Why Discounting is Like “Stuff” – It Always Rolls Downhill
Why Discounting is Like “Stuff” – It Always Rolls Downhill:
Big accounts are critical to just about every business. They help drive significant chunks of the revenues that are critical to meeting financial goals. And, in many cases, high-volume customers help keep costs down through economies of scale. As such we often shower large accounts with special terms, discounts, or extra support and give them superlative labels by conferring “Strategic” or “National” account status on them.
One of the best feelings in business is landing a major new account. The team pulls together around a common goal and works for months or years to achieve it. They plan solutions and do battle with the competition and then come away victorious. Sure, there are concessions made along the way but big accounts have purchasing power and sharpening the old pencil to get the deal is necessary.
This is all true to a point but managers often take this old adage to the point of self-delusion. The biggest lie that they tell themselves? “This account is unique and so are the concessions. What we did here won’t affect other accounts.” Many managers are realistic though. Their version of the story is “Yes, we did it here and it will probably spread to some of our other strategic accounts but we will keep it contained.”
This is all very nice thinking but here is what really happens. Any special concessions that you make for major accounts now become standard practice for the majority of all accounts within a few short years.
A while back, we worked with a firm that was wrestling with the fact that many of their largest accounts were starting to demand “signing bonuses.” They ultimately gave in but assured me that there was no way that this would ever happen for any but a handful of really important accounts. You probably know where this is going…I returned a few years later only to find out the majority of accounts were now negotiating…and receiving signing bonuses.
How did this happen? The way that it always does. Smart customers and sales people learn of the practice and push to extend it. Those same senior managers that promised discipline get desperate for business – and then it’s Katy Bar the Door
It can be a struggle to get managers to see past the deal in front of them. The key is to do the analysis to show what the potential impact of the “once in a lifetime” concession of the day will have on the whole business when it spreads. This can be done in a matter of hours with a simple spreadsheet and a few basic assumptions. Doing so may not stop the problem immediately but it will define the full cost and leads to more formal discussions and support policies to keep things contained. If you have more time, you can do a little forensic work and track the spread of a particularly nasty concession from one account to common practice. Infectious disease specialists call this finding the “alpha patient.” While the first analysis is somewhat speculative, finding the alpha patient allows you define actual historic costs to the business.
What does a stable approach look like? Firms that manage discounts well do a couple of things. First, they track the effects of negotiated discounts. Second, they recognize that discounting can be an important tool but that it must be done by policy and based on objective criteria that are available to all customers with similar attributes. Finally, they back everything up with specific sales tools, training, and incentives.
If your firm doesn’t adhere to these basic principals, we have one word of advice for you. “Look out below.”
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