How Pricing and Rebate Management Overlap

There is a question I get asked a lot. It’s about the difference in technology providers for pricing and rebate management. Who does what, what are the strength of the various offerings, and so on.

In pricing, we often talk about how rebates are an effective method of driving good behavior by customers. This is particularly common in the area of volume compliance. Imagine a simple scenario of a widget usually at $100/unit where the buyer wants to pay $90/unit for a quantity of 1,000. If you give a volume discount up-front, the seller takes the risk of the buyer not fulfilling their commitment over time; they could get the price agreed in writing, order 10 items, and pay $90/unit. Better, then, for the seller to offer a volume rebate, whereby after the thousandth unit order, a credit note will be issued to cover the discount.

Here’s an illustration of that concept:

Bad Volume Discount Structure

Example of Good Volume Discount Structure

good volume discount

To enable all this, there are a few pieces that are required. Firstly, transaction information, showing order performance for this “sold-to” is critical to making a good decision. Secondly, the accruals – in near to real-time – should be available for contractual/agreement performance and to know the true profitability for each customer and deal. Let’s take a moment to discuss why, with an anecdote: I knew a company who had made a particular set of strategic decisions about a price 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 information available at decision-time. Lastly, the terms of the rebates are contained in the original offer document to the customer. That’s typically not a function provided by the rebate administration tool, so it needs to be integrated into whatever tool is used by sellers and pricers for performing that activity.

Sometimes, we talk to companies who have got the impression that currently available rebate administration software will also adequately cover their needs in pricing strategy 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 and rebate administration 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’etre. However, we leverage rebate administration software to perform those functions… because we require that information as part of proper price setting and analysis hygiene. One of the cool things about the PROS price optimization solution is that it brings data in from a variety of sources into one centralized location, creating a single source of pricing truth. Having a centralized pricing data source can also be used to help both pricers and sellers have the detailed data and information they need to make confident and consistent pricing decisions about the deals they offer to their customers – with profitable pricing, sensible rebates, and a strong rebate admin system working away in the background to inform pricing strategy and execution.

 

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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