Tuesday, June 22, 2010

An Ingenious Method to Add Profit

Have you ever had a client ask for a discount? What a pickle. Do you: 1) give in and feel taken advantage of; or 2) refuse and risk losing the client.

The other day I was at the service station D & S Auto where I took my car in for a $40 oil change. I asked Denny, the owner: "Can I get a discount?" He looked down at the floor, shuffled his feet, and caved. He grudgingly agreed to knock $5 off the bill.

I asked him how he felt about acquiescing. He confessed he disliked it but was afraid declining would upset me. "Besides," he added "$5 won't break me."

The Impact of this paltry $5 Discount

Would you believe me if I said that Denny was about to give away most of his profit? I detail this below but let me share a way to offer a discount that saves your blood pressure while offering the customer a supposed concession. All while adding profit to your bottom line.

The Discounted Upsell

We've all experienced the upsell. This is when the drive-in asks you "Do you want fries with that burger?" You give a discounted upsell by offering a discount off an additional purchase. But it can also be used effectively when a client asks for a concession.

Instead of shaving profit off an already booked sale, offer an additional purchase at a discount. In the case of my oil change, Denny could have asked to rotate my tires and offered to reduce the normal price by $5.

Choose a service with an ultra-high margin and the firm books additional profit for additional work it wouldn't normally perform. The customer leaves satisfied because they feel you gave them a concession. And you can feel satisfied too.

The Mathness Behind the Method

  • Denny employs a skilled mechanic at roughly $50/hour. We'll ignore payroll taxes and benefits that increase costs. Let's assume that a half hour oil change is $25 in labor costs.
  • My vehicle is occupying one of his bays on the floor. Denny sells this time slot only once. So we must apportion overhead. The company pays rent, utilities, office supplies, telephone, advertising, and other expenses. We'll allocate $5 for overhead. So far his costs are $30.
  • Other costs: interest on bank loans and credit cards, bad debt, equipment, and any other unexpected or unusual costs eat up profits. These easily make up 5% of gross sales. That costs $2 leaving $8. A 20% margin isn't terrible. However, after taxes Denny's left with net profit of $5.
By Denny discounting $5, he relinquished all his profit. Scary, huh?

In a future post I'll explain how you can use a variation of this technique to placate an irate customer. With this simple gimmick, they'll usually settle down immediately. And there are additional ways to use this tip to dramatically boost net profitability. But more on that in the next and future postings.

Request

These tidbits are from my time at the consulting firm. I'll post at least weekly.

I appreciate all your comments. Let me know if there are any particular business issues you've experienced and I'll write about them and credit you. Until then,

profitable business All!

4 comments:

  1. Great Post! I have been guilty of giving in when a discount is requested. I was uncomfortable at the time, kicked myself later, and probably didn't give that customer our normal level of service in future interactions. You offer a great perspective.

    Cory Jensen, Owner
    I-Spy Mystery Shoppers
    Omaha, NE

    ReplyDelete
  2. I'm glad you enjoyed the technique, Cory. Please continue to keep reading. I'll be posting more 'greatest hits!' from my time as a management consultant in future posts.
    Chris

    ReplyDelete
  3. Great strategy indeed!

    When I am in the processing of selling rabbits to someone I always try and do the thing where they can choose to add a rabbit for so much money instead of taking the ones, I already set the price on and me as a result losing money.

    ReplyDelete
  4. Thank you, Rabbit Raiser. You might consider discounting feed or other accessories that have a much higher markup than your customary merchandise (rabbits in this case.)

    Thanks for your readership!

    pb All!
    Chris

    ReplyDelete

Google-Translate-Chinese (Simplified) Google-Translate-English to French Google-Translate-English to German Google-Translate-English to Italian Google-Translate-English to Japanese Google-Translate-English to Korean Google-Translate-English to Russian Google-Translate-English to Spanish

Ratings and Recommendations by outbrain

You might also like:

Related Posts with Thumbnails

-----------------------------------------------------

Search This Blog