Discounting
Discounting
Today, we are proud to introduce our new guest writer, Bill Pyles. His blog today is on the topic of discounting. After separating from the United States Marine Corps, Bill started a lifelong career in heavy equipment dealer product support. Starting as an apprentice technician, Bill worked his way up to the General Service Manager for a multi-state Cat dealer. Bill continued to serve in similar roles as General Manager of Product Support to VP of Service for multistate OEM dealers. Coming up thru the product support ranks gave Bill an invaluable education of customer relations, dealer product support and an understanding of the dealers most valuable resource, the product support team.
After 47 years of service, Bill has retired, living in Florida with his wife Diana and golden retriever, Shelby. Bill & Diana spend their time with their two sons and five grandchildren.
Bill can be contacted at LinkedIn; www.linkedin.com/in/billpyles or wlp69ss@gmail.com
Discounting
Don’t Sell Yourself Short.
At one time during my career, I worked for a dealer with a very large and diverse rental fleet. The OEM we represented did not provide a full construction and paving line needed to support a large rental fleet, so we purchased new and used equipment from other dealers.
Now after being on the dealer side for many years, my role was now the customer with other equipment dealers and I thought I’d ask for the one thing many customers ask for, the dreaded, deadly discount.
During my career I’ve worked with a few very large OEM dealers who had customers on the international level. They purchased the largest sized equipment on the market. I had personal relationships with many professional purchasing agents who know little about the equipment but knew every trick in the book to secure discounts.
My involvement at the time was service (shop, field, rebuild) related and these large customers ran hundreds of thousands of dollars through our service departments. Back in the 70’s and 80’s many dealers were not using data to analyze customers buying, renting, parts purchasing for large, if any customers. When the data did become available, and available to all product support and sales management, it became painfully apparent the dealer, while moving millions of dollars through the dealership, overall profitability was minimal. Why? Each department, not wanting to upset the large customer trotted down the discount road. Service was busy discounting labor; parts was in a hurry to discount while the sales department was taking the skinniest deals possible. These larger customers consumed a lot of dealer time and dealer resources. Regular meetings to discuss equipment and or product support issues. Demanded a very high parts availability percentage, major components in inventory on hold for their use only, an on-site field tech within 4 hours of the machine down call, guaranteed machine availability with consequences, and generous dealer policy dollars when the warranty expired (but did not purchase the extended warranty).
Were they bad customers? Absolutely not. They were very organized, knew their costs and had highly trained and professional managers, especially the purchasing managers. They in fact were holding all the cards when it came to dealing with most equipment dealers.
Dealers were discounting in all areas of dealer support. While the revenues of the financials were outstanding, the margins and profitability were poor due to unmanaged discounting. But one lesson quickly learned, no matter the size of the customer account, discounting has the same negative impact.
Let’s look at what just a 10% discount in labor (the same concept works for parts) does to your profitability.
The known variables are your:
- Current labor rate (sell)
- The cost of the labor
- The resulting gross margin (labor rate minus cost)
- Your expenses, many are fixed
- Your EBIT (Earnings Before Interest and Taxes)
You control the labor rate and the potential to discount it.
Your cost for the labor is the tech’s wage and I doubt if you’ll get the tech to agree to discount his wage! Subtract the cost from the sell and you have your gross margin and remember, labor sale dollars do not pay your costs and expenses, gross margin dollars do that!
Consider your expenses that the margin dollars must cover, uniforms, training, utilities, tooling, depreciation, rework, policy, vehicle maintenance, and many others. Several of these expenses remain fixed month after month and must be paid. Yes, training is a variable expense but I’m thinking you will not want to cut your training program to support discounts.
