Why Volume Discounts in Staffing?

discountRecently, we received an invoice for $76,000 for a volume discount rebate from a large client organization. Obviously, this was a surprise. Because my former business partner signed the agreement, I was not aware of this discount setup. Volume discounts are becoming a trend in corporate America and now the staffing industry is affected.

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It’s been a while since I studied economics in college, but what I do remember is that when the supply of a desired commodity goes down, the price goes up. We are in the digital staffing space, and our talent pool of mobile application developers, SEO specialists, web marketing managers and UX designers are scarce. Even though the talent is in short supply, our large client, and I’m sure the rest of corporate-America, still expect to take discounts with stated volumes.

I can fully understand the desire to save money, and when I visit Costco or Sam’s Club, it’s great to land that 16-pound bag of frozen shrimp where the shrimp net out to $2 per pound. Or even that tub of Mayo that will last four summers if it doesn’t spoil. The big box retailers have perfected the model and now corporate America wants to adopt volume discounts for service based industries. Is it fair for the staffing industry?

In staffing, we are penetrated only 1.8 percent into the U.S. workforce. In my opinion, that does not justify volume discounts — that calls for premium pricing. As credit card balances grow for customers of these financial institutions; interest rates don’t go down; if fact, they go up. Where’s the volume discount?

Regardless, large clients will continue to look for these and any other ways to save money. We need to ensure the agreements don’t hurt us in the process. If you are an executive at a large staffing organization or an owner at a small or midsize firm, encourage your managers to negotiate fair terms for staffing. They should use a basic economic model that is appropriate for the talent you are supplying.

Our client, a large financial institution, calculated the rebate based on sales volume over a specific time period. Luckily, upon double checking their numbers, we discovered their calculations and time period were wrong. The new amount we owed was approximately $40,000 — a bit better, but that is a base salary for a junior recruiter we could have hired instead.

MORE: Clauses staffing firms should have in their contracts

Joe Gambino
Joe Gambino is owner of Profiles, a recruiting and staffing solution for creative, marketing, web and IT positions. He can be reached at jgambino (at) careerprofiles (dot) com.

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2 comments
Scott Wintrip
Scott Wintrip like.author.displayName 1 Like

Joe, a stand against the destructive process of volume discounts is one that all firms should be taking.

 

Why? You said it in your article when you wrote:

 

"I can fully understand the desire to save money..."

 

The job of those selling staffing is to show how this valuable service saves them time, effort, money, and risk. All of which are worth our full price.  One of my consulting clients did just that using a plan we created and achieved a 37% margin on over $2 million in business in creative and IT staffing.

 

Good for you for taking a stand!

 

 

George Reardon
George Reardon like.author.displayName 1 Like

Good article, Joe. Volume discounts in general are usually justified by economies of scale enjoyed by the provider of the goods or services. However, I don’t think that staffing services enjoy economies of scale at high volumes. Wages don’t drop just because people are assigned to big accounts. Neither do the associated payroll burdens. In fact, it is more likely that per-employee costs will go up, because of the customer interaction, routine reporting, and formal business review meetings that large customers tend to demand. Add to those costs the cost of responding to RFPs, negotiating over the customer’s contract terms, extra-long payment terms, and conversion fees lost because of free customer hires. Indirect costs of big accounts would also include the higher likelihood that the staffing firm will be called upon to indemnify the customer because of severe contract terms and the negative effect that highly-concentrated business has on the staffing firm valuations. Because the business is often put out for aggressive bidding, the rates will probably already be low, so volume discounting would be double-dipping.

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