Rebate pricing strategy: How to Use Rebates To Maximise Margins 🎗️
In rebate pricing strategy, it’s essential to ensure you maximise margin on each sale and generate value for your customers too. Evaluating and structuring each option for different types of customer engagement scenarios, and calculating the right rebates to apply to different customer groups.
In many B2B pricing examples, however, rebates may be a common practice, but they are certainly not a best-in-class practice: Generally, the problem comes down to this:
1) quantity breaks are often miscalculated
2) quantity is usually considered in absolute terms rather than in relation to changes in price, cost, mix – and very seldom measured against margin changes
3) most rebates are un-managed and poorly structured with customers agreeing to buy certain volumes of product, but often not sticking to volume commitments
4) the seller leaks margin across their customer base as their rebate channel strategy has worked against them
Rebate pricing strategy in detail
In this article, we will discuss the rebate pricing strategy in more detail and look at a wide variety of rebates you could use to make more revenue and margin. We will explain why different rebates are used and the pros and cons of doing so.
We argue that if you are using rebates to reward incremental volume; try to avoid customer haggling and apply instead a tactical rebate to regain control of the negotiation. We believe that every element in the price waterfall of a business should be there for a specific purpose. This is especially true of rebate pricing strategy.
At the end of this article, you will learn how to employ a set of rules for your rebates to ensure you make (rather than lose) margin on each sale. Including how to evaluate and structure rebates for different purposes, and what processes you need for applying rebates to different customer groups.
What are rebates in rebate pricing strategy?
Rebates are used to price on ‘real’ rather than ‘intended’ purchases. Instead of granting a discount right there and accepting the responsibility to audit sales to the customer, or worse, not auditing; the seller grants a discount only for actual volume, thereby bypassing the risk of non-compliance to the buyer.
In addition, rebates can be optimised to drive customer behaviour such as growth, retention, product mix improvement, or purchases of b2b tiered pricing. Like other forms of discounts designed to modify behaviour, rebates allow sellers to communicate to customers how the customer receives the lowest price. The burden of realising the lowest price, then, falls to the customer with the rebate granted only for achieving the value-based pricing b2b.
Different types of use in rebate pricing strategy
Rebates can be classified by business objective and customer type. It is used to manage incentive programs to achieve business goals and to improve the effectiveness of selling through distribution.
Volume rebates are the simplest and most common type of rebate. They are designed to limit customer bartering and over-promising. Instead of quoting a price-driven largely by the customer’s ‘supposed’ volume, the seller responds with tiered pricing where the invoice price is fixed, but the actual price varies with volume and the difference is granted by rebate.
Sellers often do not consider the relationship between price and volume and volume and cost when they devise their quantity/volume breaks.
2. Growth Rebate
This is an altered variation of volume rebates. Growth rebates are like volume rebates with one condition: that the rebate is paid on incremental volume, rather than on all revenue or total volume.
Problem: Selling organisations often do not measure this well and this eats away at the sellers’ cash flow when the customer comes to collect their money.
3. Retention Rebate
Retention rebates are rebates to reward continued business or customer loyalty. It can be rebates of any form, volume, mix, growth, but are usually end of year rebates, paid upon fulfilment of a condition. Example: purchase from Company A every month in 2010 and receive the following rebate at the end of the year. Similarly, rebates can be used to smooth volume, by giving customers with “lumpy” consumption a financial incentive to smooth purchases.
4. Mix Rebate
Mix rebates intended to help improve the customer and product mix of a supply relationship. A seller uses mix rebates to encourage a distributor to sell more volume of the higher mix, or margin, products, or sell more to a selected end-users or end-user segments. Rebates should rarely be a constant percentage, for example, 2% on all revenue. Paying different rebate rates or amounts on different product segments allows the seller to use rebates as a strategic lever and drive improvements to product mix.
Used with end-users, and absolutely used with distributors and buying groups.
- Conditional Rebate is a term that can apply to any rebate type coupled with a set of conditions.
- Ship & Debit rebates are a special use case. They represent an off-invoice discount which camouflages the actual price, but Ship & Debit rebates are associated with a sale made through a stocking distributor.
Examples of channel management rebates:
1.Pay Rebates on Net or Pocket Price Points
In complex channel environments or when selling to large customers, a supplier may have multiple rebate programs on every transaction. The best practice is to pay rebates not on invoice price, but on pocket price.
