Discounts & Rebates Optimization
Discounts, rebates and promotions play a key part in sales for most companies and often represent a marketing investment far larger than advertising or direct marketing… yet many companies have very little visibility on their real impact.
The Discount and Rebates effectiveness approaches developed by PriValEdge aim to measure and optimize the profitability of these key Marketing levers or Investments.
Discounts and Rebates – can be a good thing if done right!
But in most companies that have not set up an effective Discounts and Rebates management process, the initial Dispersion Chart analysis of customer level Discounts and Rebates very often looks like this and reveals a number of issues:
- Large discounts given (or not taken away) from small accounts that do not warrant them
- Large accounts put at risk by unfairly high net prices
- General lack of coherence or control and discipline in the management of Discounts and Rebates
- Significant money ‘left on the table’ whilst it could be used to boost bottom line
Top Price and Value Performers provide the answers to 3 Key Questions before providing defining and implementing effective Discounts and Rebates policies?
- What do we want to achieve with the discount? Which specific customer be-havior are we trying to drive and how do we benefit from it?
- What type of discount should we give? Link discounts to sales drivers or cost savers, Think about what the customer really wants – do we have to give discount or are there alternatives? Discount one-off things rather than repeat buys…
- How much discount should we give? Not more than necessary but enough to drive the customer behavior - evaluate bottom line impact, Discounts that are proportionate to our benefit…
The approach developed by PriValEdge provides detailed analysis of the impact and effectiveness of Discounts and Rebates and helps companies optimize the return on this key.
The first step is to increase the visibility of Discounts and Rebates. all too often billing and reporting system provide very little or no visibility on Discounts and Rebates granted and only show a net invoice price with very little to explain how it was derived and it’s link to ‘List Price’.
Visibility is the first and often most time consuming step towards effective management of Discounts and Rebates in many companies.
The Discount and Rebates Efficiency and effectiveness analysis
The Discounts and Rebates Effectiveness approach developed by PriValEdge can then provide a number of key analyses to measure the at a detailed level efficiency of these investments (ie do they actually contribute to increased sales? Do they actually translate into a bottom line im-provement?...). Surprisingly enough, more often than not, the answer is negative (we just provide a cheaper price to a customer who was going to buy anyway….) … or at least negative for some offers or some targets (we invested a lot in that program, but its efficiency was less that that other one??? Or we should have fo-cused the offer on that segment as it is the only one that really responded to it…).
But, with sufficient data, the approach also enables optimization of Discounts and Rebates investments. The idea is simple:
- Too little incentives and the customers do not react (red left line)
- Too much Discounts and Rebates and we are wasting money because the customer would have bought anyway (right red line)
- The optimal Discount zone is around the ‘inflexion’ point where the customers are most reactive to the offer (and where the ROI is highest)
The statistical and analytical tools developed by PriValEdge in the ‘Discount Toolbox’ enable analy-sis of the Discounts and Rebates elasticity and can help companies Optimize their Discounts and Rebates policies.
But Discounts and Rebates Effectiveness is not just about setting the right Discounts and Rebates policies, it is also about implementing them with good discipline and control and constantly learning from customers’s reactions.
Successful companies that want to complete Level 2 of the Pricing Excellence pyramid treat it as a real ‘Change Management project’ and follow the 5 Golden Rules of Discounts and Rebates:
- Simplicity: limit number of elements, differentiations, thresholds…
- Give and Take: incentivize desired performance
- Measurability: make it easy to implement and monitor
- Right level of transparency: not too simple, not too complex
- Flexibility (within limits): respect country-specific characteristics
- For companies that follow them, the rewards are high and quick. The graph below shows how the initial dispersion chart (shown above) had evolved within a year of the Discounts and Rebates Improvement project
After 12 Months, the shape of the dispersion map has changed quite dramatically Average Price realization improved by 4%, Pricing ‘exceptions’ were reduced by 75%, + 5% of Volumes, and Profits were up +60%.