If you are in the charter business, you also seem to be unavoidably in the discount business. We use lots of ways to justify it, and we are under what feels like constant pressure to hand out discounts like candy at a parade.
That’s the case from the ubiquitous “can you match this price?” to pressure to “sharpen the pencil” on an RFP response. From professional consumers like tour operators and corporate transportation coordinators to churches calling looking for donations and discounts appealing to your “higher” self, discounts are a part of the business of being in the bus business.
So, if discounts are part of the business and foundational to the game, why are we taking your valuable time to discuss them? Because they are costing you, your company and our industry more than you can imagine. Like so many things in life, recognizing you have a problem is the first step to fixing it.
Obviously, discounts are not unique to the transportation industry. In fact, there are not many industries that I am aware of that don’t offer discounts in their business model in some form or fashion. What may be unique to the bus industry is the impact that discounting has on our businesses.
Why the bus business is different
For many industries, discounts are a part of the pricing structure. Simply mark it up, so you can mark it down. Car manufacturers, for example, create inflated MSRP pricing so dealers can “mark them down,” offering manufactured “sales” that drive consumers to act. Other industries offer discounts based on things such as volume. For example, if I buy 10 widgets, they will cost me one unit price per widget. However, if I buy 10,000, the per widget cost can go down significantly. Scale economics are at play in these types of discounts.
Unfortunately, in the bus business we don’t benefit from either of these scenarios. Falsely inflating prices just to offer consumers discounts does very little when it comes to our core consumer group. They understand daily and mileage rates and have a fairly good grasp of what our costs actually are. Economy of scale in this business does very little for us as well. When we offer a discount to a customer, very little in our cost structure changes. Fuel may vary a little based on volume, but drivers’ wages, insurance, vehicle maintenance, compliance and the rest stay fundamentally the same.
That leaves us offering discounts out of nothing but our profit margins, which may be affecting more in your operation than you might think. Take, for example, a charter that was quoted at $1,100 a day for two days. But then the phone rings and you get the question that so many have to deal with: “I have a quote from the guy down the street. He is willing to do it for $950 a day. Can you match that price?”
Having sold charters myself, the logic often goes as follows: “Well… I don’t want to lose the chance at $950 a day. If I say no, this guy books with my competition. I have drivers that need work; I should probably just take the deal and get my bus on the road.”
Where does it stop?
If you are like so many other operators, you will probably push back a little trying to get more. However, if the customer resists even a little, you take the work and put the driver and the bus on the road.
Over the last five years, I have heard a lot of justifications for doing discounted business—everything from keeping staff working to having buses on the road “advertising” for future business. While I know that there is some truth to these reasons, they are justifications. Here is the reality.
Every dollar that you give away in discounts every month is money that could have been directly on your bottom line. There are no additional fixed or variable costs associated with it. Every person in the chain from the charter sales person to the bus washers and drivers to dispatchers will have to do exactly the same amount of work regardless of the discount. The bus will still get the same wear and tear, the same fuel will be consumed… literally the exact same things will happen to deliver that trip, just with less upside for the company.
Dig into the economics of discounts for bus tours
Let’s look at a real world example here. First, let’s take a look at company A. They run at a profit margin of 20 percent. They take the charter that was originally quoted at $1,100 a day for two days at the rate of $950 a day in order to “get the work.” A move that costs them $300. Based on their profit margin, they would have made a company profit of $440 on the trip at the original rate. That means that in the case of this trip, the 10 percent discount on the front end, resulted in a 75 percent discount in actual profits on that trip. Yep…75 percent.
Now, I know that there are those who will say, but they still made $140. They put drivers in seats, rolled the bus and at the end of the day that is a win. That is of course a business decision. With all that said, let me ask you this: When was the last time you thought to yourself, “I want to do that… but where would I get the money?” Whether it is a marketing opportunity, hiring a new GM, building a new facility, buying a piece of equipment or outfitting the fleet with a new tool. If you are like most operators, not very long ago.
In single charter terms, giving up a few hundred dollars to “rescue” the charter from a competitor can seem like a plausible decision. When that same strategy becomes a major part of day to day operations, it can gut a company of its ability to do anything but survive.
In simple math terms, if you look at this as a linear equation, you can often be fooled into a sense of complacency. Taking from the example, if you give this discount and figure that you will make 20 percent as a profit margin, then the math says that you would have made $440 and after the discount you would make $380… so you may say that’s not a big deal. The issue lies in the fact that we make 20 percent profit not on whatever we end up charging, but rather on our full rates. In this case, when you should have made $440, you ended up making $140.
Opportunities as challenges
The future of the charter business is filled with as many opportunities as challenges. Many of the challenges we face come with a price tag. From unfunded mandates for compliance from the government to the need to shift how we employ drivers, what we pay and what benefits we offer.
Challenges seem to be around every corner. Facing these challenges will be infinitely easier with well-stocked war chests. One of the fastest ways to address this is to work to fix the constant backslide that erodes the profits of so many charter businesses. The way to do this is to learn how to sell value over price. This is something that I am excited to teach at the upcoming Sales Summit at the end of May. We will be covering specifically how to address discount requests, how to develop, and leverage, a USP (unique selling proposition) and what you need to do to empower a team to sell from your price sheet and stop needing to provide discounts to get deals done! We will see you there!