17/10/2023
Discounting is by far the most insidious problem plaguing small business owners across the country.
Part of the problem is that most business owners don’t have an automated system of lead generation for new business.
As a result they get desperate and lower their prices every time their customers ask for a concession.
There’s a reason why high value people play “hard to get” (though that’s a topic for another day;-)).
Another problem is that business owners often don’t think about how much profit they need to make to support their business in the present and the future as well as what they need to take out of the business to support their personal financial goals.
The easiest way to do this is to calculate your fixed costs of wages, rent, utility bills, software costs etc per month and then add how much profit you want to make each month to this figure.
For example if your fixed costs including your salary (the ones you pay regardless of how many customers you serve) are $25,000 per month and you want to make a profit of $10,000 per month, then you need to be generating $35,000 per month in gross profit.
The next step is to work out how much profit you generate per job on average so you can work out your gross profit margin or %.
Let’s say an average job is $7,000 and the average cost of materials and subcontracted worker time is $3,500. Then your gross profit is $3,500 or 50% of sales.
This means that to make $35,000 per month in gross profit, you need $70,000 in sales and you need to complete 10 x $7000 jobs per month.
In other words to make $10,000 in profit from 10 jobs per month, you are working with just $1,000 per job, which equates to 14% margin per job ($1,000 divided by $7,000).
So when your client asks for a 10% discount to win the job, they are literally stealing 67% of your target profit because you only have 14% to work with…
If you liked this post, it would help me greatly if you followed my FB page, liked the post, subscribed to my e-newsletter or shared the post with other people on this platform.
