Client gifts & value adds - the gift that doesn't keep on giving...

In almost every industry I work, the race to the bottom is on - you have to give clients free things, value adds, discounts, concessions, etc to beat those darn competitors & show your love and commitment.

Do they love you back? Read on... 

The "gifting" camp has grown. The current logic is that to secure and grow client relationships, and most importantly, to fend off competitors, you have to provide "value adds", or include "free" things for clients. In fact, a whole new accounting category has emerged - C.O.B (cost of doing business), and a new word - "Freemium". The logic of this strategy is presumably:-

• The "gifted" component (which may include price discounts offered, inducements, absorbed expenses, inclusions (training, consumables, trial periods), etc, once monetised, makes the total offering to the client cheaper, and therefore, more competitive;
• A "reciprocity effect" is triggered that motivates the client to respond by preferring the supplier; and
• The "relationship" with the client (independent of contractual commitments) is enhanced such that they will "like" the supplier more, see you as more committed to them, and consequently, want to work with you to the exclusion of competitors. 

But does it work? 

The answer is yes, if you measure success under Logic Principle 1 above as securing clients by being CHEAPER than competitors. Clients really love you if you have a strong brand, superior product AND meet or even beat generic and other competitors' pricing and terms. Sounds ridiculous, doesn't it?

The problem is, as an advisor, it's what I see and hear all the time. "If we don't meet the market, or compromise by being flexible with our terms and inclusions, we'll lose the client". I hear variations on this in virtually every industry and profession. Pardon me, but I can't see the logic of investing in and developing your brand and product/service offering, then pricing it as a generic, or you "lose clients"? Proprietary cost base, generic revenue?

Moving on, the answer is also a qualified yes, under Logic Principle 2 (Reciprocity) - a LITTLE bit!

Virtually every sales program, sales training offering, etc has swooped like seagulls on Robert Cialdini's best seller "Influence - The Psychology of Persuasion" as evidence for the proposition that if you offer something to another person, even if unsolicited by them, it creates a psychological obligation or reflex to respond or reciprocate. So, offering clients inducements or gifts (as broadly defined), presumably triggers a reciprocity response that suggests they will prefer and accept your product and terms offering.

From my reading of Cialdini's work, it's clear to me that there's a scale or de minimis principle in play, that is, a small unsolicited offer may trigger reciprocity, but there is no evidence that a large one triggers a large response. So, a sales rep offering some free laundry product to a householder may be invited to give a demonstration, but I can't see Unilever's procurement team awarding a contract to a supplier who offers lots of free value adds based on a subconscious reciprocity mechanism?

Absurd, isn't it? What I'm seeing is suppliers are giving things away, which just makes their offering cheaper (which is effectively what makes it more attractive to clients), yet falsely rationalising it as a relationship investment, triggered by reciprocity.

There's an even more critical principle in play here. If a supplier offers gifts or inducements to a client, does a client attach value to these gifts such that they perceive that a gift or benefit has even been conferred on them? Do they actually see they have been given additional "value", or do they just assume it is priced in?

Let's say a Sydney based training supplier usually charges $2,000 for a 2-day training program, plus travel expenses for programs ex-Sydney (airfare & accommodation - say, an additional $500). They target a potential Melbourne client (one-hour flight) who advises they are talking to local and other suppliers. To hopefully win the business, the Sydney supplier says "Usually, we charge travel expenses ex-Sydney, but on this occasion, we won't - a saving to you of $500. So, $2,000, all up."

Does the Melbourne client feel compelled to give them the job based on this $500 discount and reciprocity? Of course not. The client will give the job to the provider who best meets their needs. All the supplier has done has thrown their hat in the ring at $2,000. The client will weigh this offer against others and assume the Sydney provider makes sufficient profit to run the session for $2,000, including travel expenses, otherwise they wouldn't offer it. The $500 conceded, which is a real cost to the supplier, and eats into their profitability, will not be a factor in the client's thinking.

Here's the big problem, and my key message - when you give things away to make your offer more attractive to clients, not only do they see it as something that costs them nothing, more perilously - they see it as something that costs YOU, the supplier, NOTHING, otherwise you couldn't have afforded to offer it! It is simply accepted, and immediately devalued.

Not yet convinced? I'm a lawyer by background. Ever got a lawyer's bill that says "...usually, $10,000, but say, $8,000"?

As you can see, they're trying to trigger the reciprocity principle - we could have charged $10,000, but we didn't. The psychology - you should be grateful (we've "gifted" you $2,000), pay $8,000, don't challenge the bill and pay it promptly.

Going back to my message, when you got the bill did you think, wow, these are nice guys giving us a $2,000 discount? Of course not! I bet you thought if a lawyer could charge us $10,000, they would. The $2,000 has no real value in your mind. Your focus, and disenchantment or otherwise, is with the $8,000 payable.

I think this principle applies everywhere (not to be hard on lawyers). Client logic is that if they've charged us this, there must be sufficient profit for them in it. They're not grateful, and your gift is not valued as such. It's not a value add (on top of), it's a value inclusion (subsumed).

And before the sales guys have apoplexy, going back to our Melbourne training session, I can hear them all saying - "This guy's missed the point. If you sacrifice the $500 travel, win the job, do a great job, you then win future business!"

Perhaps, but surely a better way to win the job is to rely on the confidence in your differentiated training solution and know that a smart client appreciates there may be a premium they need to pay for the best solution? Or, invoke a variation of the reciprocity principle and say, " What I would be prepared to consider is fitting a pilot session in with another Melbourne assignment and sharing the airfare, but I could only do that if you confirm the pilot".

What I've also learned is that it's very hard to recover costs or profitability after a gifting or loss lead. If the Sydney supplier does get the training brief at $2,000, there's a slim chance the client will then turn around and subsequently accept travel expenses for future sessions, because as we've seen, they assume there's sufficient profit in it without expenses, otherwise you wouldn't have offered it.

The clients that I advise all know my mantra, don't self-delude - if you go in with loss lead terms, gifts and concessions, especially with big corporate clients, they expect them every time and there's very little chance they will gratuitously let you increase and mark to market next time around - you're banded!

Given I've written elsewhere on Logic Principle 3 (Gifting builds client relationships), I'll simply say here that I see no compelling evidence of that proposition. With the growth of procurement, intermediaries and the complexities of modern corporations, giving things away to be nice guys is seldom rewarded nor reciprocated. Clients generally want the best deal for themselves every time, and they're entitled to that.

Modern clients, especially big ones, are complex eco-systems - constantly shifting, changing, morphing, restructuring, de-budgeting, omnivorous, unfaithful, promiscuous, etc. Anyone who thinks you can have a healthy, monogamous, long term "relationship" with them, running independently of and outside contracted commitments is, respectfully, misguided. Especially suppliers who've given things away in the hope that they can call in markers down the track to secure preferential treatment.

Big corporate clients have little memory, only current needs.

Modern suppliers are far better advised to spend their time developing better brands, products and services, and then teaching their sales teams and others to sensibly promote, protect and negotiate higher quality, more profitable deals. You have relationships with people, you have contracts with client companies. Don't confuse the two.

Author description - Tony Shepherd is an Australian lawyer, communication & negotiation specialist who works globally advising & training teams to profitably manage commercial relationships. His contact no is 61 412 004 011 or email: [email protected].