Are Discounts a Type of Customer Value?

It depends

Photo by Jon Cellier on Unsplash

Are discounts a type of value? Answer: It depends on who you ask. Actually to be more precise, it depends which perspective a person has.

Pricing consultants and financial types would likely say that discounts are NOT value. They are a necessary evil that needs to be managed carefully.

But for customers? Yes please, and the bigger the better! Every customer loves a good deal (including this pricing consultant).

A Useful Way to Think About Discounts

The value-based pricing strategy perspective would characterize discounts as a form of “value to customer” that is distinct from value drivers. Value drivers are (or should be) the primary source of your product’s value. Value drivers describe the economic benefits (cost reductions, revenue gains, asset efficiency) from using your product.

Discounts on the other hand, have only one customer economic impact: reducing the cost of purchase. Because of this, discounts are both the easiest and most expensive type of value to give away to the customer. It is expensive because it directly reduces the amount of “value capture” your product earns. In other words it directly reduces your profit. Which is why they need to be managed carefully.

Let’s Ask This Another Way

So, are discounts an adjustment that aligns price to the customer’s true willingness to pay? Or is it a sign of weakness from a salesperson who desperately needs to close a sale?

Answer: that depends on how much value your product actually creates. To quantify value you would need to build a customer value model. AI-based tools make it easier than ever to build a basic model.

A value model is an essential tool for the sales team to use to have productive value conversations. This changes the tone of the conversation from zero-sum price negotiation to win-win value discovery.

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