Imagine offering a client a 10% discount to win the project only to find out you actually took a 33% hit. Ouch!
If you’re engaged in time based consulting work you may be surprised to learn that offering your buyer a modest discount can actually reduce your gross profit by a much greater margin.
This is an adapted summary of Ori’s explanation on page 26:
At first glance, this makes sense…
- You’re a consultant that has just offering your client a 10% discount on your rate for the project.
- You expect the project to be about 1000 hours at your rate of $500/hr.
- If your costs on the project are $350, that leaves you with $150/hr profit (that’s a 30% gross margin).
- Your total profit from this project would be $150,000.
Here comes the pain…
- Your 10% discount would equal $50 off your regular rate.
- That means your hourly rate drops to $450.
- Your costs will remain the same ($350) unless you’ve negotiated otherwise (key point!).
- That means your profit falls to $100/hr.
- Your total profit is now down to $100,000 from $150,000.
- That’s a decline of 33%, not the 10% you first bargained for!
Lessons and Considerations
- Be clear on why you’re offering a discount and if the discount makes sense.
- Understand that if you have an income goal and you’re offering discounts, you’ll have to work much more to reach it.
- If you’re going to offer discounts, consider adjusting your costs or making other arrangements so that your profit and margin don’t take such a beating.