Blog

What is a Sales Discount Policy & Why You Need One

In this article, I’ll cover the term ‘sales discount policy’ including its benefits like standardized sales experience, level playing ground for reps, protecting the bottom line, and more. Then I’ll talk about the factors that affect discount ranges like product maturity, territory, consumer purchasing power, profit margins, payment terms/deal tenure, and logo clients.

Discounts are arguably the most potent weapon for a sales rep when it comes to closing a deal.

And at times rookies or even veterans struggling to make quota might offer discounts far too early in the sales process – rendering the sale unprofitable and devaluing the product.

That’s why you need an effective sales discount policy to protect your bottom line.

And this article will tell you all about it, including what a sales discount policy is, why (or when) you might need one, and the factors that influence discount benchmarks.

Let’s begin!

What is a Sales Discount Policy?

A sales discount policy is an official company document containing the rules and regulations that reps must follow when offering discounts and closing deals.

Most sales discount policies start out as informal, verbal agreements between reps and managers in the early stages of a product. It is only once a product matures and starts to get adopted frequently that a sales discount policy is formally rolled out.

At this point, someone from the Finance or RevOps team usually makes things official.

Pro-tip:

As companies mature and introduce more product lines, you should update your discount policies regularly, to include selling guidelines for each new product.

Why Do You Need a Sales Discount Policy?

There are several reasons why a sales discount policy is crucial for a well-functioning sales team. Let’s look at the top four:

1. To protect your bottom line

Imagine not having a sales discount policy and one of your reps offering a 35% discount to a client when you clearly stipulated 30% as the max discount.

Now, imagine that client saying he wants to take the deal. You can’t possibly back out because your rep already made the offer and you have an image to protect. So you bite the bullet and let the deal happen.

Next, that same client goes out into the market and spreads the word about the juicy discount. Needless to say, things have gone from bad to worse in the blink of an eye. 30% has suddenly become your discount benchmark, and you’ll be hard put to bring it back down to 25%.

To avoid such sticky situations that can wreak havoc on your revenue streams, a sales discount policy is absolutely vital.

2. To standardize your sales experience

From discounting freedom to providing a rough outline on how much to quote, a well-drafted sales discount policy will have answers to every pricing-related question.

It also helps ensure everyone on your sales team is speaking the same language.

Sort of a nifty handbook your reps can use to deliver clear, uniform pricing information to each prospect!

Additionally, it boosts sales velocity, as your sales reps will be clear about the discounts they can offer – avoiding time-consuming back-and-forth negotiations.

3. To create a level playing ground for your reps

Let’s say a company has two sales teams and no sales discount policy.

John is a sales rep in team A.

He closed his last deal by offering a 20% discount, which is 5% more than the limit prescribed by upper management. His manager didn’t mind, though, so John’s a happy cookie.

John’s colleague, Bob, sells for team B.

Bob missed making quota last month by just one deal. Worse still, he had a client who would’ve closed on a 17% discount for the same product John sold at 20%, but Bob’s manager wouldn’t budge over 15%.

Now, this can leave Bob feeling angry and mistreated when he hears about John’s deal. And if it happens again, Bob might even consider looking for other job opportunities.

However, with a sales discount policy, everything will be written in black and white – fostering an impartial sales culture.

4. To project an enterprise-level image to clients

With a solid discount policy in place, your reps will have a structured document to work with when preparing quotes and offering discounts.

All the rep has to do is enter each deal’s relevant details (type of product, usage, contract duration, etc.) into the policy document. Once that is done, the rep will be presented with an exact discount amount they can offer for that deal based on the given metrics.

Besides making the sales process easier, it also creates a more favorable image in your clients’ minds. They’ll see you as a big-league player, even if you might not technically be one yet.

Factors Influencing Discount Ranges in Sales Discount Policies

Now that we’ve seen why you need a sales discount policy, let’s look at some common factors that affect the discount limits in each policy:

1. Product maturity

Companies with an early product tend to allow higher discounts, especially in the initial stages, as the main priority is building a strong customer base.

On the other hand, companies with mature products tend to have stricter policies because cash flows and revenue generation becomes critical for daily operations and future growth.

2. Territory

If a company is planning to enter a new territory, it will likely allow better discounts for that territory in order to establish a customer base.

Similarly, if sales in an existing territory are generally hard (reasons may include bad weather, low population, remote location, etc.), reps handling that territory will likely get a more lenient discount policy.

3. Consumer purchasing power

Some countries are more price-sensitive than others, plain and simple.

To tackle this, companies use slightly different strategies but with the same goal.

Some might offer different prices for the same product in different countries. Others quote the same price globally but discount heavily in price-sensitive countries.

4. Profit margins

Technology products like SaaS can have profit margins anywhere between 5-30%, so the discounts are higher. Moreover, some firms tend to discount product subscriptions more heavily than services as the latter has lower margins.

Whereas industries with high overheads and low margins like hardware products offer margins between 2-10%. So, naturally, the discounts will also be lower.

5. Payment terms / Deal tenure

Companies with a strong focus on revenue can have a discount policy allowing reps to offer higher discounts on deals where the upfront payment is higher.

On a similar note, the longer the deal tenure, the higher the discount limit tends to be (for the similar reason that there’s more guaranteed revenue at the time of signing the deal).

6. Logo clients

A logo client is simply a big-name client (Apple, Google, Facebook, etc.).

You can literally ‘use the client logo’ on your website to impress new visitors, and also leverage the client’s name during business meetings and sales pitches.

Given the many benefits of a logo client, companies often let reps offer very heavy discounts to bag a logo client.

Note: This factor is usually implied rather than explicitly stated in sales discount policies. And more often than not, it applies to companies that are still growing and want to conquer larger markets.

Wrapping Up

One of the most critical factors affecting the success of a discount policy is its implementation.

You can’t have any exceptions. If you let even one rep circumvent policy rules, others will also expect preferential treatment and the entire purpose of the policy will be defeated.

Go through the factors mentioned in this article to pick what matters most for your business and create a discount policy that’s fair to everyone!