Never Give Away Your Core Product
Written by Mark Baker, Business Development Manager of INTAKS NZ Limited
Discounting off core product is prevalent across many industries, and scaffolding is no different. Of course, you should always appreciate your customers, but “free” can be more expensive than you think.
My wife rarely misses a chance to use loyalty cards at her favourite shops. Airpoints, Fly Buys, One Card, you name it, she’s got it. She has another section in her wallet for “coffee stamp cards” from a couple of cafes around town. Several years ago at her favourite coffee shop, as a cashier was stamping her Coffee Card (buy 6 coffees, get the 7th one free), I asked her: “Does this card make you shop here more often?” After a moment of reflection, my wife responded with a knowing smile: “No, but it is nice of them to offer it”. This made me think about the effectiveness of discounting your core product in the hope of building some sort of loyalty.
Discounting off core product is prevalent across many industries, and scaffolding is no different. When I discuss sales of scaffolding services with my customers, it’s common for them to feel compelled to offer their customers something for free to close the deal, like a period of free rental. My immediate question is: “Why?”
Giving something away for free as a gesture of thanks has almost become expected in business, but when examining the strategic value and underlying costs of this, I’ve found that discounts and free rental are seldom necessary to close a deal, nor are they always highly valued by customers.
Of course, you should always appreciate your customers, but “free” can be more expensive than you think. Small discounts may seem pretty harmless, but they come straight off the bottom line.
Consider the following; a company with $1m turnover per year, delivering $315k profit to the owner – they have a net profit margin of 31.5%.
A typical project for them sells for $3,000 for install & dismantle, plus $300 per week in rental with the scaffold generally up for about 4 weeks; and one of their customers has asked if they can do 2 weeks as free rental.
Under a normal scenario the project gives them $4,200 in revenue and $1,320 as profit (31.5%). But if they were to give away 2 weeks rental for free the following happens; the projects returns $3,600 in revenue but because the costs stay the same the profit the is now just $720.
If they did this for every job, the business goes from $315k profit, to just over $171k. A drop of over $140k per annum.
In turn, the capital value of the business drops from $945k, to $516k.
What appears to be a small discount can significantly impact profits within your business.
The next time you're considering offering a freebie, stop and ask yourself “Do I really need to?”
Freebies or discounts, in many cases, are overlooked by the customer and are therefore throwing money away. Consider other ways to build a loyal customer base, such as:
- Demonstrating a strong commitment to customer-focussed service
- Delivering on promises
- Maintaining a professional team
- Delivering the best outcomes with high standards and quality work
So think about other ways can you show gratitude to customers aside from discounts. I can't help that think a simple thing like remembering my wife's name would have built the same loyalty.