Death by 1,000 cuts is how the ancient Chinese tortured people. No one single cut killed them. However, it was the accumulation of 1,000 cuts that eventually killed the person.
What does this have to do with your business?
It’s the little things that you don’t pay attention to that could add up and kill the business. No one of these things, by themselves, will kill your business. Do enough of them, and you could experience a slow, painful death.
Over the next few weeks I’ll be writing about these “little things” that can add up to big losses and potentially put your company out of business.
First – how do you discount?
This past February, when I was teaching Field Manager’s Survival School we got into a discussion about pricing for maintenance and non-maintenance customers.
The managers were adding 15% to the cost for non-maintenance customers. You need to divide by 0.85…a small cut…but it could have a huge impact on your bottom line.
Here’s an example:
The maintenance customer service hourly rate is $300. What should the non-maintenance hourly rate be?
They said, multiply by 1.15.
I said no, to get a true 15% you must divide by 0.85.
Here’s why:
When you multiply 300 X 1.15 = $345.
Putting this into the P&L:
Revenue = $345
Cost of goods sold = $300
Gross profit = $45
Gross margin = 45/345 = 13%
If you want a true 15%:
$300/.85 = $352.94
Cost of goods sold = $300
Gross profit = $52.94
Gross margin = 15%
This is death by a small cut. The difference between $345 and $354.94 is $7.94…round to $8.
How many service tickets do you generate a year for non-maintenance customers?
If it is 1,000 a year that is $8,000 less than you should be earning.
A little cut that could add up to large losses.
Next week – another little cut.
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