Rebates vs. Discounts: The Incentive War That Might Be Undermining Your Margins 

So I guess a little bit of housekeeping.

So firstly, the session today is being recorded, and it will be available on our website shortly after we finish the session. So if you have colleagues that want to access it, if you missed something and want to go back to something, if I accidentally said something interesting, then you can come back to and find it find it later.

And in terms of interactivity, this is kind of like a broadcast for the first section, but then if there are questions, if you have thoughts, comments, or questions for me, then feel free to submit them. There is a little box in your top right hand corner. I’ll try and point to the right. That’s always confusing when you’re reversed. But anyway, it’s the little one with a question mark on it. That’s the one for entering any questions that come up or things that you wanna think about being addressed. And obviously, if it’s appropriate for the whole session, we’ll answer it there and then and if not, we can kind of answer stuff offline as well and you can always send things to me afterwards.

Okay. So I’m I’m Dominica Regan. I’m a strategic consultant with PROS. So I spend my life talking to people about how they might automate and how they might drive greater success, generate greater margins, revenue volume, whatever it is they’re looking to achieve in in the world of pricing. So that means in thinking about how you set up discount programs, but also how you set up and manage rebate programs and how they come together and how they get transacted upon.

And and I’ve been with PROS now for around six years, and prior to that, I’ve been working in the pricing industry for, I think, about ten years before that as well. So I have a a breadth of experience not just with my PROS knowledge, but also a little bit broader kind of experience in in the price management world.

So here’s our agenda. It’s really, really simple. And so if you look at the agenda and none of that’s remotely interesting, now’s the time to run. Hopefully, it’s not, though.

Hopefully, there’s something interesting in here. So I have to start with a teeny bit of terminology. That’s the boring bit because when I’m talking about discounts or rebates, I’m quite conscious that there are traditional phrases, and it gets even more complex when we think about different languages, but I’ve often heard one called the other and vice versa, and so I just want to be really clear as we start discussing the topic. When I say discount, what I mean, and when I say rebate, what I mean.

Right? So let’s make sure we’ve got that kind of terminology right and understood between us.

We’ll we’ll have a little look at some of the pros and cons, advantages and disadvantages, when you might use rebates versus discounts, entry level stuff. If you’re an expert in the field, this stuff will be kind of pretty straightforward for you.

But then we’ll kind of step into how sometimes these things can actually be working against each other or undermining each other. And that’s kind of the topic of our of our webinar. So that’s kind of where where we’re heading towards. You’ll find that actually that’s not a complex thing to think about, but but that’s the purpose and that’s the kind of question as to are we managing them both in an effective way to make sure that they’re not actually fighting for the same space and potentially trampling all over each other. Right? That’s the real the real danger.

Since we’re pros and since we’re talking about price management and rebates and one thing versus the other, Obviously, I’m going to mention what you might need or what you might use to manage that complex situation. It’s not gonna be a big hard sell on pro stuff, but just to kind of bring it back a little bit to the risk technology and what can technology do and where can that fit into this landscape, how might it help.

And and if you’re unlucky enough, I might even throw in some opinions in and in and throughout the the session and a little bit at the end as well in terms of kind of where I think rebate programs can be improved or shouldn’t happen and stuff like that. Right? So that’ll be a little bit more off the cuff if we get if we if we get time to it. It might kinda bleed into our q and a.

Okay. So let’s get let’s get started. So the the easy stuff. Right?

Rebates and discounts. And so I have been to companies where I’m sitting down to talk about their discount programs, and as we’re talking, I realized that what they’re describing is something that I would have called a rebate program.

And so there are even the word discount might be used for rebates.

Don’t think I’ve heard it the other way around, but for me, the core definition and the core difference, when I think of discount, I’m thinking of something that is part of my upfront price and transactional offer to my customer. It’s on an invoice. It’s on an order. If my customer buys, they’re seeing and paying the discounted price. So whether that’s the fixed price, their special price, whether that includes incentives, promotions, or whatever else, but the line item on their invoice is the discounted price. So so when I think about discounts, I’m talking about how do we manage and reduce from maybe a, you know, a big list price down to the price that they’re going to be charged and invoiced, for.

When I think about rebates, I’m thinking about anything that is money off invoice that goes back to, not necessarily money, but mostly money, that goes back to my customer outside of the invoice process on a monthly, quarterly, annual schedule. So the kind of, well, if you spend more than you did last year, we will send you another one percent back off everything you spent this year, and we’ll do that at the end of the year. Those sorts of programs, and I have seen them called everything humanly possible.

Company recently referred to them as retros, which is nice because it’s kind of retrospective. Right? So there’s so many different words that can be used for for those sorts of programs. But discount for me, anything on invoice, rebate, anything off invoice sent later to my to my to my customer. So so the definition bit, like I said, should be should be quick and easy. So pros and cons. Right?

