I got a call from a customer recently asking about whether to discount a proposal.
The brief background: after some great initial conversations, the prospect had asked my customer to create a proposal for a mid-sized project. The initial discussion of the proposal was positive. The prospect raised a few questions about intellectual property, which my customer clarified to the prospect’s satisfaction.
Then, a few days of radio silence.
My customer started, as he put it, “stewing in his own juices.” We’ve all been there. If you’re using Mimiran to send your proposals, you at least know when your prospect is reading your proposal, which takes a big weight off your shoulders. But what if they’ve read it, but not signed? Doubts can creep in. Are they just busy, or are they thinking about a different approach? Sometimes, you think that the only thing you can do to take control of the situation is to call back with a lower price.
DON’T DO IT.
Preemptive discounting can kill your business and make your life miserable. Think I’m kidding? In this situation, the prospect never expressed any problems with the price, even while they raised other issues. If price was an issue, they would have raised that, too. (They may come back later and say they couldn’t get enough budget.) If you discount, say 25%, you may but your profit in half (or worse). You now have to work twice as long to make the same money. You have half the reserves the weather lean periods between projects. And you just told your prospect that you’re desperate, that you’re not confident, that you don’t believe in the value of your work. Now, they may wish to negotiate further, knowing that you are on your heels. Even worse, they may start to question your value, as well. Your preemptive price cut increases the risk that you will lose the deal. The very opposite of what you hoped. And, if you get it, you make a lot less profit.
Details on the math:
Let’s take a hypothetical $120,000 project that will take 2 people 3 months to do. Let’s suppose that each person costs $10,000 per month, just to keep the math simple. So your gross profit will be $60,000, or 50%. Suppose also that you have to cover basic overhead of $10,000 per month, including office expenses and a basic salary for yourself. Now you’re down to $30,000 net profit. Suppose that, on average, your team’s utilization rate is 75%, so you also need to cover a month of unpaid work for every 3 months of paid work. So those two people will eat another $20,000 while on the bench, leaving you with $10,000 net profit. If you preemptively discount $20,000, you have not only given up your $10,000 of reserve net profit, but you have eaten into the core expense budget that pays your salary. You may end up losing money on the project.
I’ve used numbers designed to keep the math simple here– you can plug in your own numbers to see the impact of preemptive discounting on your business.