Short answer: usually more than you think. A 10% discount on a deal with a 40% gross margin gives away a quarter of that deal’s gross profit, and you need 33% more volume to earn it back. Most mid-market businesses don’t know their real discount level, because it’s spread across invoice discounts, rebates, free extras and payment terms. If nobody can tell you what you actually net against list price, by customer and by rep, discounting is probably costing you margin.
What does a discount really cost?
A discount comes straight off the top line, but it comes entirely out of profit. Your costs don’t fall when you drop the price. So the share of gross profit you give away is always much larger than the discount itself.
The quick way to see it: divide the discount by your gross margin. At a 40% gross margin, a 10% discount removes 10 ÷ 40 = 25% of the gross profit on that deal. At a 30% margin, the same discount removes a third.
McKinsey’s analysis of the average S&P 1500 company makes the same point from the other direction. A 1% price rise, with volume steady, would lift operating profit by about 8%, nearly 50% more than a 1% cut in variable costs and more than three times the effect of a 1% rise in volume. The lever works both ways: a 1% slip in average price takes about 8% off operating profit.
How much extra volume do you need to win back a discount?
This is the number to put in front of a sales team. To earn the same gross profit after a discount, volume has to rise by the discount divided by the margin left after it:
Extra volume needed = discount ÷ (gross margin − discount)
| Gross margin | 5% discount | 10% discount | 15% discount | 20% discount |
|---|---|---|---|---|
| 30% | +20% | +50% | +100% | +200% |
| 40% | +14% | +33% | +60% | +100% |
| 50% | +11% | +25% | +43% | +67% |
| 60% | +9% | +20% | +33% | +50% |
Gross margin as a share of the full selling price, with costs per unit unchanged. My calculation.
Read the 40% row. A rep who gives 15% off to close a deal has committed the business to selling 60% more just to stand still. That rarely happens, because the discount usually wins a deal you’d have won anyway, or one a competitor matches.
Where discounting hides
Most leadership teams look at the invoice price. The real price is what’s left after everything else: what McKinsey calls the pocket price. Between list price and pocket price sit two layers of leakage:
| Layer | What it includes | Who usually sees it |
|---|---|---|
| On-invoice | Standard and negotiated discounts, volume discounts, promotional prices | Sales and finance |
| Off-invoice | Rebates, payment-term discounts, the cost of carrying long payment terms, free freight, marketing allowances, free extras and services | Often nobody, in one place |
In McKinsey’s example of a lighting supplier, on-invoice discounts took average invoice prices 32.8% below list, and a further 16.3 percentage points disappeared off-invoice. The average pocket price was about half of list. And the spread was wide: some customers paid less than 30% of list and others 90% or more. McKinsey reports seeing spreads where the highest pocket price was five or six times the lowest.
A wide spread isn’t always bad. Some customers genuinely are worth more to serve than others. It becomes a problem when nobody can explain it.
Seven signs discounting has become the default
- Nobody can tell you your average discount. Or the answer only covers invoice discounts, not rebates and free extras.
- Similar customers pay very different prices. Two customers of the same size, buying the same thing, are a third apart, and the difference is who negotiated.
- Deals cluster at the end of the quarter. Customers have learned that waiting gets them a better price.
- The discount is in the first proposal. Reps lead with a reduced price before the customer has asked for one.
- Price increases don’t stick. You put list prices up and net prices barely move, because the increase is discounted straight back.
- Commission is paid on revenue only. The rep earns almost as much on a deal at 25% off as at list price.
- Approvals are a formality. Discount requests are approved by email, nobody has ever said no, and nobody tracks what was approved.
On my fractional CMO and CRO page I list this as one of the signs a business needs senior revenue leadership: pricing that hasn’t been reviewed in years, or discounting that has become the default. The two usually come together.
Why it matters more right now in Australia
The Reserve Bank’s November 2026 liaison, with around 240 businesses, found that most firms expect above-average increases in their selling prices over the year ahead, and that in many cases margins are under pressure from costs that show little sign of easing.
That’s exactly when loose discounting does the most damage. If you raise list prices to cover rising costs and your sales team discounts the increase away, you carry the higher costs without the higher price. Before you announce the next price rise, find out how much of the last one you actually kept.
Nor is it only an Australian blind spot. Simon-Kucher’s 2025 Global Pricing Study, a survey of more than 2,200 business leaders in 28 countries, found that sales volume is still the profit driver companies count on most over the next two years, and called pricing an underused profit lever.