If I if I think about discount or net price type programs, there is a beautiful simplicity for my customer. Right? They can see what they’re expecting, they get it on their invoice, there’s no complexity, there’s no having to take into consideration how do I compare this price against someone else’s price because it’s all baked into one kind of simple number. Right?

That simplicity exists not just for your customer, but it exists for you and your sales teams as well. Right? A a discount, fixed price, special, whatever you wanna call it or think of it, program is much, much easier to manage and deliver. Right? I’m I’m going to be transacting. It’s not so it’s easier for me to manage over time.

It’s easier for me to understand and communicate upfront, and it’s easier for me to keep on top of to know where I am profitability wise with a given customer halfway through the year because there isn’t gonna be some complexity around extra money they get get later. Right?

So discounts for me have a beautiful simplicity, and sometimes you’ll see companies taking advantage of that where you work in an industry that is maybe very rebate heavy and the new competitor arrives and talks about an honest an honest price or a day to day best price or or, you know, phrases like that that are suggesting that everybody else in their normal behavior is somehow overly complex and dishonest. Right? Dishonest is is a harsh label, but it’s easy to paint them that way when you walk in and say, no. No. I’ll just give you my best price upfront all of the time. Right?

So there’s a nice simplicity to kind of discount programs, but but they don’t really deliver everything that’s needed in every situation.

And probably the simplicity of them means that they are perhaps overused compared to rebate programs. So rebate programs by their very nature are more complex and are more difficult to create, manage, and monitor. Right? Because my rebate program could be, and for the benefit of anybody that’s kind of relatively new to the field, a rebate program could be as simple as I will give you one percent back on everything you spend, but could get as complex as I will give you one percent back on these products if you spend more than this much on those products in this time period and and and and and. Right? So they can get very complex.

And as the more complex they get, the harder it is to predict how much money your customer is actually going to earn. So it becomes not just complex in terms of the kind of structure itself, but they become complex to manage and maintain. And, of course, a lot of companies are just doing this in kind of spreadsheets and so on. Right? So so that it’s not really without an ex a rebate management system, you’re almost forced to stay relatively simple, which isn’t always a bad thing. I mean, I know I want you to buy a rebate system from pros, but actually staying simple is still a good idea no matter what you’re doing and no matter what kind of systems you’ve got in place.

So there is a a complexity to to rebates, but they have a really big advantage which is that they are a mechanism that can drive real behavior in a way that discounts don’t. With a rebate, you can say I’m going to give you a reward but only if you actually step up to what you said you were going to do. So if you tell me you are going to spend a lot of money with me this year and I give you that as a discount and you spend half of what you said you would, you still get all of your discount. Whereas if I say to you, should you hit this number that you say you’re going to, you’re going to get this reward but only if you hit it, then of course, can use that to drive behavior and we can remind our customer and we can make sure that they’re tracking towards and delivering against. I can influence behavior in a much more targeted and direct way when I think about rebate programs. Right?

I can also be be really, really clever. There’s some really interesting psychology that can come into play with, with rebate programs. So I I I think of an example, which is actually a kind of a b to c example, but it’s one that I experienced where I was buying a new telly new television, like, two or three years ago. And the the company I was buying the television, the manufacturer had a special offer on.

And the special offer was that if you buy in this particular time period, there is you’ll be entered into a draw and there is a one in twenty chance that we will send you all your money back, so the TV would have been free. Now if you think about it, that is mathematically for them exactly the same as a five percent discount. But who gets excited about a five percent discount? I didn’t.

I wouldn’t.

I did get excited about the idea that I might, a couple of weeks later, discover that actually my TV was free. Right? So there is some interesting psychology that can play in in rebate programs and and not just in that b to c world as well. There’s psychology that can work in the b to b world where sometimes a rebate incentive can seem bigger.

It can also be really, really clever. I came across one recently where what the company had done is a little bit like the TV. They’ve made it a bigger, bigger prize, but but instead of saying I will you hit my growth target. Right? I want you to grow by twenty percent this year. If you hit that twenty percent, I’m gonna give you an extra one percent on everything you spend. Instead of that, they said I’m gonna give you a fixed amount of money if you hit that growth target.

So that might be the same as the one percent. Right? But the difference is, of course, if you overshoot your growth target, you still only get that fixed amount. Right?

So it becomes a kind of a but but you’re also writing down a big number for them in in headlights. Right? So the psychology can kick in and they can get excited about it. So like I said, rebates are way way more complex, but far more kind of interesting in driving behavior and can kinda give you the opportunity to start thinking about the psychology that might push your customers and incentivize them to kind of the work the way work the way you want to.

Right?

