How to Differentiate Discounts and Rebates

We discussed in the previous section about how important it is to pay the distributors for their work. Let’s look at an example to explain this better. Imagine different parts of a business where this can happen: for instance in some countries, the distributors can be paid 30% of the sales, while in others, only 5%. This difference makes sense because if they're only doing basic tasks like handling deliveries and collecting money, they shouldn't get paid a lot. For instance, pharmacy managers might earn small commissions for their work. But if they are actively involved in selling and supporting products, they should get more money.

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Now think that distributors grow bigger and more influential. They might ask for higher profits because of their size. For example, the biggest distributor in a certain industry can negotiate better prices because of their size. However, there's a risk that these higher costs may end up being passed on to customers.

When you sell something, you need to think about the price for the customer, how much the middleman gets, and how much profit you make as the supplier. It's important to keep these things separate, even though they might all look like one big number in your system. Balancing how much distributors get paid and how much profit you make is crucial but can be challenging to figure out. Regardless, it's essential to pay the distributors based on the value they bring to the table.

The Importance of Aligning Discounts and Rebates with Strategic Objectives

In this section we are looking at different objectives of a rebate and discount scheme, including increasing market share, boosting profits, strengthening partnerships, reducing operational costs, and managing commercial risks. It is important to categorize and standardize discount and rebate schemes to simplify management and improve visibility. In return, this will allow flexibility for larger clients making the process more streamlined and effective.

Key Objectives in a Rebate/Discount Scheme

In the context of a rebate and discount scheme, there are several key objectives to achieve. These include growing market share by increasing sales volume, enhancing profits through higher prices or product mix, strengthening partnerships to promote sales, reducing operational costs through measures like improved forecasting or bulk purchasing, and managing commercial risks such as payment terms.

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To effectively address these goals, it is essential to categorize and standardize the various discount and rebate schemes available. If you organize them into a library of distinct types, you can simplify management and gain a better understanding of similar schemes for harmonization, improved visibility and easier management.

The approach involves establishing standard conditions for the majority of transactions, aiming to process around 80% of business through these standardized schemes. For larger clients with specific requirements like major corporations such as Procter & Gamble for instance, customized solutions can be accommodated. Cataloging and understanding these schemes, allow you to navigate the complexities effectively, even if not all schemes are fully harmonized.

Conditional vs Unconditional Discounts and Rebates

The main issue here is how rebates are divided into unconditional and conditional categories, with the latter being task-based and the former being outcome-based.

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In an unconditional scenario, for example, a distributor may receive a 15% rebate for certain activities, which is considered fair. Additionally, it is advisable to set a list price as a recommended retail price, offering a margin upfront.

Conditional task-based rebates involve compensating partners for actions that can potentially boost product sales, such as training or expanding product portfolios. Conditional outcome-based rebates, on the other hand, are tied to specific results.

A balanced approach that combines both types of rebates has proven to be most effective. You can maximize impact by using a mix of these strategies. This principle also applies to sales reps' incentives – rewarding them for the right actions and outcomes.

Benefits of Maintaining a Trade-off Mentality

In negotiations, it is crucial to maintain a trade-off mentality when offering incentives. Setting up pricing structures with various package options allows for flexibility in negotiations and enables constructive conversations around value versus cost. In other words, giving something for free, may diminish its real value simply because there is a lack of tit for tat attitude.

You can engage in productive discussions with partners and customers to find mutually beneficial solutions if you implement a tiered approach in pricing strategies, such as offering good, better, and best bundles. This fosters positive dynamics and supports commercial partner growth across different business segments.

Understanding Conditions for Rebates and Discounts

Key questions arise when considering which discounts and rebates companies utilize and how conditional rebates are structured. It is crucial to understand the conditions under which these rebates are applied and whether they align with the company's objectives.

In a case study conducted in a mature country, the focus was on increasing profits, yet 80% of the rebates were centered around volume. Upon realizing this discrepancy, the company acknowledged the inefficiency without external intervention. This highlights the power of self-discovery in optimizing discount and rebate strategies.

Many companies lack clarity on effective discount and rebate management practices. Once they get perspective on best practices, they can reassess their approach and drive improvements in their strategies.

 Furthermore, it is essential to address how these incentives are managed. Identifying areas of complexity and potential inefficiencies can help you minimize revenue leakage and prioritize valuable customer relationships over less beneficial ones.

 Key Questions to Ask when Dealing with Discounts and Rebates

Here are some key questions to ask when embarking on this discovery journey.

• What discounts and rebates do you use?

• What behaviors are you trying to drive with discounts and rebates?

• How effective do you consider your discount and rebate programs?

• How are conditional rebates structured?

• How are rebates allocated across customer segments?

• How does rebate spending vary across product segments?

• How do you manage rebates end-to-end?

• Which aspects are most difficult to manage?

• Where does the most unintended price leakage occur?

