales Enablement / Deal Desk works best when discounting is widespread among reps and is a relatively large cost ($1M+). In this case, the Sales Enablement function must provide not only additional training to reps, but also structured guidelines around discounting. A best practice is to establish a deal desk that can not only review pricing, but also offer proposal guidance. A Deal Desk is designed to support the sales process by serving as a hub to ensure all the right pieces of a deal are aligned with company policy and sales strategy. The optimal Deal Desk is empowered to take a complex deal through the pricing process with limited manual involvement. A Deal Desk can keep sales focused on its core competency – staying close to the customer throughout the sale and closing the deal. It can also reduce sales pipeline cycle time, create fluid real-time pricing/discounting solutions, and ensure consistent sales practices across the enterprise.
Configure, Price and Quote CPQ Solution can be the most effective way to stop discounting for highly complex sales organizations. The right CPQ solution can produce discounting guidelines, enforce pricing policy, and link rep compensation to corporate objectives (revenue, market share). Furthermore, advanced CPQ solutions can suggest optimum discounts based on previous deals and sales objectives. However, implementing a CPQ function typically takes 6-12 months and costs on average $75-150 per rep per month (not including implementation costs, which can be $1M+).
Thus, to get your reps to stop discounting, start by sizing the cost and identifying the root causes – segment strategic and non-strategic causes. Then implement a solution that fits the problem. The solution will likely warrant some form of rep training and improved sales enablement capability. Many clients find discounting to be a symptom of larger sales issue – the sales process has grown too complex for the reps to facilitate deals optimally without greater centralized support. If this is the case, then consider implementing a deal desk to optimize pricing and improve overall sales effectiveness.
Download The Seller Business Case Tool to get help with illustrating the value of focusing the rep on framing the purchase as a financial benefit rather than a cost to the company.