Are Volume Discounts Against the Law?

And how would that work out?

Matt Stoller argues that volume discounts are illegal and pro monopoly. I’ll leave the legal/illegal argument for others. I want to talk about ending them, as they were a key part of our pricing at Windward (the company I founded, grew, and then sold).

Windward was unusual in that we did not discount. Most software companies selling to enterprises have a secret discount range and they then negotiate with a prospect as to how much each sale is discounted. And they try to make each purchaser feel that they got a better deal than the others.

I decided to not discount. It meant an argument early in the close process, but avoided the long dragged out negotiation of the final discount. (Note: for ISVs we had a number of unusual terms¹, but again no discounts.)

I know of 3 sales we lost because of the refusal to discount². That’s out of thousands of sales total. So we treated everyone equally and it worked well for us.

But we also had volume discounts. They were public, everyone got them, and they arguably violate the Robinson-Patman Act according to Stoller. So let’s talk about this.

My first instinct is to say of course a volume purchaser gets a discount. Just like buying a case of Pepsi is cheaper than buying 12 individual cans. And our customers definitely thought the same. So, if we did not provide volume discounts, it would have to be due to the law because otherwise we would face a lot of resistance. And I would struggle to justify this to prospects (I was very comfortable justifying the no discounts).

My second thought is that the discount is fair. The majority of our price is to cover the R&D of the product. The biggest advantage our software provides to a customer is that first use. As the use spreads, it is going to people for who the advantage is less. That final Nth user - generally we’re providing significantly less advantage. So the volume make sense to me.

But… we sold our software to a lot of the Fortune 100. One of our financial services customers in the Fortune 100 was, per license, paying less than a smaller financial services company. That meant, for their backend software, they were paying a bit less to generate their financial documents³. Add that up across all the enterprise software that large financial services company purchases - that’s a measurable advantage.

My Take

No volume discounts still feels wrong to me. But I think rationally that it’s a valid approach. And if that’s the law, then the law is the law.

However, in the case of enterprise software, the only way to make this work is all software prices need to be public with no leaving it open to ways to get around it.

At the same time, it does need to allow cases like Microsoft’s pricing for start-ups where you get all their software for a low flat price. They provide this not to large companies, but to start-ups that are anything for 1 person to a team of 30 that is creating a new idea that may be successful. Maybe allow discounts for companies smaller than the smallest in the Russel 5000?

If you can create a workable set of regulations for this I think most software companies would embrace it. Negotiating discounts is the bane of every sales team. So much so that salespeople we brought on, while disliking the no discounts at first, within 6 months loved it.

And as the CEO, I would be thrilled to not discount for volume. That would mean more profit which meant I could hire more people.

If the regulations for this are clear and workable and the allow for the special cases to favor companies that are small and trying to break into the market, most software CEOs would be happy with this.

But it will be a mindset change that will strike most of us as wrong. At least at first.

1. With one ISV they paid us a percentage of their gross sales.

2. Two of who were complete assholes, so no loss there.

3. Windward’s product was enterprise docgen (document generation).