Price Execution in a Nutshell

Executing pricing involves setting list prices, determining pocket prices, and defining behaviors to incentivize through discounts and rebates. The challenge is ensuring effective implementation by sales teams without breakdowns. A robust pricing process includes knowing what to do, acquiring skills and permissions, ensuring sustainability, and demonstrating progress. Understanding who makes pricing decisions and where is crucial for automating pricing processes effectively. Identifying key decision-makers and roles streamlines pricing processes and optimizes decision-making, tailoring pricing strategies to different contexts for successful implementation.

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The Right Approach to Executing Prices

When it comes to executing pricing strategies, the focus shifts to setting list prices, establishing pocket prices, and defining behaviors that align with desired incentives for discounts and rebates. The challenge lies in ensuring that these strategies are effectively implemented by sales teams without encountering breakdowns.

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 Incorporating a deal pricing screen as done in Pricefx, integrated with a quote configurator can guide sales teams towards appropriate pricing decisions, emphasizing the importance of steering sales towards the right pricing rather than allowing independent price interpretations.

A robust pricing process involves understanding what actions need to be taken, acquiring the necessary skills and permissions, ensuring sustainability, and demonstrating progress to stakeholders. It is essential to grasp which pricing decisions are made by whom and where within the organization to automate pricing decision processes effectively.

Identifying key decision-makers and their roles within the pricing structure is critical for streamlining pricing processes and optimizing decision-making. By clarifying roles and responsibilities, companies can tailor pricing strategies to regional variations and organizational needs, ensuring efficient pricing management aligned with market contexts.

Considerations of Process Harmonization and Automation

In this section we will dig deeper into determining what should be standardized and what should be automated. We propose considering two key dimensions for this assessment. The first is the frequency and occurrence rate of the task, while the second is its level of importance and strategic value. Tasks that happen frequently and hold significant importance should be standardized efficiently. Conversely, tasks that are deemed unimportant or occur infrequently should be managed manually offline. The challenge lies in determining how to address tasks that fall within this middle ground.

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It's not always necessary to automate tasks related to these five customers, even if they account for 50% of your business. Some tasks can be effectively managed using manual processes or Excel without the need for full automation. The focus should be on automating tasks that have a significant impact due to their scale.

Unlocking Harmonization

Think of pricing software applications as the dark side of the 80/20 rule. The majority, the 80%, receives significant attention, while the remaining 20% often goes unnoticed because it is perceived as less important. This phenomenon leads to a scenario where the focus is not evenly distributed. Normally, one would anticipate that when considering factors like customer size and discounts, the margins would flatten out. High-margin, large customers typically wield more pricing power, resulting in better prices for them compared to smaller customers. However, in reality, this balance is rarely achieved; instead, it tends to resemble a funnel shape. This skewed attention is often due to the emphasis placed on significant customers, while smaller ones are somewhat neglected. It is crucial to identify and address deals with low margins and a high risk of price erosion to ensure profitability.

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Therefore, prioritizing tasks that are repetitive and low in value for automation can yield significant benefits by allowing resources to focus on more critical matters. Establishing a common framework for foundational elements such as pricing structures, product hierarchies, pricing metrics, and approval processes is essential for achieving harmonization. While achieving uniformity across areas like discounts and rebates may present challenges, striving for consistency in processes and gradually increasing harmonization levels can be the most effective approach in the long run.

Five Steps for Powerful Price Waterfall Design

In this section you will learn five steps to a powerful price waterfall strategy:

1. Define key price points with common definitions across the business.

2. Brainstorm a list of possible adjustments.

3. Rationalize price points and adjustments → This means focus on price points with common definition across the business. Furthermore, waterfall adjustments should be of material size, vary across transactions, be influenced in the sales process, and have available data sources.

4. Order waterfall elements logically.

5. Confirm data sources and quality of said data.

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It is crucial to get the price waterfall right. This is a classical approach where we start with a base price and then add features on top. This could be a value pricing approach or even cost-plus. The list price is generally the price you aim to sell to customers ideally. From there, discounts, rebates, and net price lead to the invoice price, and non-cash components contribute to the pocket price. If you've done your job well, you can stop focusing too much on margins as someone else can handle that for you. One helpful approach is to align on common price points and definitions within the company. It's essential to rationalize these price points and adjustments for clarity. The adjustments in the waterfall should be significant and varied to be valuable. The goal of a price waterfall is to aid in decision-making, not to serve as a perfect financial tool. It's advisable to keep the waterfall simple and avoid unnecessary complexity.

Optimizing the Price Waterfall

Starting with a basic standardized waterfall and gradually expanding or contracting it as needed is recommended. Not every detail needs to be included in the waterfall; some elements can be grouped together if they are not significant. It's important to track data at an appropriate level of granularity to capture profit and cost-related information accurately. While having data is essential, it's crucial to be cautious as not all data points may be relevant or make sense for inclusion.

