Summary
A drop in input costs does not always reach the customer. In this episode of The Pricing Guys, Avy and Michael examine why lower oil prices, distributor margins, sales habits, and weak discount controls can prevent savings from moving through the market. The larger lesson is simple: discounts only create value when they change behavior.
Key takeaways
- Lower supplier costs do not automatically lead to lower customer prices.
- Distributors may resist price reductions when they put margin dollars at risk.
- Discounts should be tied to a clear customer or channel behavior.
- Sales teams often treat discount limits as standard market prices.
- Pricing decisions need data, structure, and ongoing measurement.
- AI can help identify patterns, but experienced pricing teams still need to guide the strategy.
Why lower costs do not always reach the customer
Oil is a familiar example. When production increases and oil prices fall, businesses may expect related products and services to become cheaper. Yet prices at the pump, and across many downstream categories, may not move by the same amount—or at all.
That gap exists because pricing is rarely controlled by one company. A product may pass through manufacturers, distributors, resellers, and sales teams before reaching the end customer. Each participant has its own margin goals, inventory position, and view of demand.
A supplier might reduce its price by 10% and expect the market to see the same reduction. But if the product is sold through distribution, the supplier may not have clear visibility into the final selling price. The distributor has to choose whether to pass on the savings, hold its price, or use the lower cost to improve its own margin.
This is where a value pool analysis becomes useful. The question is not only, “What price should we charge?” It is also:
- How much does the end customer pay?
- What share of the value does each participant receive?
- What behavior is each margin level meant to support?
- Who benefits when the supplier lowers its price?
Without this view, price reductions can leak through the channel without improving volume, customer value, or supplier profitability.
The distributor’s margin dilemma
Distributors often earn margin as a percentage of selling price. A lower price may leave their percentage unchanged while reducing their margin dollars per unit. Unless the price change is expected to create meaningful additional volume, the distributor has little reason to pass it along.
There may also be inventory concerns. A distributor holding stock purchased at a higher cost may not want to immediately reduce its selling price. It could lose margin on existing inventory, or simply wait to see whether demand changes before making a move.
This does not mean distributors are acting improperly. It means the supplier’s objective and the distributor’s objective are not automatically aligned.
A supplier that wants a price adjustment to reach customers needs to define the behavior it wants from the channel. That might include:
- Passing a specific reduction to end customers
- Increasing inventory or product availability
- Improving product placement or sales focus
- Targeting a new customer segment
- Reporting sell-through and realized prices
A discount without a defined behavior is often just a margin transfer. Revenue Management Labs helps organizations examine these channel dynamics in the context of their industry, data, and actual commercial relationships—not through a generic margin model.
Why discount limits become the real market price
The same issue appears in direct sales, especially in software and business-to-business markets. Companies may give sales representatives discretion to discount up to a certain level. In theory, that limit is supposed to be used only when needed.
In practice, the maximum discount often becomes the opening position.
One communications hardware provider found that roughly 95% of sales in one product category were discounted at the 20% limit. In another category, about 98% of sales reached the 25% limit. The discount approval threshold was no longer an exception. It had become the company’s effective market price.
This pattern is common because discounts can feel safer than holding price. Sales teams want control over the deal, and they are close to the customer. But individual judgment can create wide and unexplained variation across similar transactions.
A better approach is to connect discounts to customer behavior, such as:
- Adding users or products
- Agreeing to a longer contract term
- Paying earlier
- Increasing order size
- Accepting a defined service model
- Expanding into a broader relationship
The discount should have a job. If it does not support a measurable action, its business purpose is difficult to defend.
Price is not always the reason customers buy
In many B2B situations, a lower price does not expand the customer’s need. The decision may be a simple choice between buying from one supplier or another. A 10% reduction will not necessarily lead the customer to buy twice as much.
Other factors may matter more, including:
- Reliability
- Ease of doing business
- Product performance
- Implementation support
- Availability
- Customer service
- Responsiveness when something goes wrong
This is why discounting should be linked to the real conversion barrier. If the customer is worried about support, a lower price may not solve the problem. If the customer needs flexibility, contract terms may matter more than a deeper discount.
Revenue Management Labs combines pricing expertise with AI-enabled analysis to help identify these patterns across customer segments and transactions. AI can surface unusual discounting behavior and show where value is being lost, while pricing practitioners bring the commercial judgment needed to act on those findings.
From discount stories to pricing discipline
Every unusual discount usually has a story. A special customer request. A new salesperson. A competitive threat. A different market condition. Some of those explanations are valid.
The problem comes when every transaction is treated as a unique exception. Across thousands of deals, individual stories can create pricing chaos. What looks like a large number of special cases may actually reflect only two or three recurring situations.
Companies need enough structure to separate true exceptions from repeated habits. That means reviewing discount dispersion, win rates, volume, profitability, and customer outcomes. It also means giving sales teams useful guidance rather than simply taking discretion away.
A strong pricing process should include:
- Clear discount rules tied to business objectives
- Data showing expected outcomes by segment or deal type
- Approval paths for genuine exceptions
- Regular reviews of realized prices and margin
- Feedback from sales teams and channel partners
- Adjustments when market behavior changes
If the forecast does not match reality, the answer may be to improve the model or change the strategy. Measurement makes that conversation possible.
The real cost of an unmanaged discount
Lowering a price can be the right decision. But it should never be treated as a harmless shortcut to more volume. The cost may show up as lost margin, weaker price positioning, channel conflict, or a sales organization that learns to negotiate from the discount ceiling.
Before reducing a base price or approving a discount, leaders should ask what the move is expected to change—and how they will know whether it worked.
That is the core pricing discipline: discount with intent, measure the result, and adjust based on evidence. With the right combination of customized models, practical expertise, and hands-on implementation, pricing changes are far more likely to create lasting value instead of simply disappearing somewhere along the chain.
