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The Magic Red Pen: How Pre-Discounting Kills Profits

An engineering firm was struggling to meet industry benchmarks for profitability.

Despite their excellence and expertise, their projects consistently fell short of the margins projected at the time of sale.  They described their pricing process to me:  when quoting a project, they figured in all the materials, equipment, and time of the various levels of experts at standard rate.

Original Pricing Breakdown

$120,000 Materials
$60,000 Equipment
$52,800 Other Resources:
    6 Weeks Junior Tech
    2 Weeks Senior Engineer
    4 Executive Meetings
$232,800 Total

Sticker Shock Sets In

The total often scared them:  “Over $230,000?! I’m worried the customer will freak out about anything over $200K!” In response, they would make cuts to the estimate by:

  • Reducing material scrap rate estimate
  • Cutting time from equipment rental costs
  • Reducing the amount of time engineers and techs need to complete the work

These cuts weren’t reductions in scope; they were simply adjustments on paper, what I call the “magic red pen.” Somehow, by changing the estimate, they believed the team could complete the work in less time and at lower costs.

Revised Pricing Breakdown

$115,000 Materials

$55,000 Equipment
$31,200 Other Resources:
    4 Weeks Junior Tech
    1 Weeks Senior Engineer

    2 Executive Meetings

$201,200 Total

They sticker-shocked themselves into revising the plan to hit a more acceptable number in their heads.  They expected the same margins because they had cut the estimated costs.  And then, to stay beneath a self-imposed ceiling, they would change the price to $198,500.  (“Gotta be under $200K!”)

This dreaded practice, which I call “pre-discounting,” happens before the customers even has a chance to beat them up on price.  Even lower post-negotiation pricing further erodes profitability.  (I’ve been railing against pre-discounting for years!  See this video for more about this problem:  Watch Out for Pre-Discounting)

What’s So Bad about Pre-Discounting?

After submitting the proposal and winning the project, the reality would hit. Committed to excellence, the firm wouldn’t compromise on quality. The junior tech would need the full six weeks, the senior engineer two full weeks, and so on. The project would end up over budget compared to what was sold, with costs aligned to the original higher estimate.

This happened over and over and over, resulting in chronically low margins.  We highlighted the danger of the magic red pen and the self-limiting beliefs that caused them to impose unnecessary ceilings on their pricing.

How do I know their pricing ceiling was self-imposed?  Once they stopped pre-discounting and started quoting higher prices based on realistic time and costing estimates, their win rates didn’t drop.  Their profits, however, rose dramatically.

Does your team engage in this profit-killing practice?  Forward this article to them.  If it was forwarded to you, subscribe here for more helpful pricing content.