Most businesses spend a lot of time deciding on their prices and much less time checking how much of each price they actually keep. The gap between the two is where a surprising amount of revenue goes missing.
Price realization is simply the share of the intended price that ends up as revenue. It is rarely a single big leak. It is many small ones, spread unevenly across your customers.
Where the leaks are
Discounts that became permanent. A discount agreed to win a deal, or to rescue one, often outlives the reason for it. Years later the customer still gets it, and nobody remembers why.
Rebates and allowances. Volume rebates, marketing allowances and year-end credits are easy to agree and easy to forget. They come off the price after the invoice, so they rarely show up in day-to-day pricing reviews.
Free extras. Rush delivery, extra drops, special packing and generous returns. Each one has a cost, and when it is not charged for, it is a discount by another name.
Payment terms. Waiting sixty days to be paid instead of thirty has a real cost, especially for customers who take longer than agreed.
Price increases that did not stick. A list price rise that was waived for the largest customers, or applied late, or applied to some products and not others.
Why it matters more than list price
A small improvement in price realization often adds more profit than a much larger push on volume, because there is no extra cost to deliver it. The revenue is already there. It is just not being collected.
It also tends to be concentrated. In most customer bases, a minority of accounts account for most of the leakage. That makes it fixable: you do not need to renegotiate with everyone.
How to tackle it
- See the real price by customer. Start from the invoice price, then take off every discount, rebate, allowance and free extra, so you see what each customer really pays.
- Compare it with what serving them costs. A low price is fine for a customer who is cheap to serve. The problem is a low price for a customer who costs a lot.
- Prioritize. Focus on the customers where the gap is largest and the relationship can take the conversation.
- Fix the process, not just the price. Give discounts end dates, review rebates every year, and decide which extras are charged for.
Where to start
The free cost-to-serve calculator shows, for one customer, whether its price covers the cost of serving it. A Revenue Opportunity Assessment does the same for every customer, and puts a dollar figure on each place your price is leaking.