Operating a Service Business

4 Discounting Pitfalls for Service Businesses to Consider

In a recent post, we explored reasons why offering discounts for the sale of physical goods can be a major mistake. But the pitfalls of slashing prices can be even deeper for service providers like accountants, lawyers, designers, writers — not to mention a long list of others.

Here are four things to consider before offering a discount on your business’s services.

1. You’re selling yourself short. Service providers are ultimately selling themselves — their skills, their expertise, and their ability to fulfill customers’ needs. When you discount your pricing, you may be saying: This is what I’m really worth.

“[Discounting] devalues your service and what you are offering. If you are your product, as is the case for a lot of small-business owners, that’s not a position you want to be in,” says Diane Conklin of Complete Marketing Systems. “Once you devalue your worth, it’s very difficult to get that back.”

2. You’ll have to do more work to generate the same amount of revenue. Lowering prices can spur sales and corresponding cash flow. But service providers might find the tactic keeps their nose to the grindstone. “From a financial perspective, discounts can drastically affect your bottom line, since you now have to entice more customers to buy in order maintain the same level of gross profit,” says CPA Eric Levenhagen of ProWise Tax & Accounting. “So now you have more transactions, and most likely more transaction costs, for the same amount of income you had without discounting.”

That model is usually more workable for a volume-based products retailer, especially big businesses with reliable cash flow. It can be a back-breaker for service businesses and self-employed professionals. There is, as the saying goes, only so much time in a day.

3. Discount buyers may never stop haggling. Offering a one-time discount is a common sales tactic for attracting new customers. But ProWise’s Levenhagen notes that there’s a downside to this strategy for service providers. “Since I am selling expertise and knowledge rather than a tangible product, I don’t want to open the doors for my clients to come try and negotiate every transaction with me,” he says. “My philosophy is that I provide a better service than most, this is what it costs, [and] you can either pay it or go receive a lesser service down the road.”

4. There are other ways to build business. Photographer Rebecca Nash echoes some of the above thoughts on value and taking the long view. “It has also been my experience that once you begin offering discounts even your regular clients begin to wait for a sale or discount, knowing that they will be able to get your service for less than the regular cost,” she says. Yet, like many small-business owners, Nash knows the power of a good promotion. She suggests an alternative: Offer some sort of bonus with your regular service instead of lowering your price.

It’s good advice: A recent business-school study found people would much rather get something extra for free than receive a discount. The main reason? “Free” doesn’t require buyers to do any math.

Chapter 6.
Understanding Software as a Service: How to Build a SaaS Business5 min