The essence of strategy is the ability to make difficult choices using scarce resources to achieve a goal. In modern times, business leaders often face the challenge of hitting growing targets while having gradually less resources to do so. Years, if not decades, of cost-cutting have created a corporate culture where expecting to achieve more with less is all too common.
While revenue management capabilities can play an important role in supporting finance, sales and marketing, in most organisation it is often under resourced. It is no surprise then that pricing practices often spiral out of control due to mismanagement. One such practice is discounting.
“What gets measured gets managed” is only true if a) what you measure has value to the organisation, and b) you know how to implement management solutions. So why is it important to manage discounts and how do you do it?
1. Discretionary vs system based
Why? The less structure exists, the more likely discount levels will be all over the shop. Salespeople will tend to apply a discount range based on their own personal gut feel, sometimes based on what they would have been taught by another employee, but with an ability for discretion which can be harmful to an organisation. It is suggested that the closer a salesperson is to hitting their monthly target, the more likely they are to discount to achieve a sale. In other words, the price lever serves to achieve short term revenue targets which further erodes profitability by the incentive pay outs.
How? The suggested remedy is to develop clear discounting rules to help regulate when a price concession is warranted. All systems are not rigid by design, and it can certainly help to have a transition period where soft guidance rather than hard rules are the norm. This will allow the salesforce to feel supported and justified in their decision making, while providing customers with a sense of fairness in treatment.
2. Discount range
Why? If you do not determine a maximum discount level, overtime it is inevitable that arguments for a further slip will arise, most of them justified for a short-term revenue gain. I have seen first-hand the damage a lack of range control can unleash, with customers paying over ten times the price for the exact same product as other clients of comparable size and behaviour. Furthermore, determining the range of discount (i.e. from 0 to 30%, or up to 70%) will have a significant impact on your customers by providing some with a potential competitive advantage.
How? Figuring the optimal range implies a good understanding of the competitive landscape and the channel to serve the end consumer. If you need to provide significant margins to your wholesalers, then allow for a sizeable discount range between wholesale and retail. I would recommend mapping out the market and various channels outlining margins achieved at all levels to refine your view on what an ideal discount range may be, knowing fully well that existing practices will act as a major hurdle to change.
3. Incentive based discounts
Why? Why do organisations discount at all? At first glance, the intend is to lower the price to tap into a customer based which has a lower willingness-to-pay. Discounting is not however all about price elasticity. Another aim of discounting is to incentives behaviours you wish to inculcate to your customers. By rewarding positive behaviour through discounts, you signal your customers that pricing is really within their control.
How? Decide what behaviours you wish to incentivise and determine an appropriate price reward for displaying each behaviour. A business reliant on liquidity may for example decide that it is entirely appropriate to discount up to 5% for cash on hand. Payment terms may as such be baked into contracts, with various payment options attracting different discounts. Moving away from brick-and-mortar, some retailers offer online deals which incentivise shoppers to use their online platform, hence helping the organisation reduce costs in the long term.
4. Number of discounts
Why? A system with too few discounts is either too rigid or discretional, at least in B2B. A system with too many discounts is complex and hard to manage. Finding the right number of discounts will make your system both simple enough to explain the system to your customers and nimble enough to discuss options with them.
How? To implement a reliable discount system, one needs to take into consideration the realities of the technology with which the organisation operates. The order management system needs to have the right parameters configured to be usable by the salesforce and support functions. Because it is often not practical to change an IT system to accommodate sales transformation, one should start by looking at what is achievable in the short term. Ultimately, the right number will be dependent both on the desired client behaviours you wish to incentivise, and the discounts expected by the industry (e.g. wholesale discounts).
5. On vs Off invoice
Why? Not all discounts are on the invoice. Some discounts, which are commonly referred as rebates and very popular in Continental Europe, are offered off-invoice after an elapsed period of time, usually a quarter or a year. Rebates are particularly effective when used to reward purchase size. In B2B, customer size is often used in negotiation to leverage better pricing and better terms and conditions. By using a rebate, rather than a discount, an organisation is able to rely on hard sales data rather than client commitment to enforce the right reward level.
How? Rebates can be difficult to manage, and often work best with a consistent approach and low number of clients benefiting from them. It is recommended to offer them to key accounts only as special recognition of their importance to your organisation, a symbol of a partnership in which they profit by helping you grow. Interestingly, the hardest part of managing rebates is not to set them up or negotiate the right level, but rather to not pay them out when your key accounts fail to deliver their end of the bargain.
These five considerations are essential when designing a discounting system for an organisation but are often times lacking in the overall sales strategy. Setting the system in an optimal way may require short-term resourcing, however businesses that do so realise very quickly that a well-designed system is easy to manage and yields profitable revenue growth.
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