Now, discounting might sound like one of those things that's a good idea to increase the workflow coming into your business or get you over the line on a few more jobs...
But I've got a 100 reasons why I could argue against that!
But what I want to focus on right now is the impact of discounting on the numbers, or the financial side of your business, because this is probably an area where most business owners don't really understand what that true impact actually looks like.
So, let's look at an example.
Say you quote a job for $1,000 at a 30% Gross Profit margin.
That means you've got a Gross Profit of $300 (30% of $1000).
Now, this means that your direct job costs (your labour, your materials, etc.) is going to come out to $700 ($1,000 minus $300).
Now, let's say you submit that quote, everything looks good, you give it to the client, the client comes back they want a price pressure you, they want you to sharpen your pencil a little bit to get you over the line.
So, instead of holding your ground, you decide to drop your price a little bit. And let's say, you drop it by 10%.
That means you've now got a quote price of $900.
Now, your cost to deliver the job is still $700. You've still got to have the same labour, the same materials and so on, to actually deliver the job.
That means you've got a Gross Profit now of $200 ($900 minus $700).
So, looking at that now, you might be a bit bummed because you've lost that $100 in Gross Profit...
But at the end of the day, you're happy because you've still got a profit on the job!
BUT... the problem is here, Gross Profit isn't what you make as the business owner.
Gross Profit is what the BUSINESS makes as a reward for taking on the risk of delivering this job.
The BUSINESS makes it, NOT YOU.
What you make as the business owner is Net Profit.
Net Profit is the leftover from Gross Profit once your overheads and your taxes have been paid.
That's the reward that you get for taking on the risk of starting and running a trade business.
Now, let's say for example sake, you have no taxes and all you have to consider is overheads.
So, let's say you have a 20% overhead recovery rate.
That means 20% of your sales revenue that comes in, needs to be used to cover the overhead costs of your business (which is pretty standard of a small trade business).
So, going back to the first example (where you didn't discount), $200 is going to be required to cover your overheads (20% of $1,000).
Now, that $200 in overhead costs needs to be absorbed into your $300 Gross Profit, which comes out at a $100 Net Profit ($300 minus $200).
Now, when we look at the second example where you've discounted by 10%, $180 is going to be required to cover your overheads (20% of $900).
Again, that's got to be absorbed in your $200 Gross Profit, which means you've got a $20 Net Profit coming out of the discounted job ($200 minus $180).
That's a 500% decrease in Net Profit!
And a 500% decrease in the reward that you're getting for the risk of delivering this job, and running a trade business!
That's HUGE!!!
So, the lesson really here is that the greatest impact of discounting isn't actually on the top line... or your sales revenue line.
The greatest impact is on the bottom line... Your Net Profit! The reward that you're getting as the business owner.
So, moving forward, whenever you get price pressured, or you ever consider discounting on the job, make sure you're considering all the numbers that it's actually impacting.
Because who would've thought a small 10% discount in the quote price would cause your Net Profit to erode by 500%!!!
If you're an electrician, plumber, painter, carpenter, or any other trade business owner who is looking to take your business to the next level, click here to learn more about how our team can help!
