How much do discounts actually cost?

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Presentation transcript:

How much do discounts actually cost? How much more work do you have to do to make the Same Money ?

What do discounts really do? If someone told you, “you will have to do 18% more jobs if you cut your price by only 5%” Would you believe them?

What do discounts really do? If someone told you, “you will have to do 35% more jobs if you cut your price by only 8%” Would you believe them?

What do discounts really do? Do you know how much your gross margin is? Have you determined how much gross margin you need using sound accounting principles or do you set your price based on you competitors price? Are you certain of how to put a margin on your costs?

What do discounts really do? Lets use $225 as our direct cost The first example will be using a 40% margin and a 5% discount We will determine how many more jobs we have to do to giving a 5% discount to make the same gross dollars without a discount

What do discounts really do? $225 ÷ 60% = $375-$225 = GM $150 10 jobs = $3750 - $2250 = GM $1500

What do discounts really do? If we give a 5% discount $375 - 5% = $356 - $225= GM $131 12 jobs @ $356 = $4272 $4272 - $2700 = GM $1572

So, what do discounts really do? If you do 10 jobs without discounts GM$1500 If you do 12 jobs with discounts GM$1572 So ask yourself “do I want to do less and make more Or do more and make less?”

What do discounts really do? Increase the gross margin, what happens? $225 ÷ 50% = $450-$225 = GM $225(150) 10 jobs = $4500 - $2250 = GM $2250

What do discounts really do? $450 x 5% = $428 - $225= GM $203($22) 11 jobs @ $428 = $4708 $4708 - $2475 = GM $2233

What do discounts really do? Full Price 10 jobs = $4500 - $2250 = GM $2250 (50%) 5% discount 11 jobs = $4708 - $2475 = GM $2233 (47.5%) This is a 5% drop in gross margin

What Happens to your bottom line? First lets assume a 28% overhead cost Net sales 10 jobs $4500 (100%) Direct costs $2250 (50%) Gross margin $2250 (50%) Overhead $1260 (28%) Net profit $ 990 (22%)

What Happens to your bottom line? 5% discount Net sales 11 jobs $4708 (100%) Direct costs $2475 (52.5%) gross margin $2233 (47.5%) overhead $1318 (28%) Net profit $ 915 (19.5%)

Doing more jobs to make the same money or maybe even less money? More liability for the customers property More wear & tear on your vehicles More people to collect from More potential warranty liability