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:
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
• 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
About the AuthorMore Content by Ben Blaney