Don’t Discount This Advice

I have written before about discounting. Generally, I’m not a fan, I think it is overused. It becomes habit forming. Teams start to think the only way they can win a deal is to discount, and go into any negotiation with that in mind. Every time a consumer goods company wants to boost sales they knock some money off, or offer a 2-for-1 deal.?

I worked with one company where discounting had become so ingrained that while they had grown their sales line, net profit had collapsed from 10% to 1%.

Don’t get me wrong – sometimes you have to negotiate, and sometimes discounts are the right tool to use. For example, you might want to stimulate sales during the off-months for a seasonal business (as long as you are not simply pulling profitable sales forward!), or sometimes you have excess stock and it’s better to turn it into cash.?

I have been speaking to estate agencies a lot recently, and they have a specific challenge regarding discounts, which I’ll address below… but if you are not an estate agent, carry on reading because the advice is appropriate for any business.

What is the estate agent’s unusual challenge? It’s how our brain processes discounted percentages.

Specifically, consider this. A valuer has just gone round the home of a prospective seller, and has given them a valuation. Now they want to act for them. Their normal fee is 1.5% of the sale price, and they quote this.

Ah, says the client, Bloggs Estate Agents have already been here, and they offered to sell for 1.0% fee – can you match it?

The temptation then is to counter-offer with 1.25%, after all it’s only a reduction of 0.25%. Hardly worth worrying about. Or maybe just cave in and say yes to 1.0%, it’s still only a 0.5% reduction.

Many of you reading this will have already spotted the issue, but the majority of people don’t have your understanding of maths or finances.

So what’s going on? Of course, knocking 0.25% off a 1.5% fee is not ‘just 0.25%’. It is a 17% discount. Dropping by 0.5% is a 33% discount. They are huge! How often in life, when we negotiate or haggle over something we are purchasing ourselves, do we get a 17% or 33% discount?

So how do we address this? There are five strategies to consider.

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1. Negotiate in absolute terms

Encourage your valuers (or sales teams) to negotiate discounts in ￡pounds rather than percentages. By framing the discussion in absolute terms, the valuer (or sales person) gains a clearer understanding of the actual value being waived. So rather than 0.25% feeling like a negligibly small number, ￡800 off a fee feels like you are offering a large saving. What’s more, ￡800 sounds like a big saving to the client too!

An extra tip – make the amount precise (e.g. ￡817), it then not only sounds like a lot but it also feels like there is some science behind it, which makes the other party less likely to try to improve on the offer.

2.?Establish clear guidelines

Provide comprehensive training and guidelines for your team on effective negotiation strategies and fee structures. This means clarity on what fee they can come down to, and what to do if they are still under pressure.

This is often called a pricing ladder. You might have a headline price; below that is a list price, which is where you really want to be; below that is a target price, the valuer or salesperson doesn’t have authority to go below this and is incentivised to get as high a price/fee above it; and below that is a walkaway price, but the only people who can sign off on any offer between the target and the walkaway are the senior team. They would consider the size of the opportunity, how busy the organisation is, how strategic the sale is, etc.

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3. Focus on Value, Not Price

Shift the conversation away from price and towards value. Emphasise the unique benefits and advantages of working with your agency, such as your track record of success, personalised service, and comprehensive marketing strategies. By highlighting the value you bring to the table, valuers can justify premium pricing and resist the temptation to discount.

My view is this: if you are talking about the fee, you are having the wrong conversation.

After all, consider a typical seller. What do they care about? They usually want the fastest sale possible at the highest price, and to be kept proactively informed about everything that’s happening (even if that is nothing).

Imagine a house is on sale for ￡400,000. A couple of months go by without any firm offers. The seller wants to get a sale, and the typical internal conversation takes place – should I knock ￡10,000 off to get some interest? No, I’ll just go straight to ￡20,000 off, let’s get some interest.?

The mental conversation regarding dropping the price takes place in ￡10,000s. A 0.25% reduction in fee on a ￡400,000 house saves ￡1,000. It only takes a slightly more competent estate agent to get some interest and the seller has got a ￡10,000 or ￡20,000 better price.

This is worth repeating. If the discussion is all about the fee, then the wrong conversation is taking place.

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4.?Highlight Differentiators

Differentiate your agency from competitors based on factors other than price. Showcase your expertise, industry accolades, client testimonials, and innovative approaches to marketing and sales. By positioning your agency as the preferred choice for discerning clients, valuers can defend a higher fee.

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5.?Monitor and Evaluate Performance

Implement systems to track and evaluate the performance of valuers in fee negotiations. Regularly review negotiation outcomes, identify patterns of discounting, and provide constructive feedback and coaching where necessary.

Consider what and how you report key numbers within the agency. For example, you might have 3 key metrics which are reported monthly – number of valuations, conversion rate to clients, average client fee (for other organisations this might be number of leads, conversion to sales, average sale price). Not only does this help everyone to know how well they are doing, but just the act of choosing the KPIs you will monitor and share communicates the importance of those metrics.

Finally, don’t forget remuneration and incentive schemes. Bonuses could be based on average fees each month.

All of these approaches will help any business. But remember, sometimes the best thing is to walk away and lose a sale, and to stick to your pricing. Fewer sales at a higher margin are usually better than more sales at a lower margin.