What a few points of discount drift is worth
A worked example, with round numbers rather than any client’s. Take a business with A$20 million in revenue at list price, a 40% gross margin and a 10% operating margin, so A$2 million of operating profit.
| Average discount drift | Revenue given away | Share of operating profit |
|---|---|---|
| 1 point | A$200,000 | 10% |
| 3 points | A$600,000 | 30% |
| 5 points | A$1,000,000 | 50% |
Simplified: assumes the same volume and costs, with the discount taken from list-price revenue.
Three points of drift, which is easy to accumulate through a few larger accounts and a habit of end-of-quarter deals, takes almost a third of the profit. And it doesn’t show up as a line on the P&L. It shows up as a margin that’s a bit lower than last year, for reasons nobody can quite name.
How do you stop discounting without losing deals?
The aim isn’t to ban discounts. It’s to make every discount a decision, with something in return.
- Measure the pocket price. Pull a year of invoices, credit notes and rebates and work out what each customer actually paid against list. Sort by customer, product and rep. This takes days, not months, with the data most businesses already have.
- Set a discount authority matrix. A simple table of who can approve what: for example, reps up to a small band, the sales leader up to a larger one, and the CEO or CFO beyond that. Write it down and log every approval.
- Ask for something in return. Give-gets: a longer term, a larger commitment, upfront payment, a case study or a reference in exchange for the price. If the customer won’t give anything, the discount wasn’t what closed the deal.
- Pay on margin, not just revenue. Move part of the commission to gross margin or to net price against list, so the person setting the price shares the cost of the discount.
- Stop training customers to wait. If deals pile up in the last week of the quarter, stop offering end-of-quarter specials and hold the line for a quarter or two. Customers learn quickly in both directions.
- Review it every month. Average discount, the spread by rep and the price realisation of your last increase belong in the same monthly revenue review as pipeline and win rate.
When I led the global commercial strategy at an ASX-listed technology company, including pricing and the revenue model, the hard part wasn’t the pricing itself. It was getting one commercial model to hold across direct, partner and carrier channels, so that a discount in one channel didn’t undercut another. The story is in building a global go-to-market.
Who should own it?
Discounting goes wrong in the gap between functions. Sales owns the revenue number, finance owns the margin, and nobody owns the trade-off between them. A rep under pressure to hit a target will always choose the deal over the margin, and that’s a rational choice given how most commission plans work.
The fix is one senior owner of the whole revenue engine, including price. In a larger business that’s a CRO. In a mid-market business it’s often a fractional CRO, because the job is to set the policy, the matrix and the incentives, and to make the first few uncomfortable calls, rather than to sit in every deal. Price realisation is one of the measures I’d expect any CRO to be judged on.
The bottom line
Discounting rarely shows up as a crisis. It shows up as a gross margin that’s a point or two lower each year, with a sales team that’s working harder for the same profit. The fix starts with one number: what you actually net against list price, by customer and by rep. If you can’t get that number within a week, you’ve found your first problem.
If you’d like a second pair of eyes on it, my two-week diagnostic sprint (from A$15,000 + GST) covers pricing and discounting alongside pipeline, channels and conversion. Read more about how I work as a fractional CMO and CRO and what a fractional CRO costs in Australia, or book a 30-minute call.
Common questions
How much extra volume do I need to make up for a discount?
Divide the discount by your gross margin minus the discount. At a 40% gross margin, a 10% discount needs 33% more volume just to earn the same gross profit, and a 20% discount needs double the volume. The thinner your margin, the faster the number climbs.
What is a normal discount level in B2B sales?
There's no useful industry average, because list prices are set differently in every business. The better question is how wide your spread is. If similar customers buying similar volumes pay very different net prices, discounting is being driven by who negotiates hardest rather than by a policy.
Should salespeople be paid on revenue or on margin?
If reps can set the discount, pay at least part of their commission on gross margin or on net price against list. Commission on revenue alone pays a rep almost the same for a deal at 25% off as at list price, while the business loses most of its profit on it.
Who should own discounting in a mid-market business?
One senior person who owns revenue end to end, usually the CRO or the CEO, with finance setting the margin floor. Discounting goes wrong when sales owns the number, finance owns the margin and nobody owns the trade-off between them.
Is it ever right to discount?
Yes, when the business gets something it values in return: a longer contract, a larger commitment, faster payment, a reference or entry into a new segment. A discount given only to close a deal this month, with nothing asked in return, is the one to stop.