2. Indirect Customer Rebates
Indirect customer rebates, sometimes called end-user rebates, are between a supplier and an indirect customer. Meaning the seller never invoices this customer. Despite selling through the channel the seller recognises the major end-users, the supplier’s indirect customers, and wants to reward the specific end-user despite not having a billing relationship with that customer.
Indirect Customer rebates are an effective tool for maintaining a supply relationship with an end-user and driving mix and volume objectives, despite the absence of a relationship. In most cases, Indirect Customer rebates take the form of a check, in lieu of a credit point, which would be the case when a billing relationship exists. The servicing of “national accounts” often involves rebates of this kind.
Indirect Customer rebates and Ship & Debit rebates often apply to the same transaction.
3. Price Masking Rebates
Another common rebate driver keeps the ‘actual’ price invisible in the market. In reality, a rebate is, by definition, an off-invoice discount, use of a rebate allows the supplier to issue an invoice at a price that isn’t the actual, or net, the price paid by the customer. Price Masking rebates, sometimes called shelter upcharges, allow invoicing at a price that is deliberately high.
Price Masking rebates and shelter upcharges designed to avoid self-induced downward pricing pressure in competitive, and transparent markets. In these situations, a supplier agrees to a price for a given customer; with risking the price exposed to the marketplace. Believing that a low price will cause market erosion. If other customers learn of that price, they too will want it.
Instead, the supplier sells it at a nominal price and then employs rebates to bring the customer’s price down to the agreed net price. In this case, rebates are an effective method of quoting a low net price while invoicing at a higher price. The supplier recognises that rumours of low net prices are one thing, but a low price on an invoice is the kind of evidence that can move markets.
National distributors frequently request this type of rebate from their suppliers, effectively masking net price form their regional branches.
Putting rebate pricing strategy to good use – Driving Desired Customer Behaviour
Now that you are familiar with each type of rebate, what’s the best way to apply them? The golden rule about rebates is they are there to help you drive a specific type of customer behaviour. So be clear on what you want to achieve when you use them.
Here are some examples of using rebates in different settings.
In B2C transactions, mail-in rebates are profitable largely because the consumer uses them when making their purchase decision. However, many customers don’t return the forms to receive the rebate. This is free money to the company offering the rebate. They typically offer rebates when their customers achieve some milestone. It could be total spend, a specific number of units, purchasing a collection of products or even a marketing objective like a published referral. There is no free money here (at least not for the vendor).
The problem here though is distributors have so much data about your past pricing behaviour that if you offer a discount to a strategic customer through a distributor, that distributor now knows how low you are willing to go. When the next semi-strategic customer comes along, the distributor will ask you for your best price, which they know because of past discounting behaviour. What’s really frustrating though is that sometimes the distributor doesn’t even give that best price to the customer. They pocket the extra margin themselves.
To stop this, offer the rebate to the customer who’s buying through distribution. That way the distributor never sees the rebate price and the customer gets the benefit.
Use rebates to avoid price actions that create downward price pressure. If a supplier’s organisation has trouble with the administration, management, or analysis of rebates, do not offer them ‘tactical’ rebates thinking you’ll gain from this because, in reality, they’re unlikely to commit to your terms and conditions.
Many companies use overly complex rebate standards to make more revenue and margin. Yet, very often the desired customer behaviours you want to maximise margin does not eventuate an outcome of these increasingly complex rebates. In many settings, rebates become nothing more than an additional driver of both margin leakage and administrative complexity.
Every organisation should carefully evaluate rebate performance. If the rebate system is achieving its objective to attract the customers and bring in revenue this is good news. If it’s not, discontinue the rebate system.
Tips on rebate pricing strategy
1.Be transparent to customers about what they should expect from a rebate programme. Don’t just give away discounts and rebates because you can. Calibrate them first how much you are actually taking off the price. Validate they earned. Know what benefit you will get from the program and monitor the results by looking at changes in the margin.
2. Create a set of rebate templates. A rebate playbook cut down complexity; ensuring the right rebate applied to the right customer objective.
3. Where possible, use rebates to accomplish your price realisation objectives. But if that is not feasible, then increase your price efficiency by streamlining rebate mechanisms and processes.
Rebates are a common pricing practice. But they are not always as effective as you like in driving specific customer behaviours and avoiding price leakage. Use rebates carefully and know what you are doing because you offer them to your customers. Define a rebate strategy, pick the appropriate rebate, and manage execution tightly. Most of all monitor them regularly to ensure that they are accomplishing the intended goal rather than eating away at your margin.
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