A salesperson returns from a meeting and reports that the customer needs a better number. The discussion that follows is about how much: the margin, the quarter, the relationship, the precedent. It is conducted by sensible people and often answers the wrong question. The more useful question is what the request is telling you.
Behind that sits a second issue that most businesses never examine. Every price is anchored to something: what the offer costs to produce, what competitors charge or what the customer will gain. Many businesses believe they price on value and in practice price on cost, partly because everyone involved in a deal can see the cost. Whoever can see the cost floor will, sooner or later, argue down towards it.
This article covers both problems. It explains how to read a discount request as a signal about your competitive position, why pricing on cost quietly hands value to customers, how to think about price as a share of the value you create, and why deciding who in the business sees which numbers is a pricing decision in its own right.
Price as a share of value created
Three things can anchor a price:
- Cost: what it costs you to produce, plus a margin.
- Competition: what alternatives charge.
- Value: what the customer will gain from buying.
Cost-plus pricing is easy to defend, because every number traces back to a calculation. But it says nothing about what the offer is worth to the buyer. A business that prices on cost has, without discussing it, chosen to compete on cost, because cost reduction is its only lever. And a business whose costs are low will systematically underprice offers that create substantial value, without noticing, because its margin percentage looks healthy.
A more useful way to think about price is as the division of a surplus. If your offer works, it creates value inside the customer’s business: money saved, revenue gained, risk reduced, time recovered. The price decides how that value is shared between you and the customer. Costing tells you the floor below which a sale loses money. It does not tell you the price.
Value the customer can actually book
Not all value supports a price. Value supports a price when the customer can see it in their own numbers. Three tests help:
- Can it be measured with data the customer already holds, such as invoices, labour hours, scrap records or sales figures?
- Will someone on the customer’s side put their name to the estimate?
- Will it still be visible when the contract is renewed?
For example, a change that removes two hours of rework per shift is bookable value if the customer measures rework labour and can see it fall. If the time simply disappears into general capacity and nobody measures it, the value is real but the price anchor is weak. A supplier who cannot tell the difference will quantify value confidently, meet a discount request and conclude that value-based pricing does not work.
The cost floor is a decision right
Whoever sees a number can reason from it. A salesperson who knows a product costs $40 and lists at $100 does not experience a price of $62 as giving away more than a third of the margin. They experience it as a healthy margin on a deal that might otherwise be lost, and they can defend that to anyone who asks. Repeat that across a hundred deals over two years, and the business has lowered its prices without anyone deciding to.
The same happens with customers. A buyer who learns your cost structure negotiates your margin percentage rather than the value they receive, a frame in which you can only lose.
The answer is not secrecy, which damages trust, but deciding which numbers each role needs to do its job well:
| Role | Sees | Does not routinely see | What it equips them to do |
|---|---|---|---|
| Owner and senior managers | Cost floor, value model, realised price against value | — | Judge whether the business captures a fair share of what it creates |
| Finance and pricing | Cost floor, margins, concession history | — | Set floors and spot cross-subsidies |
| Sales | Value model, price bands, concession authority, deal contribution | Unit cost floor | Argue from customer value and concede only on evidence |
| Operations | Cost drivers they control | Prices and margins by account | Reduce cost without reducing the value being sold |
| Customer | Value model, price, terms | Cost structure and margin | Understand what they gain and what share they pay |
If sales does not see the cost floor, it needs something better in its place: a clear value model, price bands and rules for when concessions are allowed and on what evidence. Removing a number without replacing it produces guesswork.
Why erosion goes unnoticed
Price erosion is hard to spot for three reasons. Each concession is defensible on the information available to the person making it. Gross margin percentage can stay steady while dollar margin per sale falls, if the mix shifts towards smaller jobs. And customers who received a discount last year plan around it this year, so restoring the price requires them to explain an increase internally, a much harder conversation.
What a discount request reports
A buyer usually asks for a discount for one of two reasons:
- Alternatives: someone else could plausibly supply what you supply.
- Objections: something in your offer does not yet justify the price, such as delivery reliability, service, features or terms.
These arrive in the same sentence and need opposite responses. Alternatives are a fact about the market. Objections are a fact about your offer. Discounting into an alternatives problem buys time. Discounting into an objections problem leaves the objection in place, to be re-priced at every renewal.
The common assumption that the buyer is simply testing you is sometimes true, but rarely the whole story. Asking for a discount costs a buyer some goodwill and reveals price sensitivity, so sophisticated buyers usually ask because they can, and they can because of one of the two conditions above.
Who asks also matters. A request from the person who owns the outcome you deliver is different from one from a procurement officer whose job is to reduce unit prices. Whether your sales approach ever reaches the person who owns the outcome is often the more important question.
Ask before discussing a number
Before any figure is discussed, find out which condition is being reported. Three questions help:
- What would need to be true for price not to be the issue?
- Who else are you considering, and on what basis?
- If we changed nothing about the price, what in our offer would still concern you?
Buyers will often answer honestly if asked before the negotiation starts. The answers are valuable market information, because buyers see competitors’ proposals alongside yours and you do not.
Barriers and strengths
If the buyer has alternatives, the lasting repair is to reduce them structurally. The economist Michael Porter’s work on competitive strategy distinguishes barriers that raise a competitor’s cost or time to match you from advantages that a competent competitor can copy. A useful test for any claimed advantage: could a well-funded competitor replicate it within one planning cycle simply by deciding to? If so, it is a strength, valuable but copyable.
