That 10% Discount Costs You More Than 10%

Are you sure you want to do that?

For a fixed-cost business (the typical professional services firm) with a 40% profit margin on every $100,000 of revenue, a 10% discount represents a 25% decrease in profit. 

Wait, what?!

Basic–But Underappreciated–Math

All credit to Antonella Montagna, Director of Pricing & Legal Project Management at Jones Walker in New Orleans, for teaching me this at last year's Legal Marketing Association business development precon: 

• 10% off $100,000 leaves $90,000 after discount. 

• But $90,000 is revenue, not profit. 

• If the expected profit (revenue minus expenses) is $40,000 and a lawyer discounts 10%, they are giving away $10,000 profit out of every $40,000.

• That's a 25% profit hit!!! 

And that's before including other rate erosion, such as write-downs or write-offs.

This is what law firm marketers, financial analysts, and managing partners want lawyers to appreciate before discounting their rates. 

Do You Really Want to Do That?

I'm not here to tell you never to discount. Pricing is one of the hardest aspects of professional services work, and it often feels uncomfortably personal.

My goal is simply to help ensure that you understand the dynamics when you do discount. If you've weighed your options and the discount feels like the best overall choice, then I won't stand in your way. (I'll pick a different hill to die on, thank you.)

But if you have discounted in the past without truly considering the downstream consequences–and I bet that applies to many readers–then at least stop and have a think before you cut your rate.