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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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Tina, my seven children, Jack the dog, and I all wish you a happy new year.  I’ve become famous in my home for reminding everyone that, as we start the new year, we are all back to zero – unless you’ve taken the time to build various forms of recurring revenue!  Regardless, it’s time to pull out your plan for 2009 – the one you were hopefully working on through the month of December.  For those of you who did not…all is not lost.  This morning’s Podcast post http://dstelzl.podbean.com/ starts a three part series on planning – a simple format to walk you through three short 15 minute sessions to plan your year.  Make sure you have something in writing – while laborious details are not so critical, concrete vision, goals, and plans are.  You won’t need weeks of work on this, but you do need some time to think through last year, last quarter, recent news, trends, and futures for 2009.  Since you are going to spend the entire year working, you might as well start with a realistic plan in place.