The Dangers of Discounting

A discount feels like a small concession. Ten per cent to get the job over the line. It is not small, and the reason owners give it away so casually is that almost none of them have ever done the arithmetic.

Here is the arithmetic. A discount does not come out of your price. It comes out of your gross profit, and your gross profit is a fraction of your price. Take ten per cent off a job running at a forty per cent margin and you have not lost a tenth of anything. You have lost a quarter of the money you were going to keep.

Which raises the only question that matters: how much more work do you now have to do to end up where you started?

The formula, and its mirror

Extra volume needed equals the discount divided by your gross margin minus the discount. At a 40 per cent margin, a 10 per cent discount needs a third more volume. At 30 per cent, half as much again. At 20 per cent, you have to double the business.

The mirror is more cheerful and much less used. Volume you can afford to lose after a price increase equals the increase divided by your margin plus the increase. At a 40 per cent margin, put prices up 10 per cent and you can lose a fifth of your volume and still make the same gross profit. A fifth. Gone, and you are no worse off, doing less work, with more capacity.

Sit with that pair for a minute. Discounting means more work for the same money. Raising prices means less work for the same money. Owners spend far more time considering the first than the second.

Why it matters to an owner

Because the extra volume is not free. It is more delivery, more staff time, more scheduling, more invoices, more chasing, more capacity, more risk, more of your attention. The arithmetic above assumes your costs scale perfectly and your overheads do not move, and neither of those is true. In real life you need more than the theoretical extra volume to stand still.

And because discounts are sticky. Nobody has ever rung a client to say the introductory rate ends this month. Discounts become the price, quietly, permanently, and they spread by word of mouth to every other client who finds out.

A worked example

Illustrative figures. Take a business turning over £800,000 at a 40 per cent gross margin. Gross profit £320,000, overheads £260,000, net profit £60,000. A reasonable, real-looking small business.

Discount 10 per cent across the board. Volume holds, so revenue is £720,000. The cost of delivering it has not changed: still £480,000. Gross profit falls to £240,000. Overheads are still £260,000. The business has gone from £60,000 of profit to a £20,000 loss, and nobody has done a single thing differently.

To get back to £320,000 of gross profit at the discounted price, turnover has to reach roughly £960,000. So the business does a third more work, invoices £160,000 more than it did originally, and earns exactly what it earned before. That is the deal a 10 per cent discount actually offers.

Now go the other way. Same business, prices up 10 per cent, and assume you lose nobody. Revenue £880,000, cost of sales unchanged at £480,000, gross profit £400,000, overheads £260,000. Net profit £140,000. The profit has more than doubled on a price move most clients would not comment on.

And if you did lose people? You could lose a fifth of the business and still be level on gross profit, while doing a fifth less work. The ones who leave over 10 per cent are rarely the ones you would keep.

How to apply it this week

1. Find your actual gross margin. Not the one you assume. Revenue minus the cost of delivering it, as a percentage. If you cannot get this from your accounts in ten minutes, that is the first job, because every pricing decision you make is currently a guess.
2. Write the discount table for your own margin. Five per cent, ten, fifteen, and the volume each one demands. Put it on one card and keep it where you quote from.
3. Audit the last twelve months of discounts. Add them up in pounds. That total is profit, because none of it had a cost attached. Owners routinely find a number that would have paid for the hire they said they could not afford.
4. Kill the standing discounts. List every client on a rate that was once temporary. Decide which are ending and when, and put the dates in the diary this week.
5. Build three ways to say no to a discount. A smaller scope at a lower price. The same price with better terms for you, like payment up front. The same price with something added that costs you little and is worth a lot to them. Never the same thing, cheaper.
6. Model a 5 per cent increase across the book. Work out the profit it adds and how many clients you could lose before you were worse off. Then decide whether the conversation is really as frightening as the number suggests.

When a discount is actually the right call

There are three, and they share one feature: you get something back.

Payment terms. Two or three per cent for payment in advance is not weakness, it is arithmetic. If the alternative is waiting 60 days and funding the gap on an overdraft, the discount can be cheaper than the finance, and it removes the collection risk entirely. Work out your own numbers before you decide whether that trade is good.

Committed volume. Not hoped-for volume. Committed, in writing, with a minimum. The mistake is granting the volume price for the volume promise, then discovering that the promise was optimism and the price is now permanent.

A deliberate entry price. A lower rate to get inside an account you have a specific plan for, with a written end date, an agreed reason and both sides knowing what the standard price is. That is an investment with a term. A vague introductory rate with no end date is not an investment, it is your new price list.

The principle in all three: never concede, always exchange. And every discount gets a name and an expiry, or it becomes the price by default.

The mistake most owners make

Discounting to win work they have not been able to justify. The discount is not a commercial decision, it is an escape from an uncomfortable conversation about value. If the buyer does not understand what they are getting, a lower price does not fix the misunderstanding, it confirms it.

The second mistake is dropping the price without changing the scope. That single act tells the client the original number was made up, and it prices every future quote you send them. From then on you are negotiating from your discount, not from your price.

The third is discounting to a client you will end up resenting. Cheap work does not get your best attention, resentment leaks into delivery, and eighteen months later you have a low-margin client who complains and a team who dread the account. Better to lose the job cleanly at the right price.

The questions to sit with

• Out of 10, how well do you know your gross margin, without opening anything?
• What did discounting cost you last year in pounds, and where would that money have gone?
• Which client is on a price you would never quote today, and what stops you having the conversation?
• When did you last put prices up, and what did you actually lose when you did?

This is the first lever in the Profit Accelerator, and it is the fastest. Price is the only lever with no delivery cost attached, which means every pound of it is profit and every pound given away is profit given away.