More durable barriers include registered intellectual property, scarce licences and approvals, accreditations with long qualifying periods, exclusive rights to an input or channel, genuine scale advantages, proprietary technology, protected trade secrets, a distribution network built over years, contractual commitments of defined duration, real switching costs for customers and a brand that measurably changes willingness to pay. Excellent service and responsiveness matter a great deal, but they are usually the first things competitors copy.
When a discount makes sense
Discounting is not always wrong. It can make sense when a concession buys something specific that cannot be bought more cheaply another way, and when there is a clear plan for the value to come back. Test any significant concession:
| Test | Question | Warning sign |
|---|---|---|
| Purchase | What specific thing does this concession buy? | “The deal” |
| Mechanism | How does the margin come back, and over what period? | Future growth assumed rather than planned |
| Owner | Who is responsible for the recovery? | Nobody in particular |
| Contract | Is the return to full price written into the agreement? | A verbal understanding that the price is introductory |
| Check | What event would show the recovery is not happening? | Nothing defined |
Prices are much harder to raise than to lower. If a step back up to full price is not in the contract, assume the discount is permanent and decide accordingly.
Record what requests tell you
Add two simple fields to every significant concession in your sales records: whether the request reflected alternatives, objections or both, and what the recovery mechanism is. Within a few months, the pattern becomes visible. Clusters of objections point to problems in products, delivery or service, usually cheaper to fix than to keep paying for. Clusters of alternatives point to a competitive position that needs strengthening, a matter for the owner and product decisions, not just for sales.
A worked example
This is an illustration. A small supplier of industrial dosing systems lists its standard unit at $24,000. Each unit costs about $15,000 to build and install. Salespeople can see the cost and have authority to discount. Over two years, the average realised price has drifted to about $19,800. The dollar margin per unit has fallen from about $9,000 to about $4,800, though nobody decided to cut prices.
The owner builds a simple value model. Customers using the system typically save about $30,000 a year in chemical waste and labour, which they can see in their own chemical invoices and timesheets. Over a five-year life, that is about $150,000, so the list price represents a modest share of the value created.
The business adds a field to its sales records. After one quarter, about 60% of discount requests relate to objections, mainly slow installation scheduling and limited operator training, and about 40% to alternatives, mainly a cheaper imported unit without local service.
The owner fixes the objections by guaranteeing installation dates and adding a training package. For alternatives, sales staff present the value model, including the cost of downtime without local service. Sales staff stop seeing unit cost and instead work with the value model, price bands and a rule that concessions above 5% need the owner’s approval with a written recovery mechanism, such as a multi-unit order in the contract.
Over the next two quarters, the average realised price rises to about $22,300, restoring the dollar margin to about $7,300 per unit, while the win rate holds steady.
How this applies to a small Australian business
Small businesses often have the owner and one or two salespeople setting prices deal by deal. Practical steps:
- Build a simple value model for each main offer, using numbers customers can see.
- Know your cost floor, and decide who needs to see it.
- Ask what a discount request reflects before discussing numbers.
- Record concessions with their reason and recovery mechanism.
- Fix objections in the offer rather than paying for them repeatedly.
- Write any step-up in price into the contract.
- Keep pricing representations accurate: the Australian Consumer Law prohibits misleading claims about prices and discounts, and competition law prohibits agreeing prices with competitors. Take advice if unsure.
The articles on pricing your product or service and discounting without destroying your margin cover related methods.
Signals worth watching
- A falling share of sales made at list price.
- Prices that move with your input costs rather than with customer value.
- Dollar margin per sale falling while margin percentage holds.
- Discounts deepening at renewal.
- Concessions clustering around particular salespeople or segments.
- Competitors gaining accreditations, licences or patents.
Common mistakes
- Treating every discount request as a negotiating tactic.
- Pricing on cost while claiming to price on value.
- Giving everyone the cost floor without a better number to work from.
- Discounting into an objection instead of fixing it.
- Assuming discounts will be recovered later without a contract.
- Rewarding salespeople on revenue alone.
Frequently asked questions
Should salespeople never know costs? They need enough to avoid loss-making deals, such as a price floor below which approval is required. They do not need detailed unit costs to argue from customer value.
What if customers will not share the value they gain? Use reasonable estimates from comparable customers and test them in conversation. Over time, case studies and references make value more credible.
Is it ever right to discount to win a new customer? Sometimes, if the concession buys something specific, such as a reference or a trial that leads to larger orders, and the path back to full price is written down.
Questions to ask
- For our main offers, can we state the value customers gain, and can they?
- Who can see our cost floors, and did anyone decide that?
- Is our realised price rising or falling relative to the value we create?
- Are concessions approved on value evidence or on distance above cost?
- What do our discount requests say about alternatives and objections?
- If our costs fell 10% tomorrow, would our prices follow?
Bringing it together
A discount request is accurate information about your competitive position, from the only party who sees your competitors’ offers. Read it before reacting: alternatives call for a stronger position, objections call for a better offer. Price as a share of value the customer can book, decide deliberately who sees cost floors and what they use instead, record what each concession buys and how it comes back, and route patterns to the people who can fix the causes. Protecting price is not about refusing every discount. It is about making each one a decision.
Source: KEVOS notes, drawing on general pricing practice and Michael Porter’s work on competitive strategy. Examples and figures in this article are illustrations. This article is general information, not legal advice.
