A Discount Policy for a Small Business: Who May Give What, and Why
Discounts given on instinct quietly remove most of the profit. What a discount really costs in margin, a four-level approval table, the discounts worth giving and the wording that protects your price.A stationery wholesaler lets its four salespeople "use their judgement" on price. One gives 5 percent to most customers because it closes deals quickly. Another gives 15 to anyone who asks twice. A long-standing customer discovers, over lunch with a competitor, that a newer buyer pays less for the same paper. At year end the owner sees healthy sales and a margin four points lower than planned, with no single decision to blame. A written discount policy replaces a thousand small, invisible decisions with a few deliberate ones.
What a discount really costs
A discount comes entirely out of profit. The cost of the goods does not shrink with the price.
Take an item sold at 100,000 that costs 70,000. Gross profit: 30,000, a 30 percent margin.
| Discount | New price | Gross profit | Profit lost | Extra units needed to earn the same |
|---|---|---|---|---|
| 0% | 100,000 | 30,000 | 0 | 0 |
| 5% | 95,000 | 25,000 | 17% | 20% more |
| 10% | 90,000 | 20,000 | 33% | 50% more |
| 15% | 85,000 | 15,000 | 50% | 100% more |
| 20% | 80,000 | 10,000 | 67% | 200% more |
A 10 percent discount on a 30 percent margin gives away a third of the profit. To make the same money, the salesperson would have to sell half as much again. Discounts rarely increase volume by that much.
Do this table once with your own margin and show it to everyone who quotes prices. Most salespeople have never seen it.
Why a policy
- To protect margin from erosion nobody chose.
- To treat customers consistently. Different prices for the same thing, discovered later, damage trust.
- To give salespeople a firm footing. "That is beyond what I am allowed to offer" is easier than inventing a refusal.
- To make discounts a tool, used for a purpose.
Discounts that earn their cost
A discount is justified when you receive something in return.
- Volume. A larger order lowers your cost per unit: one delivery, one invoice, better buying. Set clear tiers.
- Early or upfront payment. Cash now has value. A small discount for payment in advance or within a few days can be cheaper than waiting sixty.
- Commitment. A contract for a year, a standing monthly order.
- Clearing stock. Ageing or seasonal goods, where the alternative is a write-off.
- Off-peak demand. Filling quiet days in a service business.
- A first order, occasionally and deliberately, to win a customer with good long-term value.
Each has a condition. "If you order 50 cartons", "if you pay this week", "if you sign for twelve months". The discount is the price of the condition.
Discounts that do not
- Because the customer asked.
- Because the salesperson wants to close quickly.
- Because a competitor is said to be cheaper, unverified.
- To a customer who would have bought anyway.
- As a habit, so that the list price becomes fiction.
- Unconditional and open-ended.
The policy on one page
1. The price list
One current list, with a date. Every discount is measured from it.
2. Standard discounts anyone may apply
Published, automatic, the same for every customer who qualifies.
| Condition | Discount |
|---|---|
| Order of 20 to 49 cartons | 3% |
| Order of 50 cartons or more | 5% |
| Payment before delivery | 2% |
These are examples. Set your own from your margins.
3. Discretionary limits
Beyond the standard table, who may approve what.
| Level | May approve up to | Condition |
|---|---|---|
| Salesperson | 3% | With a reason noted |
| Sales manager | 7% | Reason and expected order value |
| Owner | Above 7% | Written approval before the quotation is sent |
| Nobody | Below the floor price | Not permitted |
4. A floor
A minimum price or minimum margin for each product line, below which no sale is made. It keeps anyone from selling at a loss in the heat of a negotiation.
5. Rules
- Discounts do not stack unless stated.
- Every discretionary discount has a recorded reason.
- A special price applies to one order or one period, with an end date. It does not become the customer's permanent price by default.
- Approval comes before the customer is told.
Train the alternatives
Give salespeople other things to offer first.
