What are the effects of offering discounts or cutting your price on your construction related services?



Everyone wants a bargain. And many business owners play into that by offering a discount. But is that a smart move for a construction-related business?


Discounts are the same as lowering your markup or margin. So, where does the money come from to cover the discount? The job costs remain the same unless you change the job. Your overhead doesn’t go down. The only money that you have to “play with” on any given quote is your profit. How much of it are you willing to give away to attract new business?


Let’s say you are on a sales call for a kitchen remodel. You have just quoted the price for a new kitchen at $48,955. Your client says, “Kitchens Overnight was here yesterday and their price for this same job was $43,900. You can have the job, but only at their price.” Desperate to keep your crews working, you agree to match their price.


What did you just do to yourself? Using average figures for a construction-related business, many contractors have job costs that range between 56- 60% of the sales price. Let’s use 58%. They have overhead expenses that range between 32-36%, so let’s use 34%. Using simple math, that leaves 8% net profit if the job runs true to the estimate, with no mistakes or problems that might eat up our profit. Please remember that an 8% profit is needed, longterm, to remain in the business and keep your business stable and functioning through the ups and downs.


Our numbers now look like this:


The price was $48,955.


Job costs – $28,394 (58%)


Overhead – $16,645 (34%)


Profit – $3,916 (8%)


When you matched the price from Kitchens Overnight, you gave away $5,055.


That means you gave away all your profit on this job, and $1,139 of the money you need to pay overhead expenses. And where will the $1,139 come from to pay those overhead bills? You have to pay the rent, put fuel in your vehicles, make insurance payments, buy paper for the printer, advertise. The money for those overhead expenses will have to come out of your pocket.


Now, don’t tell me you’ll make it up on the next job. Why should the next guy pay more than your current client? If you didn’t sell this job at the proper price, why do you think you’ll be able to sell the next job at $5,055 OVER the proper price? You won’t. And you probably shouldn’t.


It’s important to start thinking these issues through. You need a mindset on what it takes to survive in this business, and what decisions cost. I start almost all of my seminars with the saying, “Stop trying to be competitive, and start being profitable.” Charging a fair price, the correct price, for your work is how that happens.


Michael discusses issues like this, and more, in his newest book, “Markup & Profit, Revisited“, now available at his website. Sign up for Michael Stone’s free monthly newsletter to get information and tips to strengthen your construction-related business.