How to avoid value leakage as an entrepreneur
Entrepreneurial cultures are the lifeblood of growth-stage businesses. They fuel innovation, agility and a relentless drive to win. But what happens when that spirit runs unchecked, particularly in pricing?
In many companies, this results in sales teams being granted broad freedom to discount in order to close deals. While this approach might make sense to drive short-term wins, it introduces a new threat – undisciplined discounting that erodes value and profitability over time.
Let’s explore why entrepreneurialism in pricing without guardrails is dangerous and how leaders can protect their companies from the value leakage it creates.
The pitfalls of discounting freedom
In companies with strong entrepreneurial cultures, the freedom to discount is often seen as enabling. Sales reps are encouraged to ‘do what it takes’ to win business. Yet this well-meaning freedom has unintended consequences that can undermine even the most innovative businesses. Here are five key pitfalls:
1. Sales reps will discount as much as they can
Sales reps, often incentivized primarily on revenue, will discount as much as they can to close deals. The logic is simple: offering the customer a lower price increases the perceived chance of winning the deal. Seems reasonable. But it leads to over-discounting beyond what is actually required to land the deal.
2. Over-discounting results in unnecessary revenue and profit loss
Discounts given without discipline reduce both revenue and profit margins, leaving significant value on the table and directly impacting the bottom line.
For software-as-a-service businesses, this is particularly damaging, as lower recurring revenue figures not only impact profitability but also reduce valuation multiples – a double hit to the company’s financial health.
Undisciplined discounting undermines the confidence of both sales teams and customers in your pricing strategy.
3. A culture of discounting creates a self-reinforcing cycle
Over time, undisciplined discounting becomes ingrained in the culture. Sales reps learn to rely on discounts as their go-to lever for closing deals, and customers come to expect them.
This behavior becomes self-reinforcing, creating a discounting spiral that erodes perceived value and conditions buyers to negotiate aggressively.
4. Excessive discounting destroys industry-wide value
Excessive discounting doesn’t just hurt your business – it can destabilize your entire industry. Competitors often respond to aggressive discounts by lowering their own prices, leading to a race to the bottom. Value is sucked out of the market as a whole, making it harder for everyone to sustain healthy margins.
5. Undisciplined discounting erodes confidence in pricing
Finally, undisciplined discounting undermines the confidence of both sales teams and customers in your pricing strategy. If pricing isn’t seen as a fair representation of value, it becomes little more than a placeholder, a number from which to negotiate down.
This perception weakens your ability to command premium pricing even when your product justifies it.
The solution to over-discounting: The three levers of price execution
The antidote to this undisciplined approach lies in price execution. This is where strategy meets discipline – ensuring that the pricing framework you’ve worked hard to create is enforced, optimized and defended. This involves utilizing three key levers:
1. Rules and guidelines
These serve as the guardrails that prevent over-discounting. Clear rules and guidelines include discounting thresholds, escalation paths for exceptions and structured discounting bands that sales teams must follow.
By limiting unnecessary flexibility, these rules ensure that discounting behavior aligns with company goals and is oriented toward capturing more value.
With clear messaging on the product’s value, ROI case studies and effective objection handling, sales teams shift from discounting to demonstrating value.
2. Incentives
Incentives align salespeople’s motivations with the company’s pricing objectives. When compensation plans reward not just revenue but also profitability and disciplined pricing behavior, sales reps are encouraged to pursue deals that uphold pricing integrity.
Incentives transform the instinct to discount into a mindset of pricing strategically.
3. Enablement
Enablement empowers sales reps to believe they can win deals at higher price points. This includes providing the tools, training and resources needed to confidently defend pricing.
With clear messaging on the product’s value, ROI case studies and effective objection handling, sales teams shift from discounting to demonstrating value, reducing reliance on price cuts to close deals.
Balancing entrepreneurialism with structure
Pricing is one of the most powerful yet underleveraged tools for driving growth and profitability. A lack of discipline in price execution can undermine even the best pricing strategies, resulting in lost revenue and reduced enterprise value.
By enforcing the three levers of price execution – rules and guidelines, incentives and enablement – CEOs can protect their organizations from value leakage and build a culture of disciplined, strategic pricing.
With the right structures in place, you can harness the power of entrepreneurialism while ensuring pricing remains a growth driver, not a liability.
Entrepreneurial cultures thrive on freedom and flexibility, but when it comes to pricing, discipline is non-negotiable. Without it, the value you’ve worked so hard to create will slip away, deal by deal.
The good news? With the right structures in place, you can harness the power of entrepreneurialism while ensuring pricing remains a growth driver, not a liability.