Bidding is back, and the competition is fierce. It’s tempting to cut your price to get the job, but it rarely works to your advantage. Every time you cut your price for one job, it means you have to sell another job at full margin or better to make up for it. Otherwise you’ll miss your revenue targets. If you miss by too much, you’ll end up in the red, and those losses come out of your pocket.
The amount of additional work that needs to be sold to recover discount losses varies depending on target margin.
For example, let’s say you typically work on a 25% margin, and you discount a $50,000 kitchen remodel bid by 5% — a reduction of $2,500. Unless you can cut job costs or overhead or both, the only way to get back the $2,500 you gave away is to sell another job at full margin or higher. How big a job? To find out, divide the discount by the target margin (see table).
Discounts can work if you are absolutely certain that the discounted job will lead to additional work at your full margin or higher. But many companies have foundered on that rocky shore. Rule of thumb: Don’t discount. But if you must, make sure you understand what it’s really costing you.
—Sal Alfano, editorial director, REMODELING.