Beware the Big Deal
It happens to sales leaders and product managers all the time. You get an email announcing a huge deal in the works that must be approved IMMEDIATELY, otherwise the deal will go away forever. Below is a checklist of items to consider when evaluating a proposal with significant discounting:
- Make sure you understand all the financials of the deal (e.g. revenue, volume, cost, margin). What exactly are you selling, and for how much? What are the terms for service, delivery, etc.? What exactly is the company committing to? Calculate any other discounts offered to the customer (e.g. MDF, early payment, rebates). Could you be committing to pricing several years down the road? Be careful when making long-term commitments in a dynamic marketplace.
- Understand the risks of a large-volume discount deal. What if the customer buys less than expected during the course of the deal? What happens to margins? Examine the contracts to understand how the deal will be enforced, as well as both parties’ commitments and how they may change as a result of mergers and acquisitions, terminations and unforeseen events.
- Understand what the customer is committing to. For example, if the commitment is to a volume of consumables for equipment, does the throughput make sense, given the installed base of equipment? If the customer is committing to usage levels, do they make sense, given customer needs and the number of users?
- Understand the mechanism for tracking the customer’s usage. If you have given a big upfront discount on installation, training or service for a specified amount of usage, will this be tracked? Will the customer be billed automatically, regardless of consumption? In the case of hard goods, will deliveries be made automatically?
- Question why the customer needs a lower price. If a competitor is offering a more attractive package, this data is critical for competitive analysis. Use proof of the lower price offered to obtain lower costs from suppliers and manufacturers and, internally, from cost accounting and finance.
- Assess whether you could offer this deal to any other customer under the same circumstances. If the answer is no, rethink the deal. Remember, you must defend this pricing to other salespeople and customers. Consider a confidentiality agreement, although there’s a high risk that information will be exposed, especially as companies are acquired and new partnerships formed.
- Make sure you can support your pricing model with the sales team. No doubt you developed pricing models underpinned by strong value propositions and demonstrated offering value. When offering discounts, ensure you don’t undermine the sales team’s confidence in your pricing strategy. If the pricing is all over the map, the sales force cannot support the offering’s value.
- Keep track of those who request special pricing. If they are particular salespeople, the request might have more to do with a sales enablement and training issue vs. pricing. For example, salespeople who are used to selling hard goods may have trouble communicating the value of software. Make sure salespeople can articulate the value of the offering and support the price.