How Pricing and Rebate Management Overlap

In discussing pricing strategy, I often get questions regarding the differences between pricing management and rebate management: who are the technology providers for each, what are their strengths, and how do these services add value to my business? In pricing management, we often talk about how rebates are an effective method in driving good behavior by customers. This is particularly common in the area of volume compliance. Pricing management and rebate management systems are closely intertwined to ensure the successful execution of pricing strategies for volume compliance and customer performance.

 

How a Volume Discount Works


Imagine a simple scenario of a widget that usually costs $100 per unit, but the buyer is only willing to pay $90 per unit for a quantity of 1,000. Ideally, if a customer buys more volume, the bigger the discount can be applied for products and services that will further incentive them to purchase more units. However, if the seller gives the customer a volume discount upfront, the seller still takes a risk that the buyer may not fulfill their long-term commitment. Even if the seller has a written pricing agreement with the buyer, this does not guarantee the buyer adheres to the terms: The buyer could still just order 10 items, and just pay $90 per unit.


An even better pricing strategy in this case would be to offer the customer a volume rebate, whereas after the customer has purchased 1000 units, a credit note is issued by the seller to the buyer to cover the discount and ensure volume compliance.


Bad Volume Discount Structure


Here's an example of bad volume discount without a rebate strategy:

 

 

Good Volume Discount Structure

Here's an example of good volume discount using a rebate strategy:

good volume discount

 

Creating Good Volume Discount

 

To enable a good volume discount, pricing management requires a few key components:

• Transaction information in a pricing management software, showing order performance for this “sold-to” is critical to making a good decision.
• The accruals shown in a pricing software—in near to real time—should be available for contractual and agreement performance and to know the true profitability for each customer and deal.

 

Let’s take a moment to discuss why. I knew a pricing management company who had made a particular set of pricing strategies offered to a customer, knowing they had very thin margins but without considering the impact of the rebates already accrued and scheduled to be paid out. In the final reckoning, that “sold-to” essentially lost money simply because they didn’t have all the rebate management software with information available at decision time. The terms of the rebates were contained in the original offer document. That’s typically not a function provided by the rebate management tool; this needs to be integrated into price management software that sellers and pricers can use to perform this activity.

 

Leveraging Rebate Management

 
Sometimes, we talk to companies who have gotten the impression that currently available rebate management software will also adequately cover their needs in pricing management strategies, deployment, and data science-based price guidance for sellers. Here’s my view: I think that this entire area is really a close-fitting Venn diagram where pricing management and rebate management overlap, rather than an either/or situation.
 
There’s a ton of work that needs to happen for rebates to be logged, consolidated, with reimbursement schedules, and escalation rules. That’s not something that is at the core of the PROS raison d'être. However, we leverage rebate management software to perform those functions because we require that information as part of proper price management setting and analysis hygiene.
 
The good news is, PROS pricing software can be seamlessly integrated into your rebate program to help analyze and manage your rebates. The dynamic pricing management tool enables you to: 
 
• Create rebate types with accrual rules and simulate rebates payments based on volume, revenue, or other variables.
• Provide real-time analysis during deal negotiation with buyers about rates, discounts, and rebates.
• Calculate, analyze, and adjust your rebate accruals when you need them.
• Submit these rebate accruals for approval and send final payments.
 
 

PROS Price Management and Optimization Solution

 
One of the cool things about the PROS price management software and optimization solution is that it brings all of your data in from a variety of sources into one centralized location, creating a single source of pricing truth. Having a centralized data source can also be used to help both pricers and sellers have the detailed data and pricing information they need to make confident and consistent pricing management decisions about the deals they offer to their customers—with profitable pricing, sensible rebates, and strong rebate management software working away in the background to inform pricing strategy and execution to get you moving on all cylinders.

 

 

About the Author

Ben Blaney

Ben Blaney is a Senior Strategic Consultant at PROS, helping organizations select and deploy its cloud-based software. He previously served as director of Commercial Excellence for ESAB, a $2B division of Colfax Corporation, where he was responsible for strategy, execution and measurement of all aspects of commercial excellence. Blaney also led pricing strategy for a $2B division of GE; has served as a business consultant at Vendavo; and led pricing for a $1.5B business unit of ITT Corporation, where he worked for eight years in roles of increasing responsibility and seniority. He earned a bachelor’s degree from the University of Exeter. Blaney holds the PRINCE2, Project Management Professional (PMP), Certified Pricing Professional (CPP), and Lean Six Sigma Black Belt certifications.

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