- Add value. Free delivery, an extra service, priority handling, a longer warranty, a small bonus item. These often cost you less than they are worth to the customer.
- Change the scope. A smaller quantity, a different specification, a simpler package at a lower price. The price goes down because the customer receives less, not because the same thing became cheaper.
- Change the terms. A discount in exchange for payment upfront, a longer commitment or a larger order.
- Explain the value. Often the request for a discount is a request for reassurance.
A rule of thumb: never give a discount without getting something back.
Wording
When a customer asks for a discount:
"I understand. Let me see what I can do. If you take 50 cartons instead of 30, the price drops by 5 percent. Or, if you can pay on delivery, I can take 2 percent off. Which works better for you?"
When the request is beyond your limit:
"That is more than I am able to offer on this quantity. What I can do is include delivery at no charge. Shall I prepare the quotation that way?"
When you need to say no:
"I would rather be straightforward: this is our best price for this quantity, and I would not want to cut corners on quality to go lower. If budget is the main concern, the standard grade at 82,000 may suit."
Calm, with a reason and an alternative. No apology for the price.
Align pay with price
If commission is paid on revenue, a salesperson loses almost nothing by discounting and gains a quick close. The policy will be under constant pressure.
- Pay commission on gross margin, or
- Reduce the commission rate on discounted deals, or
- Add a bonus for average price achieved.
When a discount costs the salesperson what it costs the business, far fewer are given.
Watch the numbers
Monthly:
- Average discount, overall and by salesperson.
- Share of sales made at list price.
- Total value given away in discounts. Seeing the sum is often a shock.
- Margin by salesperson and by customer.
- Exceptions approved, and the reasons.
- Customers on special prices past their end date.
If one salesperson's average discount is double the others' with similar sales, talk to them. If discounts rise and volume does not, they are not working.
Promotions
A promotion is a discount for everyone at once. Use the same discipline.
- A purpose: clear stock, attract new customers, fill a quiet month.
- A start and end date.
- A limit: quantity or number of customers.
- A measure: did profit rise, or did regular customers simply buy the same amount cheaper?
Frequent promotions teach customers to wait for the next one.
Introducing the policy
- Show the margin table first. People follow rules they understand.
- Honour existing special prices for a stated period, then review each.
- Tell customers with long-standing arrangements personally.
- Start with the approval limits. They alone change behaviour.
- Review after three months.
Common mistakes
- No price list, so there is nothing to discount from.
- Limits nobody enforces.
- Special prices with no end date.
- Discounting to match a competitor's price nobody has seen.
- Stacked discounts that add up to more than anyone intended.
- Commission on revenue.
- Never looking at the total given away.
- Giving and receiving nothing in return.
Tools
The policy works when quotations record the list price, the discount, who approved it and why. In Polynusa, quotations and invoices are attached to the customer and the deal owner, so prices given can be reviewed by person and by customer. See the pricing page.
Summary
Show everyone what a discount costs at your margin. Publish standard discounts tied to conditions such as volume and early payment. Set discretionary limits by level, a floor nobody may go below, and a rule that every exception has a reason and an end date. Train salespeople to add value, change scope or trade terms before cutting price. Pay commission on margin, and review average discount and total given away every month.
FAQ
How much does a 10 percent discount really cost?
It depends on your margin. If your gross margin is 30 percent, a 10 percent discount removes a third of the profit on that sale, and you would need to sell 50 percent more units at the discounted price to earn the same gross profit. The thinner the margin, the more damaging the same discount becomes.
Should salespeople be allowed to give discounts?
Within a small, stated limit, yes, so they can close ordinary deals without delay. Anything beyond that limit should need approval from a manager or the owner, with a reason recorded. Tying commission to margin or to price achieved keeps the incentive aligned.
What is a better alternative to giving a discount?
Add value or change the terms instead of lowering the price: free delivery, an extra service, a longer warranty, faster turnaround, or a small bonus item. These often cost you less than their value to the customer, and they do not reset the customer's idea of what your product is worth.