By Jim D’Amico, President
We all look for discounts when buying goods and services. It’s just a smart way to shop. And although you may have never really thought about it, discounts come in many varieties. Here is a fairly exhaustive list.
Types of Discounts:
- Buy one, get one free
- Contractual discounts
- Early payment discount
- Free shipping
- Order-specific discounts
- Price-break discounts
- Seasonal discount
- Trade discount
- Trade-in credit
- Volume discount
For a written description of each type of discount listed above visit www.accountingtools.com and search “Types of Discounts.”
So, how do discounts impact your plumbing, electrical, or HVAC business? Well, if discounts are used to stimulate sales and promote repeat business, and factored into your pricing model, a good discount strategy may help your company grow and stay profitable.
I once talked with a furniture store owner who told me that his company ran a new and different sale every week offering discounts because his store wanted to attract business from people that didn’t buy furniture last week but may be in the market to buy furniture this week. He said, “We never know when someone decides to buy furniture and we don’t want to lose a sale to that customer because they went to another store that is offering a discount.”
Discounts by a furniture store would best be described from the list above as a “price-break discount.”
Some service companies offer price-break discounts to senior citizens, military personnel or maintenance agreement customers. Some may offer “volume discounts” to customers with multiple properties or multiple systems to be serviced.
However, there is one discount strategy that didn’t show up on the list above. I have come to know this type of discount when I was in the service business and I have labeled it “The Ugly Discount.”
The ugly discount can occur in various situations, but it usually relates back to one cause. The following examples show that the ugly discount is not necessarily dependent upon whether your company charges for service on a flat rate or time and materials method.
Consider these scenarios for an electrical, plumbing, or HVAC business.
Scenario #1: Time and Materials Pricing-Collecting on the job
Your service technician is dispatched to a service location. Upon completion of his work he presents the customer with an invoice for work performed. The customer takes one look at the invoice and becomes hostile about the fee charged and says he will not pay that much. He claims he has been overcharged both for time spent on the job and the hourly rate that was charged. The bill, he argues, is much higher than what he expected to pay.
Scenario #2: Flat Rate Pricing-Collecting on the job
Your plumber completes a repair on the customer’s plumbing system and presents an invoice. The customer looks at the fee and tells the plumber he will pay for the repair but he will not pay the service call fee.
Scenario #3: Time and Materials or Flat Rate-Customer to be billed
Your service technician completes the repair and asks the customer to sign the work order to indicate that the work has been completed, but leaves the location without presenting an invoice. The office bills the customer for the work completed and the customer places a followup call to the office complaining that he was overcharged for the repair.
Each of these situations has the potential to lead to and more than likely will result in an “Ugly Discount” that is given to a customer.
My definition of an ugly discount is as follows.
Ugly Discount – a discount that has not been planned for or contemplated by a service company in advance. It is a discount given to a service customer after work has been completed to stop a customer complaint and/or in hopes of retaining future business. This kind of discount is ugly because it comes right off of the service company’s bottom line.
Consider the impact an ugly discount has on a service company’s bottom line. Most HVAC, plumbing and electrical contractors strive for a 10-15% net profit. The average repair ticket today on an HVAC system, for example, is about $325.00. If a service company achieves a 15% net profit, that net profit amount is $48.75. If the service company bills at $125.00/hour (low by today’s standards) and decides to cut a half hour off the service bill to appease the customer, the discount is $62.50. Consequently, the entire profit is lost on that job plus an additional $13.75 is lost before the next service call begins. OUCH!
And that is why it’s UGLY.
OK, so how can one avoid the ugly discount situation?
The answer is really very simple and summed up in two words…Good Communication!
- When using a time and materials method of pricing one should be sure to quote the hourly rate upon the request for service. The technician should also be sure to discuss the needed repairs and appraise the customer of any unforeseen circumstances as his service work unfolds, also discussing how that extra work may impact the labor time and the bill.
- When using a flat rate repair pricing system, a service call fee or diagnostic fee should be discussed upfront on the request for service. Repair fees should also be quoted in advance to gain customer approval before the work is done.
- Avoid mailing surprise bills to your customers. Always inform your customer about your service charges in advance. Ask for a cell phone number so that if a customer is not home, a staff person can make a call to discuss the repairs needed and the corresponding fees.
The bottom line is to protect your bottom line and avoid an Ugly Discount with good communication about rates, repairs and unavoidable extras.