Has a client ever asked you for a discount without a reason? 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 for a discount. He looked down at the floor, shuffled his feet, and grudgingly agreed to knock $5 off the bill.
I asked candidly how he felt about it. He confessed he disliked it but was afraid refusing 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’ll show the math below but for now, let me share a way to offer a discount while adding profit to the bottom line. As a bonus, it saves your blood pressure while offering the customer a supposed concession.
The Discounted Upsell
We’ve all experienced an up-sell. This is when the drive-through attendant asks you “Do you want fries with that burger?” A discounted upsell is a discount off an extra purchase. But it can also be used effectively as a bartered concession.
Instead of shaving profit off an already booked sale, offer a discount on a highly marked-up item. In the case of my oil change, Denny could have offered to rotate my tires and discounted the regular price by $5.
Choose a service with a comparatively high margin. The firm books extra profit for work it wouldn’t normally do. 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. Ignoring payroll taxes and benefits for simplicity. Let’s assume that a half hour oil change is $25 in labor costs.
- My vehicle occupies one of his bays on the floor. Denny can sell this time slot only once. So we have to add overhead. The company pays rent, utilities, office supplies, telephone, advertising, and other expenses. Let’s allocate $5 for overhead. So far his costs total $30.
- He has other costs: interest on bank loans and credit cards, bad debt, equipment, and any other unexpected or unusual costs also eat up profits. These easily make up 5% of gross sales. That’s $2 added to $30 which nets $8 profit.
So after taxes Denny’s left with net profit of $6.
By Denny discounting $5, he relinquished most of his profit on a $40 transaction. Scary, huh?
Let’s consider the impact of adding $25 tire rotation to the $40 oil change. Denny transforms a job with $1 profit on a $40 transaction into a $16 profit on a joint $65 sale. That takes 2.5% up to a 19% net margin.
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 other ways to use this tip to dramatically boost net profitability. But more on that in the next and future postings. Until then,
profitable business All!