Discounting Tax Services: Good or Very, Very Bad?
People love discounts, coupons and the perception of saving money, even when they actually aren’t. But there is another side to the discount, and that’s the product or service provider’s. When they discount their offering, they are losing money, right? Not always.
The discount is a common and time-honored marketing tactic. It can be a powerful tool. There are a few ways discounts are used to the benefit of the provider. A few of these include: loss leader, introduction/new business and reconciliation.
The loss leader is a simple concept: by heavily discounting an offering (sometimes to cost), you get clients in the door where they will hopefully purchase additional, non-discounted offerings or upgrade from the discounted offering to a superior one that is full price.
In product or service introductions, either the product or service is new, or the client is. The idea is that the discount is used to lure the client in, give them a taste of how good the offering is, and hopefully turn them into a regular customer who pays full price.
In reconciliation, a discount is used to make amends with a good client who has been disappointed or inconvenienced. It is a goodwill gesture intended to retain business at risk, and can be very effective.
In these brief examples, we’ve seen how a discount could benefit your firm. But what could go wrong?
-loss leader clients fail to convert to a higher-dollar service
-introductions fail because the service isn’t compelling enough, or regularly priced services are too expensive to compete
-a reconciliation discount is insufficiently generous, or results from a minor customer complaint that was specifically designed to get a “freebie.”
Tax services are like most services in that they are more relationship dependent than product offerings. Think about your favorite soda or snack. If you can get it at half the regular price, do you mind cheating on your usual grocery store? Probably not. But would you go somewhere different to get your hair cut at half the price? We come to expect a specific experience from a service, and risking getting less than we are used to is often unattractive at any discount.
The Very, Very Bad
Offering discounts is frequently a trap for service providers, and tax services are no exception.
If you are just starting your practice, offering a discount as a way to get clients in the door can backfire. People quickly grow accustomed to paying less, and question why they should have to pay more. They recognize that new businesses pop up almost daily, and by their next need for tax services, they can probably find another startup offering a “welcome” discount.
Some clients like to dangle future potential business to induce you to offer them a discount. If you’ve ever heard the words, “If you make me happy on this job, there can be a lot more work down the road,” then you’ve spent time with one of the worst kinds of clients, ever. Dealing with these clients doesn’t have to end badly, though. Explain that you would be happy to entertain price breaks when the volume or value of the work warrants it, but that you are unable to discount one-off jobs because they represent too much risk to your bottom line. Underscore your value proposition, and talk value, not price. If the client is unconvinced and still making noise about discounts, they are probably just trying to get a deal. They are less likely to be the kind of client you want to come back again and again.
If you use discounts injudiciously, you can put your future business at risk. It doesn’t take much imagination to see how razor-thin margins return very little when work is stacked to the ceiling. Growth can be inhibited. If you aren’t offering (and selling) other services that have a more significant return, you’ll spend all your time chasing pennies on the dollar.
But most importantly, a discount can send a message that your service might not actually be worth what you normally charge. Clients can begin looking for excuses and reasons to get you to renegotiate your rates. When they don’t get them, they might question the relationship. So what is an effective way to use a discount?
- Ex post facto. Do you have a great client you’d like to reward, or maybe upsell later? Charge them your usual rate, but offer a small discount at billing time. Their surprise will be a pleasant one, and because it came on the bill, they will think of it as a personal favor instead of a promotion.
- A volume inducement. If your client could be bringing you more business, let them know you can lower your pricing for the additional work. Do the math. A reasonable discount can bring you increased revenue from work you wouldn’t otherwise have.
- A reward. One of the most justifiable uses for a discount is client referrals. If a good client brings in a friend or coworker who converts to a client, you can offer them a percentage off their billing as a thank you. This is a policy you can promote anytime, because it always means new business and more revenue for you. Remember to ask new clients if they were referred. If they were, be certain to thank the client who referred them and make it clear they have a discount coming.
When it comes to discounting your work, it’s important to take care not to discount its value. Resources available to AICPA members in the Tax Practitioner’s Marketing Toolkit will help you overcome fee objections and communicate your value to clients.
Adam Eric Junkroski, Lead Manager, Communications, Tax, PFP, S&C — Public Accounting, Association of International Certified Professional Accountants
Discount courtesy of Shutterstock.