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Here’s a great example showing just how much you lose when you discount services or consulting efforts.

Let’s assume you quote a job, fixed price, but calculated by estimating your time.   Here are some considerations you use in your quotation process:

1. Engineering rate: $150/ Hour.  (example rate).

2. Company’s published burden rate: $75/ Hr.

3. Hours estimated to do the job: 8 (one full day)

4. Total proposed price (Fixed Fee): $1200

5. Expected burden cost on the deal: $600

6. Expected gross profit (GP) on the deal: $600

So you put together your proposal and submit it to the client along with whatever products are to be installed.  The client looks at it and figures there’s no harm in asking for some discount.  “How about if we just go with $1000 even?”  Well,  that’s fair.  After all, it’s so close.

Assuming your engineer does complete the work in 8 hours, the client get’s billed $1000.

Looking at the numbers more closely:  That is about 17% off.  Not a huge discount, so you’re not worried.  However, let’s look at the GP discount:

Your fee: $1000

Actual burden cost: 8 X $75 = $600  (Same as above)

Realized GP: $400

Whoa, you gave away $200 right off the bottom line.  That’s a 33.33% discount which is about twice the discount you thought your were giving!  No wonder the numbers don’t work at year end…

© 2010, Dave Stelzl

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Photo By: Hannah Stelzl

I’ve met too many sales people over the past decade who are stuck dreaming about the 90’s.  They had large accounts, perhaps covered one large global client.  They made big money, have impressive contacts, traveled the world, and won awards.  Innovation was high, new technologies drove early adopter buyers to research and seek out differentiating technologies.   And they were on the ride side, selling it all.  They had it made!

Sales were high because companies were seeking out new technologies that would put them ahead.  Perhaps the first restaurant to use pagers was a hit, the first realtor to use a cell phone beat his competition to the sale, and the first company to deploy email changed the way people communicate, gaining an advantage somehow.  Sales were strong and margins were good.  But it seems as though today’s technology developments are improvements on yesterday’s innovations.  They’re faster, cheaper, and in some cases more reliable.  Digital cell phones are much clearer than the old analogue, desktops are a fraction of the cost we paid twenty years ago, and the size of mobile computing devices has made it possible to carry the power of yesterday’s mainframe technology on our hip.  And with this era of improvement comes commoditization and thin margins.

Commoditization of technology is speeding up and the number of ways to purchase just keeps growing as prices fall.  The old days are not coming back, and sitting around wishing, won’t improve your numbers.  Expect sales to get harder going forward, margin to grow thinner, and buyers to be smarter.  As a sales person, you can’t be coaches anymore, responsible only for bringing in the team.  You have to become consultants, bringing knowledge and ideas, and prepared to solve problems; in short, you have to demonstrate that you are the best choice to advise business leaders on the direction to take with technology.  The more a sales person dreams about past success the less likely he is to perform in the coming year.  Margin can no longer come from product alone, but rather the intellectual capital you bring; ideas that are better than any other, work ethic that out performs your competitor, and creativity.  All of this starts with your message; the thing that positions you above the noise and creates an opportunity to demonstrate lasting value.

© 2010, David Stelzl

Resellers, VARs, Solution Providers, and Channel Managers – this is an important lesson on the profitability of services.  While your (or your partner’s) services may be very profitable, they may not be as profitable as they seem.  As the market has commoditized, I’m seeing far more short product/install contracts…less consultative, long term engagements.  This is particularly  true in the mid and smaller markets. What is the result.

Listen and see how calculations on profit, gross profit, and net profit are sometimes confusing.  To the sales rep, all GP is good – you get paid, right?  To the person with P&L responsibility, the numbers don’t always add up…I frequently run into people who initially think they have strong services margin.  When I show them how to calculate it, we find profits to be much lower apart from the product sales.

© David Stelzl, 2010

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