Always the clearest signal of customer value you’ll ever receive.
When I first started focusing on pricing, a fantastic mentor — hi Jack! — forwarded me two articles: a 1992 Harvard Business Review piece, “Managing Price, Gaining Profit” (Marn, Rosiello), and a 2003 McKinsey Quarterly article, “The Power of Pricing” (Marn, Roegner, Zawada). A solid portion of each argued discounting was the most substantial — and most invisible — pricing problem threatening profitability.
“Huh, interesting history,” I thought. “But probably not relevant to pricing software in the 2020s.”
Oh my god, how wrong I was.
At the end of a recent engagement, I ran three comparisons across one of the client’s products we just re-priced:
- List vs. Actual: what their published pricing said versus what customers actually paid
- Recommended vs. List: what I recommended they charge versus their published pricing
- Recommended vs. Actual: what I recommended versus what they collected
Here’s what came back:
List vs. Actual: -$119,000 (customers paid well below list)
Recommended vs. List: +$274,000 (list price was already too low)
Recommended vs. Actual: +$393,000 (the full gap)The $274K is a value-based pricing problem — a big one, a separate one. I’ve covered that ground in For Starters #57, #60, #62, #66.
The $119K is different. That money was the in the Published List price. Until it quietly evaporated in the sales process. One product. One year.
Turns out history is deeply relevant.
Where Did $119K Go?
Three places:
- Salespeople discounting to close — and to make buyers feel special.The most human reason. The most excusable. Also not the whole story.
- Incompatible tier structures made bundling a guessing game.When tiers don’t align across products, salespeople can’t quote a clean bundle. So they improvise. Improvisation almost always trends toward the buyer. Standardizing the tier structure across products and giving salespeople one simple bundling rule recovered a significant slice of the leak immediately.
- The tier structure didn’t reach the actual customer base.The tiers topped out at 300 seats. The largest customer on this product had 14,500. There were 16 customers above 300 seats — and every single one of them was quoted a price someone made up on the spot.
Customers inside the tier structure: $850/seat.
Customers above it: <$10/seat.
That’s what happens when salespeople reach the end of the price book.
Yes, the largest accounts should pay less per seat — volume discounts are rational. But there’s a difference between a strategic discount and an invented number. $840 off per seat is not a strategy.
The fix was adding two enterprise tiers with clear boundaries. Boom.
The Discount isn’t the Problem
Two of those three causes aren’t a salespeople problem or a discounting problem. They’re a pricing architecture failure. In the absence of clear pricing guidance, the people on the frontlines are doing what they can to close deals. Making discounting invisible, informal, and everyone’s individual problem to solve in the moment.
The Discount Is Data
A discount may be lost revenue, it’s also the clearest signal of customer value you’ll ever receive. A customer just told you — with their wallet — what this product is specifically worth to them in their context.
The problem isn’t that the discount happened. The problem is not knowing why they paid less, so adjustments across the pricing architecture can be considered:
- Was the package wrong for them? (packaging problem)
- Were they the wrong fit for this tier? (segmentation problem)
- Did the salesperson just blink? (governance problem)
Each has a different fix. Confuse them and you’ll solve the wrong one; tightening governance when you needed a new tier, building a new tier when you should have walked away from the segment entirely.
Price is a Window, Not a Point
Some salesperson discretion is legitimate and expected. Sometimes a small concession speeds up a close. That’s fine. The goal isn’t to eliminate discretion. It’s to know which discounts are discretion and which are something else entirely.
A salesperson shaving 8% to close a deal is using judgment. A salesperson quoting $8.50/seat when the tier structure ends at $50 isn’t discounting — they’re inventing a new price.
Three patterns to watch:
- Within ~10% of list: discretion. Track it, find patterns, don’t panic.
- Patterned discounting within the structure: diagnostic signal — same tiers, same segments, same salespeople. That’s where packaging, segmentation, and governance questions live.
- Outside the tier structure entirely: not a discount. Fix the pricing architecture.
Your tier structure should always extend one tier beyond your largest current customer (hat tip to Pricing Roadmap for this simple heuristic). Your sales team is already pursuing larger customers. Your architecture should be ahead of them, not behind.
Run a List vs. Actual Audit
Pull actual collected revenue by product – not quotes, not invoiced amounts – collected revenue. Compare it to your list price. The gap is your off-list revenue leak.
Knowing this gap across segments and tiers will help us build a new pricing architecture based on customer value.
It will also help us discern how much of the gap is a result of discretionary discounting.