Are you paying your customer to buy from you? If you’re giving discounts without doing the math — the answer is yes. Keep reading for a process and a template that will help you give discounts without losing your shirt.
Everyone loves a discount! But discounts can be very dangerous to your business if you only rely on your gut and you don’t know your numbers.
Even if you’re not the most mathematical person on the planet (like me), I promise these discount tips will not only feed your need to discount, but your customers will think they got an awesome deal and you’ll still be making a profit.
How to Calculate Your Total Cost
If you’re like me and make more than 90% of your business purchases on a business credit card. Simply grab a monthly statement, divide those expenses by the number of hours worked. Then multiply that by 2.5 (to grab any stragglers you might have missed). This isn’t accurate to the penny, but it’s enough to keep you profitable.
Before you can give discounts, you have to know your break-even point so that you don’t discount your services to the point where you’re literally paying your customers to buy from you.
I worked with my bookkeeper to come up with what an hour of my time COSTS. Then I also figure out what specific tasks cost. For example “writing a 1000 word article for a sponsor” costs $1500 dollars. Inside that task are meetings, research, writing, SEO optimization and editing, looking for images, creating images, creating and scheduling social posts. In other words, it’s a serious project with dozens of steps that result in an outstanding product that the client is happy with.
This is SO POWERFUL and will stop you from giving services away (and going broke) because it’s based on real numbers, real time and real cost.
After doing this exercise with my bookkeeper she said — “OK, this is what it COSTS you to do these tasks. If you charge less than this for anything that includes these tasks — you are losing money right that instant.”
This applies to you even if you sell basic products and services. Don’t forget to include those “invisible” costs like helping clients over the phone, consulting meetings and the like. It all counts.
The Simple Mind Trick I Use to Set Prices and Discounts
Craft a pricing policy and develop a pricing table. That’s it. It’s something so simple and yet so powerful.
READ MORE: How to Set a Price for Your Product
Here are three ways that a pricing policy and pricing table will help you set and maintain prices and help you give discounts that won’t cause you to go broke:
- It doesn’t require any thinking or calculating: You’ve done the math, you know the prices and any discount options you’re sharing are “approved” anything below these price points isn’t approved. And it’s probably not a good idea.
- It removes YOU from being the “bad guy”: Once your prices and discount levels are set, they are a policy of the company. That means that you no longer have anything to do with this.
- It gives you the freedom to craft new, profitable offers: Because this method will list absolutely everything involved in developing the prices and related discounts for your offers, you’ll be able to add and remove any services to reach a “lower” price point without going broke.
And now — it’s time for the price list and the discount list.
How to Calculate Discount Prices for Products and Services
I call this bottom up pricing because you’re going to start with the a la carte list of everything you offer, and make that the highest price from which you can safely discount.
You will need to have a firm grasp on your costs and what your time is worth and multiply by 2.5.
Does that seem like a lot? It’s not. Most small business owners undervalue their time, they undervalue how long something is going to take and they don’t consider the cost of outsourcing and managing freelancers. You can sit down and do all the math, but doubling this cost will practically guarantee you won’t underprice yourself. and it will give you some space to offer a discount.
Boom! You now have a price list for everything you do.
It’s time to calculate the discounts:
There are three main discount percentages that resonate with customers purchasing digital products in particular: 20%, 33% and 50%.
I’ve created a pricing sheet template that you can use for your own product and service offer.
Download to Calculate Discounts
Once you’ve completed this spreadsheet, you’ll have a guideline with which to create a more formal pricing sheet.
And, once you’ve done that, you should label it as your official pricing sheet and use this when you are quoting business.
How to Estimate Your Hourly Cost
To get a quick estimate of what your hour is costing you, run over to where you track your business expenses. I use my QuickBooks account and find my number for annual expenses for the last year and monthly expenses for the last month.
Then I simply divide that number by an average hours worked during that period. I compare my average hourly cost from the annual calculation with my average hourly cost for the previous month. And then I pick the larger number and round up.
If my annual expenses for 2021 were $50,000 and I worked an average of 20 hrs per week. I assume a 50 week year, so that’s a nice round 1,000 hours per year. So then my hour would cost $50 per hour.
I will usually either double this number or multiply it by 2.5 if I quote my hourly rate because I assume that there are a dozen little things that I’m not considering. This way, I can guarantee that I can cover any re-work or unforeseen expenses that I hadn’t considered.
Protect Your Profits
I can’t stress enough how important this process is to protecting your profits. Don’t discount the power of going through the exercise of truly understanding the cost, energy and effort that goes into serving your customers.
Use this price list and discount sheet as your guide. Remember, every time you go BELOW the prices listed on this sheet you are literally PAYING your customer to buy from you.