Pricing for wimps: Should I give a quantity discount?
Bulk discounts are commonplace in retail, but do quantity discounts have value if applied to your services? It all comes down to a matter of choice.
Has a client ever asked you for a quantity discount?
If so, the client might have said something like this: “I’d like to commit to buying 20 hours of your time every month, for one year; but rather than pay your usual rate of $150 per hour, I’ll give you a rate of $100 per hour. Deal?”
On the one hand, you think it would be great to have regular work and regular cash flow. It would certainly ease your soloist worry of where the next dollar will come from. Plus it would save you marketing time – 20 hours a month that you don’t have to go and find: phew. Then there’s also the 20 hours the client will purchase in the December Dearth-of-Work Zone. This is starting to sound like a great deal!
But then you get a little nagging voice in your head. “But what if I get busy? What if I have to turn down work that pays a great hourly rate because I’m committed to my $100-per-hour client? What if I want to take a big holiday? What if I don’t enjoy the work?”
"[With a quantity discount] you’d be accepting less money and working more hours, but you’d have the security of knowing the work exists."
It’s not an easy decision.
Calculating the opportunity cost of a quantity discount
A good way to approach the quantity discount dilemma is to calculate the “opportunity cost” of taking on the job. There are all sorts of ways to do this, but you can keep it simple with a little bit of common sense.
The first step is to work out how many hours per month – at your full rate – would you lose by taking on this client?
Let’s say, in the above example, that you would have to say “no” to about 10 hours per month of $150-per-hour work (at no marketing cost).
If you accepted the “quantity” work then you would be giving up a likely 120 hours of work worth $18,000 (10*12*$150) for the security of a locked-in 200 hours work earning $24,000. It then just becomes a question of choice – are you prepared to work the extra 80 hours, at an effective rate of $75 per hour (calculated as $6000/80 hours) for the peace-of-mind of regular income?
Risk versus security
How about a different scenario. Say you thought that by spending $5000 on marketing you could probably fill the 20 hours with $150-per-hour work, but only for 11 months of the year (December would still be empty).
If you opted for the “quantity” work then you would be trading a probable 220 hours of work worth $28,000 ($20*$150*11 less $5000) for a committed 240 hours of work for $24000. So you’d effectively be accepting less money and working more hours, but you’d have the security of knowing the work exists.
These decisions aren’t easy but if you do the calculations you do at least get a sense of what the options are costing you. And it’s worth doing; I know a few fabulous soloists who’ve discovered that the “quantity” client has cost them dear.
Of course, there are other things to add into the mix that can’t be measured, such as whether it’s an interesting project and a good client to work for. Or whether having done that project will benefit you in the future.
Ultimately, your answer might be something like this: “Yes, I’m happy to work 80 hours at an effective rate of $75 an hour to earn an extra $6000, because the total contract assures me $24,000 of work, it’s a good client, I like the work, and – overall, it’s worth it to me.”
Have you ever offered a quantity discount and was it the right decision?
Read the full ‘Pricing for wimps’ series:
- Getting started
- Your minimum hourly rate
- How to get the price you want
- Should I charge the same as my competitors?
- The four-letter words that backfire
- Do I have to charge everyone the same?
- Your customers’ biggest fear
- How to price for speed
- Be the boss of your price
- Raising prices