November 2008                                                                    Issue 7

The True Cost of Discounting ......................

As engineers, we normally send out newsletters showing how we can maximise your profits or keep down your costs by good design.

Equally, it is important to look at all areas of your business to keep the bottom line healthy. The following is an example that we should all understand in our pricing through these difficult days.

We are not the authors of this piece of information, it was originally written by experts in this field, so read on and do your own sums.

For instance, if you are tempted to succumb to pressure to drop your prices, or be more "flexible" in negotiating with clients or customers, then take a look at the following tables before you make any decisions.

The results may well shock you

The first table shows that discounting for many businesses can have a devastating impact on bottom line profits - often much more than we would ever believe. Even with seemingly modest reductions.

For example, the table below shows that a business with a 30% gross profit margin that implements a 10% price reduction (either through promotion or negotiation) needs to increase sales by a MASSIVE 50% just to stand still in terms of profit!

 
The implications are mind numbing.

Just to maintain today's profitability you and your people have to work 50% harder, you may need to drastically increase stock levels, your machinery and equipment have to handle 50% more throughput - and that's before you consider the potential negative hit on your cashflow.

And you make no more profit. In fact, if you 'only' achieve a 20%, 30% or 40% increase in sales you make less money.

On the other hand………

What about putting your prices up? Crazy you may think - especially now

I can hear your estimators and partners protesting already - you'll lose customers, you'll go out of business, your competitors will have a field day.

But consider this.

Again based on a 30% gross profit margin, if you put your prices up by 10%, you would have to do 25% LESS business before it affected your net profit.

 
In other words, 20% of your clients could leave, or your revenue could drop by 20%, and you'd actually be better off.

You would be doing less work and making more money.

And you have to ask what are the chances that 20% of your clients would leave if you are doing a great job and providing excellent value?

The reality is that when we first work with new clients we discover that many undercharge.

And when they muster up enough courage to increase prices, most discover that they keep their clients and continue to win more new clients - because they give great service, excellent value and go that extra mile.

While for some businesses a price cut can result in enough new sales to increase profit, the truth is that for most businesses a price cut is a recipe for disaster.

These tables will help you make much smarter decisions and resist the temptation to make seemingly minor, but potentially crippling price cuts.

For further information or assistance please contact Paul Waite on: 01535 633350 or paulw@pwaite.co.uk