4 min read · 856 words
At a glance
- Three points of average discount on a $20M revenue company is $600,000 of earnings a year. At a 5x multiple, that habit is $3,000,000 of sale price.
- Discount creep never shows up as a line item. It hides in the gap between list price and realized price, spread across hundreds of invoices nobody reads side by side.
- The fix is not a sales crackdown. It is seeing realized price by customer and product, deciding which discounts earn their keep, and holding the line where they do not.
Three points of quiet discounting on a $20M revenue company is $600,000 of earnings, and at a 5x multiple it is $3,000,000 of sale price. That is what discount creep costs, and almost no owner can name the number, because the number never appears anywhere. There is no account called Discounts We Did Not Mean to Give. There is only list price, realized price, and a gap between them that widens a little every year.
What is discount creep and why can’t you see it?
Discount creep is the slow drift between the price you set and the price you collect. A concession to close a quarter. A legacy rate a good customer kept for eight years. A salesperson’s standing 10% that became the real list price. Each decision was small and defensible when it was made. Stacked up, they reprice the whole company.
You cannot see it because your books were built to record, not to decide. The P&L shows net revenue, which means the discounting is already inside the number before you ever look at it. The margin line moves a little and everyone blames costs. The context that produced each concession has died, but the concession is still collecting its toll on every invoice.
How much is it costing in dollars?
Run the arithmetic on your own numbers. Take twelve months of invoices, compare realized price to current list by customer and product, and total the gap. On companies in the $5M to $50M range, an average realized discount of 2% to 4% that nobody consciously approved is common. On $20M of revenue, each point is $200,000, and nearly all of it would have reached earnings.
Then run it through the multiple, because that is what a buyer will do. Earnings is the number the multiple multiplies. At 5x, a $600,000 leak is $3,000,000 of enterprise value, which usually makes unmanaged discounting a larger lever than any cost program in the building. A few points of margin, run through a multiple, is the biggest lever in the whole sale, and discounting is where those points most often leak.
How do we find it?
We run the same sequence on every company, and an owner can run a rough version alone:
- Rebuild realized price by customer and product for the trailing twelve months. Not net revenue in total. Price per unit actually collected, line by line, against current list.
- Rank the gaps in dollars. A handful of customers and one or two product lines usually carry most of the leak.
- Sort each discount into earned or inherited. Earned discounts buy volume, terms, or strategic weight you can name. Inherited discounts buy nothing. They are just old decisions still running.
- Re-price the inherited ones first and prove the change holds. A buyer pays for a trend he can believe, not a one-month bump, so the earlier this starts, the more of it lands in the trailing twelve months he prices.
This is the same discipline as pricing off today’s cost and knowing which job, product, or customer actually makes money. Realized price is simply the third place the truth hides.
Why does a buyer care about your discounting?
Twice. First, the leak sits inside the earnings he multiplies, so every recovered point moves the price at the full multiple. Second, pricing discipline is one of the signals he reads to decide whether to believe your numbers at all. An owner who can show realized price by customer, name which discounts are deliberate, and point to the ones he closed is demonstrating control of the machine. That earns trust in the earnings number, and trust is what earns the multiple. A sale price is a multiple times earnings, and this one habit touches both numbers behind the price.
Where this leads
Discount creep is a pricing problem, a margin problem, and a believability problem wearing one coat. The good news is that it is also the fastest kind of value to recover, because the product already exists, the customer already buys it, and the profit is already in the building. It just is not reaching your earnings.
The Sellable-Numbers Scan rebuilds realized price along with the rest of the buyer’s-eyes read, and dollarizes what the leak is worth through a realistic multiple, in 14 days, guaranteed: at least 3x the fee in owner-accepted value, or you pay nothing.
If you suspect the gap is there, book a fit call. Thirty minutes, no pitch.
Russell Fette · Decisive Finance · Creator of Financial Rhythms™