In the words of the late, great Father Guido Sarducci of Saturday Night Live fame; “I canna teach you everything you need to know about business inna fiva minutes. You buya something, and thena you sell it for more.”
A business owner was relating to his peers how difficult it was to increase his margins. He rebuffed suggestion after suggestion.
Raise prices? He was already the most expensive provider available in his market. Increase efficiencies? He would get up before dawn to move equipment from one job site to another so it was never idle. Schedule better? He was already solidly booked for the next 16 weeks.
Finally they asked him to walk through his quoting process. He showed them how he calculated the difficulty of the job, the number of labor hours required, materials and overhead. He said “Then, when it is all totaled, I take off between five hundred and a thousand dollars, and give the customer the final number.”
The group asked about the last minute reduction. “I’m already the highest priced operator in town,” he said, “I just want people to feel that they are getting a good deal.”
When queried further, he admitted that he didn’t show the discount on the quote, nor did he tell the customer that he was reducing his profits. The group made him promise that for the next 30 days he would quote each job exactly as estimated. In that month, 100% of his prospects accepted the pricing without question. In the next year, he almost tripled what he took home from his company.
This is a blatant (but true) story about invisible discounts. It’s easy to read it and say “How foolish!” about the business owner’s quoting process, but I see similar invisible discounts occurring every day in many businesses.
Some companies price based on the hours expected to do a project, but job after job gets additional hours without examination of either the estimating process or the execution. Increases in material costs are absorbed because the price sheet was just distributed last month. Features are added to a product without announcement or price adjustment,
The only reason to grant a discount is because the customer asked for it, and justified the request. We all want to treat our customers well, but if they are getting a better deal than they bargained for, they at least have to know about it.
Good article, and I agree completely.
A discount is an incredibly expensive give away as it comes straight out of your bottom line. Every penny is additional profit you could be making, and to give away anything you don’t need simply amounts to charity. This is even more damaging when it is what I call a Post-Sale Discount – one you voluntarily offer after the customer has already agreed to buy.
I saw this in all its destructive glory with a client of mine who owned an upscale optical store. He was always complaining about the pressure on his margins and never made the kind of profits he should. We analyzed his problem up and down, but it wasn’t until I bought a pair of glasses from him that I saw the root cause of the problem.
I picked out what I wanted from his inventory and knew the price for both the frames and the lenses before I was measured up. I was happy with the price, but when the time came to pay, he suddenly took 10% off . This took place without any prompting on my part, and I probed into his sales process in a way that I hadn’t thought about before.
It wasn’t just because of our relationship, and it turned out that he did this on virtually every sale. He couldn’t really explain why he did it and while he root causes might lie in a general lack of business confidence, it had simply become a habit that had been integrated into his sales process. His other salespeople followed his lead and the practice was costing him substantial lost profits.
In my case, the sale was $1,000. His gross margin of about 50%, which after overhead probably would have generated a net profit of about 10%. After the discount, his gross margin fell to 40% but his net profit on the transaction after fixed overhead actually disappears, making the transaction a break-even!
I find this interesting. I am finally at a point where I can honestly give a quote, but I always need time to figure all areas for the final proposal and then I make sure I record all parts of the quote so I don’t end up giving added materials for free. I am a small business, so with experience and time, I will probably have to learn the hard way at times.
Thanks for the blogs!
Cathy
I agree and I am going to meet with my Mentor today to make some adjustments, I know I am giving discounts and for a small business , I cannot do that. Thanks, great reply.