Small business: Anthony O’Brien

Giving customers a discount sets a risky precedent that can harm your profitability, so consider other options first

Discounting may seem like a good strategy for your small-to-medium enterprise (SME) in these challenging times as it’s a quick fix to nail down some sales and keep cash flow ticking over. Already two in five (42%) Australian businesses have had to access support measures to manage the impacts of the Covid-19 pandemic, according to the latest research from the Australian Bureau of Statistics.

For small businesses, however, discounting is a strategy that can backfire in the longer term, especially if your SME is already working with clients doing it tough. More than 70% of businesses in manufacturing (78%), wholesale trade (74%), recreation and personal services (83%), information media and telecommunications (75%), property and business services (74%) and transport, postal and warehousing (72%) have been affected by Covid-19 to some degree, researcher Roy Morgan reported earlier this year.

Look at other options

When you offer a discount, whether it’s a first engagement with a customer or for a long-term client, there’s no going back once the offer is made. As soon as you drop your price, your customer will expect the discounted price to continue – or they’ll hold out for another special offer. Worse still, they may not buy from you until the discounted price or fee is back on the table.

Although a discount might seem like your only option to win over or keep a client, it’s not. Moreover, you don’t want to set the precedent that every time your client commissions work from you or buys your product, it’s at a reduced price. That is simply bad business, says Anne Nalder, founder and chief executive of the Small Business Association of Australia.

“As a general rule, I am not in favour of discounting. The retail sector has shot itself in the foot with continuous sales. This erodes the profit margins and has done nothing to help that sector,” she says.

Another major rub with discounting is that the more you drop your prices, the greater the volume of widgets, houses or gym memberships you must sell to stay afloat. “By discounting, you are eroding profits, and your small business needs money to function,” says Nalder.

Discounting can also hurt your brand, she warns. “You will find quality products and services rarely offer discounts or sales. Most importantly, you have to find out what your client’s needs are and then try and work within their budget. The only time I would offer a discount is to longstanding clients as a reward for their support.”

Getting the price right

When it comes to negotiating fees and prices for products and services, there is no right or wrong answer, says Nalder. “Firstly, you have to know what and who your market is. That determines pricing.

“You do need to do some research as to what other similar businesses are charging and then you create your pricing. [Your pricing] boils down to what the market is prepared to pay and what services and quality you offer. The main thing is you must be competitive, but if that means you reduce your rates to the lowest common denominator then that is not good business.”

Former journalist Nick Harford, a director of environment and sustainability consulting firm Equilibrium in Melbourne, says he is cautious about discounting. The firm, which includes a team of six consultants, provides a range of private and government sector organisations with technical and strategic compliance services such as energy audits, environmental management systems reviews, and waste and recycling management advice.

At the start of the year, Equilibrium was travelling well on account of some significant contract work with major corporates such as Qantas and Jetstar. Then Covid-19 hit the airline industry and Equilibrium’s contracts were frozen as the national carrier, and its subsidiary, grounded their flying fleets. Consequently, Equilibrium lost 50% of its work in a matter of weeks.

But Harford, along with business partner Damien Wigley, didn’t panic and adapted their approach by focusing on existing contacts and seeking more government work. In relation to managing his fee structures during these tough times, Harford says his firm aims to be flexible with its clients.

“Our approach is to support the client as much as we can. We consider the nature of

the specific project to see what value we bring and what price is fair,” he says.

“For example, a project may be strategic for us as it extends our presence in a particular field or positions us for future work. Therefore, a reduced rate may be to our long-term benefit.

“In other cases, our standard charges and rates may be warranted because of the specific work, timing or deliverables. We are never reluctant to consider discounting fees, but do so cautiously and only if the situation warrants it and the client values it.”

Payment plans as an alternative

Mark Calleja, from Sydney-based Mark Calleja Accounting, says that rather than discounting, SMEs can talk to clients about different categories of payment plans.

“We are advising SMEs to estimate the fees they expect to receive from a client and then look at different ways they can receive these payments,” says Calleja.

“For example, rather than completing $5000 worth of work for a client and then invoicing them in one hit, perhaps they can make repayments over 10 months at $500 a month. This strategy can lock away some work for an SME and, more importantly, guarantee them cash flow over a period.”

Postponing fees until a client returns to business as usual is another strategy that SMEs can put in place to support clients and help them keep the lights on too.

“This is like the payment holidays the banks are providing to cash-strapped homeowners struggling through Covid-19,” he says. “The kicker here is that you are not just keeping your SME going, but you’re also giving them access to your services, which might help them to get ahead of the game.”

Before offering payment options to a client, an SME might need to consider legal advice, especially given recent ABS research found that one in 10 businesses reported that if government support was no longer available, they would expect to close.

Whether you seek the advice of a lawyer will depend on the relationship you have with your client, says Calleja says.

“With some of my clients, I’m just putting the agreement in an email. We still raise an invoice, but make the fee payable over a term of 12 months or whatever we agreed. It comes down to the trust between the two parties.”

Preparation is everything

Before talking to your customers about your fees, it is critical to be prepared. As part of your groundwork, be sure to put yourself in the shoes of your customers.

Writing down the arguments before engaging with a client on price makes plenty of sense. Then consider if the discussion on price should be conducted face-to-face via online video or by email. Once you have decided on the meeting approach, make your move and don’t vacillate.

“As part of your discussions, you need to be thinking outside the square to show your cash-strapped clients there is value in continuing to work with you in these challenging times and to justify these payments,” says Calleja.