Thanks for the responses so far. It seems that kneejerk discounting is a bad option, but discounting as a considered strategy can make good sense.
I like Greg's idea of adding extra value into your service rather than dropping the price. And creating lower cost options as bchapman suggests is a way to service a broader audience without slashing prices... and you're right, there is some excess doom and gloom around at the moment
I agree with the process ninja as well... that it's not all about the money. There can be lots of non-monetary benefits to a project such as flexibility, great people, long timeframes, a learning experience etc... I guess it's just a matter of being conscious as to why you're discounting and what you or your business gain from it.
Also, it seems that many people just routinely ask for a discount just to try it on, even if they don't really expect one!