Rebate vs Pricing Optimization
Those of you dealing with rebates may find yourselves struggling to get a firm grasp on setting appropriate prices, analyzing strategies and optimizing based on real-time data. This results in rebates being seen as a burden, meaning businesses neglect a rebate management strategy, instead of a growth opportunity. Plus, it shrouds the very data that can lead to the insights you need to price more effectively. In this article, we discuss the similarities and differences between rebate and pricing optimization.
What are Rebates and How Do They Drive Behavior?
There are two kinds of rebates in B2B rebate management: customer rebates and supplier rebates. As we explain in our article on Customer Rebates vs. Supplier Rebates — What You Need to Know, customer rebates are discounts or reimbursements that have to be paid to customers. They’re an expense.
Flip this around and you’ll see the same deal from the other side. That’s a supplier rebate. Supplier rebates are income. A supplier rebate is an incentive that anyone in the supply chain receives to promote and sell certain goods. Usually, a supplier rebate that comes from suppliers to an organization helps improve profits. In some cases, supplier rebates can even make the difference between a company’s profit or loss.
For manufacturers, rebates incentivize distributors and retailers to sell the right products to the right customers, in the right ways and at the right volumes, to drive growth and profitability. Their aim is to create personalized rebate schemes for individual trading partners, based on a joint business plan drawn up to leverage the partner’s strengths or ambitions in a particular market.
For distributors, rebates reduce the cost of doing business, allowing more investment in inventory that helps to drive revenue growth and contributes a significant amount to the bottom line. Building closer relationships with individual suppliers to understand their organizational goals and negotiate more favorable rebate terms in return helps to achieve those goals. Tracking progress towards higher rebate tiers in real-time allows you to make smarter decisions about what to buy and when in order to maximize rebate earned.
Why Use a Rebate Strategy?
Rebates enable partners to set pricing strategies and deliver competitive quotes in line with customer demand, while allowing them to course-correct when projections aren’t aligned with reality. They’re especially important in the current crisis, as manufacturers increasingly regionalize their supply chains and try to secure contracts that will minimize risk and help them manage exploding costs for products and raw materials.
A strategic incentive program can promote loyalty by providing greater rebate amounts to customers at higher purchase volumes — but these rebates should be carefully priced, so they don’t hurt the manufacturer. By pricing correctly, manufacturers and customers both win. Manufacturers move more product and customers receive more rebates.
Longer-term, rebates can become the bedrock on which loyal, trusting relationships are formed, as they align partners around common goals. When turned into a strategy, rebates can become an important driver of revenue and margin in their own right.
What Is Pricing Optimization?
Just like rebate management, a fundamental element of pricing optimization is data. Pricing optimization is the practice of analyzing customer and market data to find the most optimal price point for a product or service. Using data, instead of guesswork, organizations can price their product or service to attract customers, therefore maximizing sales or profitability.
Beneath all of this, there is a lot of complexity such as supplier constraints, price introduction, and product end-of-life. If an item is priced too high, it may not sell at all, while if the price is reduced too much, the organization will not make a profit. Finding the perfect balance between profit and value is critical, and because the relative values of goods and services constantly change, this can become a never-ending task for many organizations.
Why Use a Pricing Strategy?
Too many organizations set prices without having a proper strategy behind their decisions. This mistake can make an organization’s offerings appear uncompetitive and position them poorly in the current market. To maintain cash flow and grow an organization, it’s essential to have a smart pricing strategy. This will solidify your position in the market, build trust with customers, and ensure you meet your organization’s objectives. Similar can be said about having a concrete rebate strategy.
To protect profitability, organizations must model, execute on and analyze pricing at a higher level of granularity and precision than ever before — just like rebates. An effective pricing strategy can quickly shift demand onto products with higher inventory or margin and shift demand away from products with lower inventory or margin. For example, instead of disappointing customers with out-of-stock items, retailers can entice consumers to alternative products or brands and balance inventory levels.
How Are Both Rebates and Pricing Currently Managed?
The reason many businesses don’t implement a rebate management strategy is that many systems simply aren’t set up to handle them. Most ERP systems lack the granular rebate management functionality — let alone the collaboration tools — to allow rebates to be used to their full potential.
Organizations that manage rebates on spreadsheets outside of their ERP quickly find they spend all of their time entering data and making manual calculations, rather than working on building win-win relationships with their trading partners. More and more organizations are fixing these issues by implementing dedicated, cloud-based rebate management software.
Like managing complex rebates, pricing is also a highly labor-intensive, manual process. Mostly managed in spreadsheets, it carries a high risk of errors due to the manual work required. For example, retailers need to generate price-change events when competitors’ pricing data is loaded for analysis. They also need to collaborate with various stakeholders to constantly monitor and ensure that pricing stays within a tolerable range for the market.
This requires a tremendous amount of flexibility in pricing models since changes will also need to be made to the business rules that drive pricing. Spreadsheets are not an efficient or secure way to handle both these complex and dynamic datasets that require constant adjustments due to the multiple variables involved.
Managing Rebate and Pricing Together – PROS & Enable
Organizations use rebate programs to incentivize sales and influence buying behavior, but few understand the real impact rebates have on their profitability. Without a combined view into their pricing and incentive programs, organizations can’t analyze, and control profitability and customers cannot track and maximize their earnings with the purchases they are making. As a result, organizations are unaware if they are effectively incentivizing performance-related purchases.
The PROS and Enable solution combines industry-leading omnichannel pricing and configure price quote (CPQ) capabilities with a full suite rebate management platform.
With PROS & Enable, you can:
- Offer different rebate types with dynamically optimized prices
- Streamline the quoting/approval process
- Handle complex rebate agreements
- Dynamically calculate margins with and without rebates
- Manage rebates upstream and downstream in a single platform
- Leverage a single data source
- Use workflow and automation and reporting to manage, forecast and analyze rebate agreements.
Are you looking to sync your rebate and pricing together? Schedule a demo to see our joint solution in action.