(AKA: You want how much of a discount? Hah. Aha. Ahahahahaha. AHAHAHAHAHAHAHAHAHAHAHAHAHA!!!! Oh. You were serious. Well, this is awkward.)
When I was a poor starving student getting by on radiator-heated Kraft Dinner, I loved getting discounts on…well, everything.
And the fact that my university ID also doubled as a discount card at half the grocery stores, coffee shops, and other retailers in the city was a point of pride.
I got discounts on haircuts, books, my bus pass, movies, and a whole lot more.
And it was a point of pride for me, because I was proving that I’m a responsible adult who can manage his money properly.
(Except for the part where I graduated with $30,000 in student debt. That part kinda sucked. But it was also somewhat unavoidable. Tuition’s hella expensive, yo.)
I bought my coffee in bulk because it came with a volume discount. Same with cereal.
And while offering a volume discount is a great way to encourage customers to buy more when you’re selling products, it’s something that I’ve come to believe simply doesn’t work when applied to service-based businesses.
There ain’t no shortage of people who will try to get a deal by any means necessary.
Compulsive deal-seekers think that they can get a great price just because they ask for it. They understand the price of everything and the value of nothing. They’re determined to never, ever pay full price – and if someone insists they do, they’ll just go somewhere else.
And as the owner of a service-based business, I’ve faced my fair share of negotiations with people who want bulk discounts.
And I’ve had to explain to them that just because they’re ordering 20 articles per month, that doesn’t entitle them to pay me a below-market rate.
See, it’s a misconception that people are doing you a favour by sending you more work.
If you’re running a product-based business, getting more orders is always a good thing. The more people who order your product, the more money you make – and even if you give people a bulk discount, you usually still earn a rather tidy profit on the goods you sell. Bulk discounts can incentivize your customers to spend more money, and it pulls in more customers than standard pricing would. That means your cash flow improves. Plus, it helps you to clear out old inventory so you can bring in new inventory, which is also good for the bottom line.
In other words, it almost always makes sense to give bulk discounts on products.
But if you run a service-based business, giving bulk discounts will be the sleep-deprived, mentally frazzled, coffee-chugging death of you.
See, the entire idea of offering a bulk discount is predicated on the premise that doing so offers benefits to both the customer and the supplier.
For the customer, a bulk discount means getting more of a desired product for less money.
For the supplier, a bulk discount is a great way to manage inventory and move otherwise unsalable product while still turning a profit – because oftentimes, the cost of holding on to a product that’s not selling can quickly eat into the potential returns of stocking a #1 best-selling product.
But in a service-based business, a bulk discount only ever benefits the customer – never the supplier.
The one thing that makes it possible to give bulk discounts on products is mass production.
Let’s break out some math.
Say you’re selling car air fresheners. Let’s assume, for the purposes of this thought exercise, that it costs $0.15 to produce each individual air freshener, and you sell each one for $2, or $10 for a box of ten.
Even though you’re giving a sizeable discount on the bulk deal, you’re still turning a massive per-unit profit. You’re also clearing out a ton of old inventory.
Plus, it’s not as if you’ve got a pile of money invested into the inventory – you’re not selling diamond-encrusted air fresheners. It’s not like you’ve spent your life savings developing the world’s greatest air freshener. An air freshener is an air freshener is an air freshener is an air freshener. And the more you sell, the more money you make, even if you’re giving out a discount.
But with a service-based business, each service you provide takes up the same amount of time – and you can’t deliver two services at the same time. If one deliverable takes one hour of work, then ten deliverables will take ten hours of work. And it’s not like you have any excess inventory to clear out – a service-based business doesn’t have inventory.
You can’t scale a service-based business the same way you can a product-based business. Selling more services doesn’t give you economy of scale – it just takes up more of your precious time.
And that means giving out volume discounts for service-based businesses will have you working 80 hour weeks for next to nothing.
You’ll also need to consider your opportunity cost.
Alright, so let’s say you end up giving out volume discounts on your services. And suddenly, you get booked beyond your wildest expectations. Beyond simply diminishing your ROI, a bulk discount will also prevent you from chasing more lucrative opportunities.
Whenever you price out a project, you need to consider your opportunity cost. The fact of the matter is that your time is limited, and that makes it inherently valuable.
(It’s simple supply and demand. Demand for your services will likely increase as you gain experience and recognition. But you’ll always have the same supply – because everyone only gets 24 hours each day.)
That’s why you need to think about your opportunity cost – because every project you take on is occupying a slot in your schedule that you could be dedicating toward something else. What are you giving up in order to take on that project? What freedom are you surrendering?
Maybe you’re giving up the opportunity to work on a project that pays twice as much money but wouldn’t be as fun.
Maybe you’re giving up the opportunity to work on your own personal projects – the stuff you really care about.
Maybe you’re giving up your sanity because you’re already booked solid.
Selling a product doesn’t present this opportunity cost in the same way or at the same magnitude that selling a service does. That’s why product-based businesses can offer bulk discounts – because, like we saw earlier, selling more of a product is always a good thing. There’s no downside. The company isn’t surrendering or sacrificing anything by selling more product – but when you sell more of a service, you’re sacrificing more of your time and energy.
That’s what makes it a poor practice for service providers to give volume discounts.
(Aside from the fact that it undermines the value of your expertise and turns you into a commodity, of course. And that’s not cool, because you’ve worked your ass off to develop the kind of expertise that lets you charge professional rates.)
So how do you deal with people who want volume discounts?
Just say no.
“Hey, I was wondering if maybe you’d consider reducing the price if I were to order more…”
“So, I’d love to move forward with this project proposal, but there are a few extras I’d like included. But do you think we could get a reduced rate, seeing how we’re bestowing upon you the honour and privilege of doing even more work for us?”
“I don’t want to pay full price. Give me a discount and I’ll buy more from you. It gives you security!”
If you offer a valuable service, you should be charging a rate commensurate to the value you provide. End of story. Because quite simply, at the end of the day, you have to turn a profit. You’re running a business, not a charity. And that means the numbers have to make sense before you make a deal.Sharing is caring!