Selling cheap to win a deal will run you right out of business.
When reviewing your financials at the end of the month, do you see red or black? Do you know why? Is it a trend or an anomaly?
There are many reasons for what you see in the numbers and why your bank account looks the way it does. If you are not impressed with your performance one particular silent killer is pricing your work low just to gain customers and win deals!
In this article I’m going to show you why you need to be smart about how you choose your customers and set your pricing.
We all want to hit our quotas, keep cash flow flowing and maintain enough work on the shop floor to avoid unhappy workers. BUT at what cost, the cost of going out of business?
The bottom line is if you sell cheap the odds of not making a profit are pretty good darn good…then if or when you mishandle production or installation (in the least) there is no margin for recovery and your hosed!
Let me drive the point home with some leverage.
How many dollars’ worth of production must be sold to recover a loss of $100 in rework/bad debt if your net profit after tax is 2%?
YOUR ANSWER: __________________
The answer is $5,000. That’s right, at a net profit level of 2% you must produce $5,000 worth of billings to return your P&L to its original position. So you need $100 of net profit to make up for the loss. But our Net Profit is only 2%: that is, each dollar of billing only produces two cents of net profit, so the equation we are asking is: “How many $0.02 does it take to equal $100?”
The answer is 100 divided by 2% which equals $5,000
The following table can be used to calculate the amount of sales required replacing income lost through bad debt charge off or rework incurred at a Net Profit after Tax Margins 2 – 5%
| Net Profit (after tax) | ||||
| Rework / Bad Debt Loss |
2% | 3% | 4% | 5% |
| 2,500 | 125,000 | 83,333 | 62,500 | 50,000 |
| 4,800 | 240,000 | 160,000 | 120,000 | 96,000 |
| 6,000 | 300,000 | 200,000 | 150,000 | 120,000 |
| 10,000 | 500,000 | 333,333 | 250,000 | 200,000 |
| 15,000 | 750,000 | 500,000 | 375,000 | 300,000 |
| 18,000 | 900,000 | 600,000 | 450,000 | 360,000 |
| 25,000 | 1,250,000 | 833,333 | 625,000 | 500,000 |
As you can see the numbers are considerable, not ones you can brush under the rug easily…
So is it you that’s setting price or the customer? If it’s you go back to your common sense corner and rethink your proposal. If it’s the customer it’s time to educate them on the merits of your value and negotiate a fair deal or cut your losses and run.
“Customer relationships founded on price often leads to other frustrations including: rework, collections difficulties and at worst nonpayment resulting in bad debt.”
If in fact you are underselling your offerings you’re creating a condition that does not allow your company to earn profit before you even get the chance to do so. Thinking you can make it up on the next sale is unrealistic (LOOK AT THE CHART AGAIN)…don’t count on a “make-up” job ever happening especially if you continue to behave the same way that got you here in the first place.
Most owners don’t realize they are in control of who they do business with and what they should be selling their products and services for. If you lead, promote and manage your company well there will be plenty of the right customers in the market for you….something to think about.