Improving Pricing Strategies

Price models guide decision-making, with a focus on managing price points rather than individual elements for simplicity. Pocket price or net price discussions may cause concern for finance due to differences in accounting systems. However, assigning a monetary value to non-cash costs can lead to better profitability decisions. Establishing pocket price corridors can streamline pricing strategies and separate execution from strategy, simplifying change management. Price realization scores can provide insights into pricing performance without disclosing margins, allowing for effective evaluation of deals.

Specific examples of adjustments in the price waterfall should be material in size and vary across different aspects. Common definitions of price points within the company are essential for clarity. For instance, if everyone is charged a fee for service, it may not be valuable. It is crucial to avoid unnecessary complexity in price waterfalls and the tendency for people to get overly excited about detailed waterfalls. Expanding elements based on data availability in data sources can enhance the effectiveness of the pricing strategy.

Key points to remember

• Establish a basic standardized waterfall → Begin by starting with a basic standardized waterfall and then gradually expand or contract it as needed.

• Focus on key details → Not every detail needs to be included in the waterfall; consider grouping together elements that are not significant to maintain simplicity.

• Track data with precision → It is crucial to track data at an appropriate level of granularity to accurately capture profit and cost-related information.

• Manage price points → Price models should guide decision-making by focusing on managing price points rather than individual elements for simplicity.

• Ensure clarity and relevance → Establish common definitions of price points within the company for clarity. Avoid unnecessary complexity in the price waterfall and ensure that adjustments are substantial in size and varied across different aspects. Expanding elements based on data availability can enhance the effectiveness of the pricing strategy.

Price Guidance Considerations for the Sales Team

Executives should guide sales towards a target price without overwhelming them with every detail of how that price is determined. While they should grasp the concept, they do not need to delve into every minor aspect. Executives prefer not to disclose information about other deals or competitive data on a deal-by-deal basis. Instead, execs suggest providing a price target or corridor, allowing flexibility for offering lower prices if needed. These corridors are not flawless and should be subject to approval, requiring justification to the management team.

Salespeople are primarily hired for driving sales, managing processes, building relationships, and understanding the product, not for their financial expertise. It is acceptable to share historical data specific to the customer but avoid inundating them with complex analyses. Understanding past transactions is crucial for pricing decisions, especially when adjusting prices up or down.

Sales teams need guidance for four reasons:

• Sales people are not analytical

• Not pricing experts: need to guide them appropriately while allowing for exceptions

• Anchoring: sets expectations with sales for price performance

• Primary way for product marketing to influence sales during negotiations 

In evaluating deals, aiming for a profit proxy through a deal score is essential. This approach involves estimating profit and loss before finalizing the deal without disclosing specific numbers to the sales team. Instead, focus on demonstrating deal quality and how different product segments may impact list prices and floor prices.

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For products with high differentiation and margins, there may be more room for pricing flexibility, whereas low-margin products may have fixed prices without room for negotiation. When determining what information to provide to sales, customization is key. Consider sharing details like pocket price, target price, realization score, cross-selling suggestions, and historical prices.

Avoid overwhelming sales teams with generic dashboards or detailed margin information. Approvals should be implemented to control deal submissions and encourage sales reps to justify their proposals to management. This process helps filter out unsuitable deals early on and promotes responsible deal submissions.

Implementing sales incentives based on price realization scores or multipliers for high-margin products can motivate sales reps effectively. However, altering sales incentives requires careful consideration due to its impact on sales team performance and behavior. 

Gradually introducing changes in sales incentives through awareness-building and incentives can lead to improved performance over time. It is crucial to involve sales teams in the process gradually to ensure buy-in and successful implementation. Experience has shown that this is on average a two-year cycle.

Establishing Price Corridors Based on Strategic Goals and Rules

The process of establishing price corridors involves several key steps. Initially, it begins with defining strategic goals and aligning them with the desired outcomes. Subsequently, rules are developed, followed by the incorporation of transaction history-based rules. Finally, a transition to utilizing big data comes into play. An essential consideration is the analysis of sales discounts, which reveals the influence of sales representatives on pricing decisions. It is imperative to prioritize strategic considerations over individual sales rep influences when setting prices.

Actionable Analysis for Pricing Decisions

When it comes to analysis, the focus should be on supporting actionable pricing decisions promptly rather than relying solely on available data. Various types of analysis can be beneficial, such as waterfall analysis, price bridge causality, margin causality, and segmentation analysis. These analyses provide valuable insights into pricing performance and help identify areas for improvement within the sales process.

Effective tracking metrics play a crucial role in monitoring activities and ensuring the correct utilization of tools. Understanding customer profitability based on pricing and product mix is vital for guiding sales teams towards more profitable outcomes. Process-oriented metrics, such as measuring prices and pricing activities, offer valuable insights into pricing effectiveness and tool utilization within the organization.

Using Analysis for Insights

To enhance decision-making processes, it is essential to listen to customer feedback and align discounts and rebates with strategic goals effectively. Simplification, automation, and proactive planning for exceptions are key principles to streamline pricing processes and ensure consistency in decision-making. Pricing decisions have a significant impact on profitability and require careful consideration and strategic alignment to achieve optimal results.