Knowing all the above let’s look at the discount impact.
| Labor Rate at List | 10% Discount | 15% Discount | ||||||||
| Labor Rate | $150.00 | Labor Rate | $135.00 | Labor Rate | $127.50 | |||||
| Cost | $30.00 | Cost | $30.00 | Cost | $30.00 | |||||
| Margin | $120.00 | 80.0% | Margin | $105.00 | 77.8% | Margin | $97.50 | 76.5% | ||
| Expenses | $72.00 | 48.0% | Expenses | $72.00 | 53.3% | Expenses | $72.00 | 56.5% | ||
| EBIT | $48.00 | 32.0% | EBIT | $33.00 | 24.4% | EBIT | $25.50 | 20.0% | ||
| EBIT Reduced | 7.6% | EBIT Reduced | 12.0% | |||||||
| EBIT Percent Reduced | 23.6% | EBIT Percent Reduced | 37.5% | |||||||
A simple, everyday give away of one hour of labor at 10% reduces your margin by $15 to $105 or 77.8%, your expense dollars remain the same at $72 but now that $72 represents 53.3% of total sales and dropping your EBIT dollars to $33 or 24.4% effectively reducing profitability by 7.6% or a total of 23.6%. Ten percent off the top will cost you over 20% in your profitability. And it only gets worse from there. You can run these numbers for one hour of labor, ten hours of labor or 100 hours of labor, the dollars will change but the percentages will remain the same. And now you must make it up somewhere else; do not dig the discount hole. I realize this is easier said than done.
Remember my story above working for a dealer with a large rental fleet of other dealers’ equipment? Whenever there was a repair on a piece of equipment, we did not have the tooling or training on, I’d send to the local dealer. I sent the machine to the local dealer and not a shade tree outfit. Why? I knew the shade tree outfit had lesser labor rates and would figure it out eventually, but the dealer had trained techs, proper tooling and OEM technical support if needed. I knew I’d get a good repair, faster turn around time and most importantly, a product support warranty I could count on. I’d call ahead to let the service manager know the machine was coming in, a description of the issue and a request for a written estimate as soon as possible. A day or so later the service manager or service writer would call and send over the estimate.
The estimate could have been well below what I was expecting, for example all the machine needed was a sensor and not the entire harness as our techs had determined. But no matter how high or low the estimate was I always said the same thing (I mixed up the words a bit not to be too predictable) YOUR KILLING ME!! And almost immediately I would be offered a revision of the quote with some level of a discount. My expectations were the estimate I would be getting would be thought out, based on OEM time guides, the right amount of labor included along with any additional shop costs (consumables). Rarely did the person calling me try to explain the costs and justify the estimate. When a service manager or service writer immediately drops to a discount it may tell the customer that he or she just shot from the hip, or perhaps your tried to fat finger the estimate.
You are providing excellent product support to your customers. You pay dearly for OEM training. Your shop has the correct and very expensive tooling. You have the machine history and know where the weak issues are. My point is your customer knows this and therefore he’s calling you and not Sunstroke Tractor (a reference for some of the gray beards out there). He knows that Sunstroke will eventually look at his machine, have the wash rack guy throw parts at it until something works. Who knows if the repair is correct and will last, but that’s why Sunstroke is much less expensive then you the OEM dealer. My sincere apologies if there is a Sunstroke dealer; I’m sure this is not your Sunstroke dealer being referenced.
Promote your dealership, invite your customer into your shop and show him around. Be proud of your techs and the work they produce.
Is all discounting an absolute evil? You can show a discount on certain skill levels. For example, perhaps you have a lower undercarriage repair rate, but I’d think an entry or lower level (not fully trained) tech would be skilled in undercarriage R&I and therefore make less in wages as compared to a senior tech. Put together a killer PM program; again, lesser cost could relate to a lesser sell rate. Some dealers will reduce a rental fee if the machine is in the shop. Some dealers offer a discount on the invoice if paid within a certain number of days (do you know if your dealer does?)
Do not blame the customer for asking for a discount, it’s almost second nature. He is asking for the best price from the best dealer to get his machine back in service. Do not let him down and you’ll stop being asked for a discount.