Discounting Dangers
A No Nonsense Approach

Discounting Dangers

I’m sure you have noticed by now the influx of commercials and mailers offering big discounts to remodel your home now.  They try all sorts of incentives to make you think you are getting a good deal or huge price break.  What any savvy homeowner will realize is that every up-front discount will cost them in the end. 

I have heard many advertisements offering everything from $500 off on a bath liner to $200 off of a window replacement.  Instead of enticing me to buy from them, these discounts make me wonder how, in a market like this, can a remodeling company afford to give up that much money.  The answer usually lies in either too large of a margin to begin with or they will make up the difference with some other “problem” they find while completing the job.

Have you ever called a carpet cleaning company and tried to use an $89 whole house carpet cleaning?  I did.  Two people showed up to do the job.  One guy cleaned and the other guy ran around my house with a clipboard trying to sell me more product.  My $89 carpet cleaning was potentially turning into a $300 job.  I stood my ground and kept him to the advertised price.  Again, many of these discount are just to get their foot in your door.

Here is an article I found that talks to Contractors about the dangers of  discounting:

It’s tempting, in a tight market, to want to discount your price. “I was practically paying clients,” says David Sturm, owner of Attention to Detail, in Atlanta, who lowered prices so drastically during the 2001 recession that he nearly went bust. “I thought discounting was the way to stay alive, but it was just a slow death.” That’s pretty much the consensus among business owners and experts.

“It’s a sure-fire way to drive your business to the brink,” writes Michael Anschel, owner of Otogawa-Anschel Design-Build, in Minneapolis, in an e-mail. “It undercuts everything you have worked to build. It undermines the industry. It makes you look desperate. It does not project an air of professionalism, strength, and longevity.” Anschel has actually raised rates by 0.5%, which, he writes, “is not really noticeable to the client, but we feel it is a little additional cash in the door [at] a time when we may have fewer projects.”

One of the main dangers of discounting is that you may not be in business long enough to finish your jobs. “It just leads you faster to disaster,” says Chris Stanton, owner of Novato, Calif.–based KSG Transform, a consulting company that serves the building industry. “Disaster comes from cash flow and running out of money. If you operate at a loss, you will at some point run out of cash.”

You’ve likely seen this happen with trade partners who offer discounted prices and eventually go under — hurting your remodeling company’s reputation in the process.

If you feel you absolutely must lower your price, don’t make a decision in haste. The tendency to want to offer a discounted price may come on when you are in panic mode in a bidding situation. “When the pressure is on, remodelers may be tempted to discount the final price for the homeowner at a presentation meeting if the homeowner says the price is too high,” notes Jerome Quinn, president of SawHorse, in Atlanta. But dropping the price so quickly sends a clear message to the homeowner that there must be a lot of fat in the job.

Quinn suggests telling the homeowner that you’ll review the numbers. “This gives you an opportunity to make a rational decision. It also sends the message that you have taken time to think through the estimate and come up with a fair price. You can also ask the homeowner to think about what they could give up to bring the price down while you’re reviewing the numbers. You may find the client willing to cut back on scope if given some time to think — and save you from dropping the price.”

In other words, you’ll be doing a smaller job at the same margin, so you’re still making the profit you need. You just have to do more jobs. It’s a trade-off, but it maintains your professionalism, and you won’t have to go back to people later on to explain why your prices are now higher. (Click here to see a discounting calculator.)

“For the longest time, I was known as being heavily discounted, and I had to stop using a lot of old clients because of that,” Sturm says. “When the economy improved and I readjusted my price, clients were astonished. It was hard to get back into the swing of things and charge the correct amount.”

Sturm learned his lesson and has made a lot of changes in his business in the past eight years. He now has a better client base, understands markup and margin, and feels that he is “a business owner and not a field hand.”

Know Your Value

To offer a better deal to clients, you must return to the difference between cost and price: Lower your actual costs and you can appear to offer a “discounted” price. You haveto work from true cost figures, otherwise you’re discounting a bad number, which will just hasten your demise. Think about how much you need to survive.

“If I want a 35% margin and I cut my overhead by $6,000 for the year — about $500 a month — revenue can drop $9,000 for the year,” says Leslie Shiner, owner of The ShinerGroup, a financial management consulting firm in Mill Valley, Calif.

To tighten overhead, she suggests looking closely at all costs. “Call your Internet provider and see if you’re on the right plan. Call your cell phone provider. You can’t cut the office in half; you shouldn’t fire the bookkeeper. But you can save money on the little things. We worked with one company that saved $24,000 by upping its health insurance deductible.”

Be wary of saving money on subcontractor fees. If they’re cutting prices, it might seem like a good idea to pass along the savings to clients, but beware: You don’t want to be left with a half-completed job because that subcontractor is no longer around.

The final lesson on price is that you can’t sell on price alone. Even if you have that just-right “Goldilocks” price, you have to sell yourself on the value you bring to a job. Work hard to differentiate yourself from other remodeling companies. Go the extra mile for customer service. “Sell on quality,” Shiner says. “If you’re selling on price, you’ll have a lot of unhappy clients.” Remind your clients that Mr. Half-Price Competitor may not be around to finish the job. You will.

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