Most disputes with customers do not arise from the price, but from what the quotation did not say: is installation included? delivery? tax? how long is the warranty? when is it delivered? A good quotation answers all of that before it is asked.
1 What a quotation contains
- A number and a date and a reference used to track it and link it to the order later.
- A precise description of the item or service: quantity, specification, unit.
- The price broken down: unit price, total, discount and tax shown separately.
- What is included and what is not — the most important line in the quotation and the most often left out.
- Delivery time and place, and who bears transport and insurance.
- Payment terms: cash or credit, and any advance payment.
- Validity — an explicit expiry date.
- Warranty and after-sales service, their duration and their scope.
A quotation with no expiry date
A quotation issued a year ago, and the customer comes back to accept it today after your costs have risen 20%. With no expiry date in the document, you are left choosing between losing the deal and losing the margin. One line spares you both.
2 Three approaches to pricing
| Approach | Based on | Where it fits | Its risk |
|---|---|---|---|
| Cost plus margin | Cost + a profit percentage | Contracting and made-to-order manufacturing | Ignores what the market will bear |
| Market pricing | Competitors’ prices | Commodity-like goods | A price war that eats the margin |
| Value pricing | What the customer saves or earns | Solutions and specialist services | Needs to be proved with numbers |
Margin is not mark-up
An item costing 80 sold for 100: the mark-up on cost is 25%, while the margin on the selling price is 20%. Confusing the two is a classic cause of loss-making pricing, particularly when commission is calculated.
3 Discount: the most expensive word in sales
An item sells for 100 and costs 70, so the margin is 30 per unit. Now a 10% discount is given:
| Item | Before | After |
|---|---|---|
| Selling price | 100 | 90 |
| Cost | 70 | 70 |
| Margin per unit | 30 | 20 |
The margin fell by a third. To earn the same profit as before you now need to sell 50% more units. A discount that looked small against the price was very large against the profit.
The practical rule: the thinner the margin, the more violently a discount bites. In a business running a 15% margin, a 5% discount consumes a third of the profit.
None of this means discounts are forbidden — it means they should be traded: a discount for a larger quantity, an advance payment, a longer contract, or giving up a free service. A discount given for nothing simply trains the customer to ask for it every time.
4 Payment and delivery terms
| Term | What it means | Effect on the business |
|---|---|---|
| Payment in advance | Before delivery | Best cash flow and lowest risk |
| Payment on delivery | With receipt of the goods | Balanced |
| Net 30 days | Within a month of the invoice | You finance the customer |
| Early settlement discount | A deduction for paying early | Speeds up cash at a known cost |
| Milestone payments | Against stages of delivery | Suits long projects |
| Credit limit | A ceiling on the customer’s balance | The single best control against build-up |
A credit sale is not a sale until it is collected
Granting 90 days means you have financed your customer for three months free of charge. And if the amount is never collected, the “achievement” becomes a double loss: goods went out, cash never came in, and a profit was booked and then written off.
Lesson summary
- A quotation is a binding document: what is included, what is not, and until when.
- Three pricing approaches — cost, market and value — each with its place and its risk.
- Margin on the selling price is not mark-up on cost, and confusing them is expensive.
- A 10% discount on a 30% margin consumes a third of the profit and needs 50% more volume.
- Discounts are traded for something, never given away.
- Payment terms are a financing decision, and the credit limit is their first control.
5 Test your understanding
Three quick questions
Pick the answer you believe is correct and you will see the result immediately.
1. An item sells for 100 and costs 70, and a 10% discount is given. The effect on margin:
The discount comes entirely out of the margin, not the price, so its relative effect there is far greater.
2. A customer returns after a year to accept an old quotation once costs have risen:
The validity line protects the margin and preserves the relationship, because it was a known condition from the start.
3. The best response to a discount request from a large customer:
A free discount trains the customer to ask every time; trading preserves the margin and keeps the deal.