RHACOVA

Pricing and margin

How Discounts Affect Contractor Profit

Cutting the price by ten percent does not cut your profit by ten percent. It can cut it by half.

The short answer

A discount does not reduce your cost, so it comes entirely out of profit. On a job priced at a 20% margin, a 10% discount removes half the profit. The percentage you take off the price is never the percentage you lose — it is always larger, and the thinner the margin, the worse the ratio.

Definitions

List price
The price before any discount, built from cost and your target margin.
Discount
A reduction in price with no reduction in scope. Cost stays exactly where it was.
Profit erosion
Discount amount ÷ original profit. The share of the job's profit the discount consumed.

The formulas

Discount amount = list price × discount rate

New profit = original profit − discount amount

Profit erosion = discount amount ÷ original profit

Price needed to hold the margin = cost ÷ (1 − target margin) ÷ (1 − discount rate)

Worked example: a 10% discount on a 20% margin

  • Cost: $8,000.00
  • List price at a 20% target margin: $10,000.00
  • Profit before the discount: $2,000.00
  • Discount given: $1,000.00
  • Price after the discount: $9,000.00
  • Profit after the discount: $1,000.00
  • Margin after the discount: 11.11%
  • List price that would still leave a 20% margin after the same discount: $11,111.11

Ten percent off the price took roughly half the profit. The cost did not move by a dollar — the customer's saving came out of one place only.

How much extra work replaces a discount

Replacing given-away profit means selling more work at your normal margin. If a discount costs you half the profit of one job, you need roughly another half a job's worth of profit to get back to level — at the same margin, the same crew hours and the same risk. Discounts granted to “win volume” therefore have to be checked against what that volume costs in overhead and cash, not just against the hope of being busy. See why high revenue is not profit.

What to do instead

  • Reduce scope with the price. Less work for less money is a negotiation; less money for the same work is a gift.
  • Offer a schedule or payment-terms concession, which costs cash timing rather than margin.
  • Build the discount into the list price beforehand if a customer always expects one, using the required-list-price figure above.
  • Decide the floor in advance — a minimum margin you will not cross — instead of in front of the customer. See target margin by type of work.

Common mistakes

  • Assuming a 10% discount costs 10% of profit.
  • Discounting to fix a cash problem, which permanently trades margin for timing — see cash flow vs profit.
  • Applying the discount to a price built on markup while thinking in margin — the two differ, as markup vs margin shows.
  • Discounting the whole job when only one line was contested.

Quick answers

Does a 10% discount cost me 10% of my profit?
No. The discount comes out of profit alone, so it costs 10% of the price — which can be half the profit or more on a thin-margin job.
How much more work must I sell to make up a discount?
Enough additional jobs to replace the profit dollars given away, at your normal margin. On thin margins, that is usually several jobs, not one.
Is there a way to discount without losing margin?
Only by reducing scope or cost alongside the price. Removing work is a negotiation; removing profit is a donation.

Run the numbers

Selling price, profit, markup percentage and margin percentage from any one of cost plus markup, cost plus target margin, or cost plus a price you already quoted.

Open the Markup & Margin Calculator

Free, no account, and the answer stays on the page.

See the damage before you send it

RHACOVA Estimates price from a target margin and Profit Guard flags a proposal that falls below your minimum — before the discount reaches the customer.

Start an estimate

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

Keep reading