So getting to the meat of the topic. Right? Everything else a little bit foundational, kind of getting us to where we want we want to be, and and the message here, to be honest, is really, really simple, but it’s something that I have seen so many times in companies. And and the reason it’s seen is because it’s very very difficult to avoid. So don’t feel terrible if your instinct is, oh my goodness, we’re doing that. So the concept of undermining for a start, I I picked a picture that just entertained me.

The the word to undermine actually is a medieval phrase that relates to, like, siege warfare where people build high walls and then mine under the wall to kind of make it to weaken it and to and to allow them to kind of attack somebody’s castle and stuff like that. Right? But the idea is that you’re focused on one thing and the other thing is actually damaging damaging the first. So in the context of discounts and rebates, many times, it’s a central part of the organization that is setting up and managing centralized rebate schemes. So all of my customers will get this much if they hit this target and so on. Right? And then the sales team sit down and agree prices with their individual customer.

And far too often, they’re blind to what are the rebates that the same customer is going to get. And if that customer is likely to get a five, ten, twenty percent worth of value back, that should impact the prices that I’m prepared to negotiate with them. So either I’m blind to that and I might be we might be double dipping, we might be giving them the value twice that they deserve once, or my rebate schemes are constrained to have relatively little impact so that I don’t need to worry my, my my sales team.

It’s very, very difficult. Very, very occasionally, I found companies where the salesperson is agreeing with their customer both the prices they’re going to pay and the rebates and schemes that they’re going to receive.

And and that in some ways is kind of brilliant if they have the capacity to do that and do that well.

Because remember, rebate schemes have a complexity, which is beautiful and valuable, but not necessarily in the wheelhouse of every sales persona and every type of b to b business. Right? It depends on the nature of of your employees and and their kind of skill sets and mathematical understanding and everything else that that comes into play.

So I’ve even seen a situation where a company was telling me that until recently, their their sales team were negotiating both both components by the way, and they said that until recently, their sales team were giving away too much on discount. So what we’ve done is we’ve really locked down and constrained how much they’re allowed to do.

And what did they do? They just gave more on rebate instead. So then we locked that down, but we had to open up flexibility on discounts. So the overall giveaway didn’t change every time we tried to reduce one but not both at the same time.

So managing that total giveaway is the the real prize that would stop us from having rebates that undermine discounts or discounts that undermine rebates that would allow us to say how much should we be giving this customer, and where do we place that to get the best value from this particular customer or customer environment. Right?

Okay. So like I said, simple concept, but very, very rare that companies have this all together and have visibility of this and have control of it, partly because it’s difficult to predict what will the impact of the rebate be, partly because it might be different teams that are managing rebates and discounts, and partly because maybe nobody really knows what the total giveaway should be. People are used to what they give on discounts. People are used to what they give on rebates. But has anybody actually added it together and worked out what is reasonable in what circumstance in terms of that total kind of, give back to the customer.

So, technology to the rescue. So this is not gonna be a big plug on technology here. You can come back to us. We can talk about PROS technology and what we can do, but just to think about what components you might need if you want to be able to manage these things without them kind of contradicting each other, without them undermining each other, and making sure that you’re using them as effectively as possible in each different situation. Right?

So so really, you need you need three things, and and they’re kind of simple and obvious in in one sense. Right? Price management, some system that’s going to work out what is a reasonable kind of discount and discount program. Right?

You need some sort of a rebate management system.

The challenge with rebates is the complexity, the accruing, the accounting, the reconciling. A rebate management system will just do all of that for you. Right? So so those two components on their own allow you to manage those two two pieces well. Right?

But you need to be able to bring them together, and that could be analytics and insights and reporting across those two separately managed, worlds.

But a beautiful place to bring them together is, of course, when you think about any quote that is being created for your customer, whether that’s a one off quote.

I want a price. I wanna buy this today. Great. I could give you this discount. Oh, I know you’re gonna get a load of money back that will alter the discount that I’m allowed to give you or that I choose to give you.

Or it could be not just a kind of a one off quote, but it could be setting up the deal for the next year where a salesperson either is managing both the rebate and the discount and choosing what the what the total is gonna look like. They’re responsible then for the profitability of their customer. Some people make their salespeople responsibility for the responsible for the overall profitability of the customer, but don’t let them manage one of these one of these key components, which is kind of like a bit scary to be honest. Anyway, if they are managing it, a quotation for that annual business, for that contract, for that agreement, for whatever you call it terms is a good place to bring that together and give them visibility and let them manage it.

Now that works even if even if they are not managing the rebate, even if they’re just managing the discount component, what you can do is to say, well, as you’re managing that, I’m gonna show you what rebates there are, what the probable impact is so that you can be doing your bit in the context of what’s already in place. So that if I’m if I’m giving you recommendations on what discount to give, if I’m really forward thinking in my price management and I’m saying, hey, you know what? Here’s a reasonable discount for this customer for that kind of product, I can adjust my recommendation to you based on the likely impact of the rebate schemes that are maybe being managed by somebody else entirely. So the quote is a beautiful place to bring that all together and to help the salesperson to kind of orchestrate that and take responsibility for the profitability of the customer that they’re that they’re engaging with.

