Does it matter whether you change a product’s price in the ERP or offer a rebate or off invoice allowance?
How you execute price discounts should be an integrated part of your pricing strategy and makes a big difference to the health of your profit margins. Managing your discounts properly ensures that the right discount is offered to the right customer for the agreed amount of time.
What is discount pricing?
Discount pricing is a strategy according to which a seller will offer one or more of its products for a lower price than usual, for a limited time only. Designed to increase sales, it will either involve marking down prices or offering different deals.
Customers love to get a bargain, so discount pricing can be really effective, but it’s important to make sure that they don’t perceive the drop in price as a reflection of the product’s true value. That is where the limited-time-only offer comes in, and effective discount pricing strategies will focus on this to avoid devaluation.
What are the 3 types of discount pricing?
There are three main discount pricing techniques – which one will work best for you depends on your industry, your product, your objectives and your overall business strategy. They all have different benefits and can be used at different points in your sales cycle, so it’s worth familiarizing yourself with all of them.
A seasonal discount does what it says on the tin: a promotional offer on products during a particular season, or on goods that are inherently seasonal themselves. Increasingly the basis of a retailer’s profits, seasonal sales events drive huge engagement, whether that’s Black Friday and Cyber Monday, or the pre- and post-Christmas sales.
A lot of this spike in sales volume can be attributed to the seasonal discount strategies, as everyone competes to make an attractive offer to consumers.
However, there is no reason why the same tactics can’t be applied during other high or low seasons to drive customer engagement, whether that’s matching the offers made by others on the market, or generating interest at a more unusual time when competitors are less likely to be doing something similar.
A clearance strategy centres around offering a product at an unusual level of discount, whether it is a flash sale or a buy-one-get-one-free offer. The discount provides a sense of urgency, and the idea is the consumers feel they have to make a purchase now so they don’t miss out.
These can be incredibly effective ways of driving interest outside of key yearly moments but must be managed carefully to make sure that any spike in demand can be met by the business, whether that’s increased web traffic or the demand placed on fulfilment and shipping.
Volume discounts reward consumers for buying your products in larger quantities, often with bigger discounts given the more items are ordered.
They’re particularly useful for B2B or middleman businesses, where the customer base is more accustomed to ordering goods in large quantities.
This pricing strategy can be a useful way of making a significant dent in inventories but again needs to be deployed correctly to ensure that the capabilities to manage selling in large volumes are actually in place.
Changing the list price in your ERP
While changing the list price of a product in your ERP is a quick short-term solution, it can cause major financial headaches later. As a quick and easy solution for reducing the price for a large customer, changing the list price in your ERP hides the activity in standard customer profit and loss (P&L) reports.
Why is this an issue? Because anything that cannot be analyzed, can’t be managed. Customer-specific changes to the list price rarely have budgets and are prone to being in place longer than intended.
This method of discounting masks the impact of a customer-specific list price. The pricing action is only visible when viewing the average list price across customers for the same product.
Using rebates to incentivise your customers
Rebates are a more profitable way to manage the discounts you give to customers. With rebates, the discount incentive is held back until you can verify that the customer qualifies for the discount.
By ensuring the customer has qualified for the rebate, you’re not rewarding a customer that has not stuck to the agreed terms of the rebate.
With rebate management software, you’re able to ward off unruly retailers who claim bill-back monies owed from an invoice that’s unrelated to the promotion’s products.
Rebate tracking software can match the rebate expense back to the correct items and time periods for correct historical P&Ls. Meaning you can dispute any deductions that weren’t owed, much faster.
Offering off-invoice allowances to reduce financial risks
Off invoice allowances are the way to go for a clear picture of the discounts offered at the time of sale. With the discount applied at the time the invoice is created, it means that the trade spend is expensed at the time it’s incurred.
So if a customer purchases an agreed amount of a certain product, you can apply the discount straight away with no outstanding liability.
Having rebate and promotions management software to manage these allowances gives you the ability to control the off-invoice discounts you offer and protect your margins. It gives your sales team the tools to achieve sales goals while not letting discounts damage your profits.
Pros & Cons of Discount Pricing Strategy
- Discount pricing is a great way to encourage customers to try out your products, hopefully creating a lasting relationship with them
- Discount pricing can also be an effective way to close a deal and increase sales
- Can lead to higher churn, as customers move elsewhere once the price returns to its previous levels
- Risks devaluing an item if customers perceive the discounted price to be reflective of its true value
- Can impact growth and forecasting, as customers that come to you through a discounting pricing strategy are more likely to churn. This can make modelling your growth much trickier than usual
How can Flintfox help companies with Discount Pricing strategy?
Our rebate management software has 100% accuracy and instant margin visibility, making it easier for you to offer the right discounts to the right customers at the right time.
No more guessing which strategy is best, Flintfox’s intelligent rebate management is the easiest way to maximize profitability. In fact, our customers see a 158% increase in their margins on average when they start working with us.
Discount Pricing Strategy Takeaways
- Understand how each of the pricing strategies might work for your business so you can be smart about how you use them
- Don’t be afraid to use a blend of different pricing strategies across the year
- Before you do, make sure you have the capabilities to actually fulfil a spike in orders
- Sometimes it’s good to follow what your competitors are doing, but not always. Only get involved in discounting if it really makes sense for your business and products
- Work with an ISV that can help you with intelligent rebate management software and take the guesswork out of your discount pricing strategies
Flintfox can help you automate your pricing strategy, including rebates.