Pricing diligence compares list prices with what customers actually pay, checks discounting patterns and looks for evidence that customers would accept higher prices.
10 min read · Level 3
A company that has never raised its prices does not yet know whether it has pricing power, and I think that uncertainty should be treated as a risk rather than a neutral fact. Customers who stay through a price rise are the strongest evidence of value a young company can offer.
Pricing diligence asks what customers really pay and whether they would pay more.
Realised price versus list price.
List price per annual contract 20,000 Average price actually paid 13,000 Average discount (20,000 - 13,000) / 20,000 = 35%
Discounts are normal. What matters is the pattern:
Are discounts growing over time? Are new customers paying less than earlier ones? Are large discounts needed to close deals against a competitor? Are free months or extra services hidden outside the headline discount?
Evidence of willingness to pay.
Price increases accepted without higher churn Customers expanding usage at full price Deals won without discounting Customers describing the product as essential rather than useful
Because revenue projections assume prices hold. A company growing by cutting prices can show strong customer numbers while revenue per customer and margins quietly fall.
Pricing power is also one of the clearest signals of genuine value: customers pay more for things they cannot easily do without.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Discounts over three years.
Year Average list Average paid Discount 1 20,000 16,000 20% 2 20,000 14,500 27.5% 3 20,000 13,000 35%
Customer count has doubled, but average price per new customer has fallen by 3,000 (16,000 to 13,000), about 19%. Revenue growth is weaker than customer growth suggests, and deeper discounts may be what is sustaining it.
Using list price in revenue projections, or treating customer growth as evidence of strength without checking what those customers pay.
Calculate average discounts and how they have changed.
Check whether newer or competitive deals are discounted more.
Find whether customers stayed through price rises.
Use calls to test how essential the product is.
During diligence on any company with published or negotiated pricing.
Do not assume discounts are always bad; early companies often discount deliberately to win reference customers.
Large subscription businesses in media and software have publicly reported implementing price increases and then disclosing subscriber or retention figures in subsequent results, and analysts routinely examine those disclosures for evidence of whether customers accepted the change.
How customers respond to a price increase is one of the most-watched signals of value in subscription businesses.
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