Everyone loves to get a discount. Some like it because they want to pay less. Others enjoy the feeling of being someone special, while those in the military and volunteer services appreciate the gratitude expressed by military and volunteer discounts offered to them for their service.

The plumbing, heating and cooling service industry is no different. I’m sure you would like to get the best price for your business purchases, and your customers would love to enjoy a discounted price from you for your services.

One thing is for sure: If you are going to provide discounts, you have to do it correctly.

First, you must be certain of the true costs you incur to run your business in totality, inclusive of all legitimate tangible and intangible operating costs.

Tangible business costs are those you can determine through the amount of money you pay for those expenses. Intangible business costs are those you incur through a loss of time, e.g., callbacks, etc.

Once you have calculated the true total operational costs you incur to run your business, you must use that data to calculate the labor/overhead cost of each hour you offer for sale. Time, associated with labor and overhead expenses, is part of the makeup of the services you sell.

Add material costs of any task that are also part of the services you offer to the public, and you have the labor/overhead/material costs to your business for that task.

Profit margin and hours sold

However, that’s just the first step to consider before you are ready to offer discounts.

Next, you must consider the profit margin to apply to the costs of any task. After all, except for nonprofit and not-for-profit businesses, the primary reason anyone goes into business is to bring in more money than it costs to operate it. 

Regarding how much money is above true operational business costs, keep in mind that success requires you to maximize your profits with legitimate and intelligent reasoning.

The money above the true operational business cost is called profit. To attain profit, you must apply a profit margin to the costs you incur to provide the services needed to perform the task at hand before quoting any selling prices.

The next issue to consider before establishing your selling prices is your unapplied labor responsibility. If you base your business costs on selling 1,708 hours per tech annually, but sell less, your profit margin should be higher than what you use when you sell all 1,708 annual hours per tech.

Here’s a helpful hint to consider. There are only a maximum of 1,708 sellable tech hours per tech in a 40-hour, 52-week year, when you consider two weeks for vacation/personal time, six holidays and nonrevenue-producing tech duties of 244 hours per tech annually.

When you calculate your total true operational business costs based on selling your maximum 1,708 hours, or whatever you have decided is your maximum amount of sellable hours per tech, and you sell less, your cost per tech hour increases. 

Therefore, since the only constant you have regarding hours sold in any fiscal period is your maximum number of tech hours available, and since no contractor sells all its available tech hours all the time, choosing your profit margin is very important. 

When you intend to offer discounts, you have another issue to consider in choosing your profit margin. 

You might be thinking that if you keep your selling prices at their lowest possible point, you will eliminate the need to consider these issues. The flaw in that thought pattern is that you will not be able to maximize your profits due to the unknown realities that certainly pop up in any fiscal period.

And you would further put your business at a disadvantage because you would not be able to offer discounts that could help you grow your business.

Not every consumer is going to be your customer. Consumer loyalty is fleeting. You must set your business up to reward consumers in a way that will make them decide to become your loyal clientele because you deliver excellence at prices they agree to before service is performed.

Your pricing strategy based on profit margin

Once you have completed the previous steps, it’s time to set up your pricing strategy. Assuming you have properly calculated your true operational business costs based on selling all your available tech hours and have chosen a profit margin that takes into consideration your unapplied labor factor, you need to adjust your profit margin to a percentage that takes into consideration your proposed discount strategy.

When choosing your profit margin and any adjustments, keep in mind this fact. Your actual selling prices can only be set in one of three ways: at your cost, below your cost or above your cost.

Only one of those choices can help you attain the goals of being in a for-profit business. Your selling prices, including your discounted selling prices, must be above the cost your business incurs to perform any task.

For every $100 of operational cost to your business, if you wanted a 10% profit margin, your selling price would need to be $111.11. That’s $11.11 more than your $100 cost. $11.11 of profit divided by your selling price of $111.11 is 10%. That’s how to describe a profit margin rather than a markup on cost.

A markup on cost would make your selling price $110 since that gives you only $10 or 10% more than cost. 

But watch out! If your $100 cost was based on selling 1,708 tech hours and you only sold 1,537 tech hours (90% of 1,708), your true cost per tech hour would be $111.13. In this instance, a 10% profit margin is insufficient to attain the reason you are in business.

Under those conditions, your selling price would have to be $123.48 for a 10% profit margin since your actual cost was $111.13. Proof: $12.35 of profit divided by your selling price of $123.48 is 10%.

Another way to look at the same example is to use a 20% profit margin. Your original $100 of cost to your business with a 20% profit margin would give you a selling price of $125. With this adjustment, even when you sell only 90% of your available tech hours, you still bring in more money than the $100 cost estimate that turned out costing your business $111.13.

Building on that same example, you must calculate your profit margin adjustment to consider your discount policy. If you want to offer a 10% discount and sell only 1,537 of your 1,708 available tech hours, and want to bring into your business the same $125, your selling price would need to be $138.89.

To attain that pricing level using the original $100 cost to your business, you need your profit margin to be 28%. With $138.89 of revenue, you must first deduct the discount of $13.89 (10% of the $138.89 selling price). That leaves you with $125. When your actual cost became $111.13 because you only sold 90% of your available tech hours, the revenue above your original cost estimate of $100 is $13.87. 

That $13.87 is a few dollars more than your original goal of making $11.11 above your original estimated cost.

In this example, you covered your estimated cost, unapplied labor factor and your discount. I realize this might seem a bit confusing at first, but it’s the simplest way I can explain it generically without knowing the specifics of your particular business. The fundamentals of the mathematics are sound. If you need further explanation, you can contact me. 

You are not limited to the factors I used in the example. You can use higher percentages, especially if you want to offer varied discount levels to consumers. You might want to provide a 10% discount for senior citizens, while having a higher discount for other groups, such as volunteers and the military. 

You could even set up a service agreement program that consumers pay to join. Service agreement programs could offer certain inspections at no additional cost and varied discount levels, depending on the program the client chooses.

As long as you calculate the numbers correctly to allow for recovering your cost while you deliver excellence to consumers and bring in more revenue to your business than it costs you to provide your services, you can enjoy the power of discounts as you grow your business on your way to success.