Discounting is Riskier than "Risk Sharing"
Last week I posed the question:
Which discount incentive best protects your margins?
1. 5% rate discount
2. 5% bottom line price discount
3. Up to 5% rebate depending on volume of fees paid each year
The obvious answer is #3, yet company policies typically make it far easier to apply #1 or #2 to their pricing.
Let's add a "risk sharing" option:
4. Tiered 5% bonus/penalty depending on achievement of project milestones or KPIs
This option is no worse on the downside, it presents the potential for upside, and most often results in no bonus or penalty being applied. Tailored correctly, it differentiates your offering and increases your odds of winning the opportunity.
Yet this option is typically harder to approve internally than all the others. Why?
• It's called risk sharing, so it must be riskier!
• We can't fully control those milestones!
• We need Legal to write up the caveats each time!
• A known risk with controlled downside and upside potential always beats a guaranteed downside (like discounting).
• The lack of control prompts motivation to collaborate better with customers.
• Contractual caveats are easily templated and don't need to be written longform at the proposal stage.
Maybe risk sharing should be easier to approve than discounting.
Make it easier to implement smarter incentives.