Now, of course well, I don’t of course, that’s probably a ridiculous thing to say. There is a an additional capability set that becomes available once you’re managing these three things together. So as soon as you’re managing all of this in a cohesive platform or environment, then you can start to think about how do I now leverage AI in a slightly different way than I might have done in in each area. So in a quote area, I might be using AI to suggest products, for example. Right? Hey, what should be on this deal? What what what should they be buying?

In a pure price management discount fixed price type world, I might be using AI to say, hey. What would the perfect price be? And we know from recent experience that that learning networks are have become phenomenally good at working out what people are prepared to pay for stuff and allowing salespeople to focus on their relationship rather than the rather than the discrete price. Right?

If we think about AI in a pure rebate management world, then we can also see how that applies in terms of suggesting what a, rebate percentage should be, but also just recommending the right source of scheme. Ah, you want to grow this customer, so we recommend a small rebate against maybe all of their business, but a clear step at the point that they actually start to generate, what we would consider to be sufficient growth to drive that to drive value, and that’s where we recommend a rebate. So the structure of the rebate scheme in your industry for your customer can also be something that AI is involved in in recommending.

Now if we think about this altogether for a moment, then the AI models that already exist that are tried and tested and proven in a pure price management world suddenly can be looking at the total giveaway instead. So not just can I say, hey, here’s the right discount for you, mister customer, I can also say to my salesperson, the total giveaway that’s needed to win the business here is fifteen percent, whatever it is? Right? And I recommend this rebate scheme, that’s gonna give them ten, and I recommend this discount, which is the five percent that’s left. Right? So you can start to become really, really clever in terms of your actual cost of sale and not just one component of it that, like we’ve said before, might be being undermined by by other by other examples and situations.

Okay. So the aim was to keep it pretty simple, keep it pretty straightforward. That’s the that’s the kind of core content that I had for you today.

My fundamental opinion on the use of rebates and discounts is that I think that most companies underuse rebates. They underuse them because they are complex, they’re hard to manage, they have maybe been burnt by allowing sales teams to create their own rebates, which managing rebates is one thing, creating your own ideas for a rebate for a customer in sales is a little bit madness, not not totally, not in every situation, but in most situations it’s madness and that’s because somebody centrally then has to manage, reconcile, and deal with whatever they came up with today. I heard this is silly, but I did actually come across a customer once where they said a salesperson had set up a rebate for their customer only if the customer bought products of a particular color, but they didn’t have any color record on their product portfolio.

So they have no real way other than actually looking up each and every product the customer bought to work out whether it was predominantly the right color to be due the rebate. So anyway, my point is keep it simple. You you can and should allow salespeople to manage these things, but give them schemes to apply rather than let them make up their own kind of scheme and an idea certainly would be would be my recommendation.

I I think people underuse rebates, and I think people sometimes use rebates like a discount. They basically say no matter what you spend, I’m gonna give you three percent back. Well, that might be nice for somebody in finance that collects that as a separate budget and puts it somewhere else and uses it somewhere, but it’s really not much of an incentive in any other way. You might as well give it to them as a discount. All you’re doing is delaying the payment. You’re not really gonna drive behavior in the way that you maybe could or should. So so I think they’re underused because the really valuable ones are the ones that do have a little bit more complexity, where there is a step, where there is a growth target, where there is something like that.

They’re also underused because in many cases, people don’t have a rebate management system, and without one, it becomes very difficult to do that reconciliation to be really sure what your customer is due and to avoid arguments with customers which are never a good idea. And so there are some cases where companies simply pay what their customer says they’re due because it’s way too hard and complex to try and prove otherwise.

So a system in place will allow the right level of sophistication, but still don’t make things over complex. Right? And if a discount is the right approach, if you have competitors that are doing that whole, hey, we’ve got our honest take it or leave it type price, then you might have to, for some customer types or for some situations, have have have similar have a similar go to market. Right?

So think about the rebate discount structure, the balance, and does it fit each channel, each go to market? Because they almost certainly have their own kind of dynamic, their own motivations, and their own kind of customer behaviors that are driving what’s important for them. So for me, my strong opinion is keep it central. I do love the idea that the salesperson is responsible, not for the scheme, but the the actual kind of yep.

I’m gonna give you this because I’m gonna communicate alongside my prices what my total value is to them.

And so I I think just managing it centrally and the salesperson not having much visibility of it is a real lost opportunity to make sure that the salesperson is reinforcing what the real end price is going to be to your customer and what they need to do to kinda get best value from you as a as a supplier, as a as a vendor.

So that’s that’s kind of it for today.

I I said and I hope we’ve kept it fairly brief, fairly light, just exploring how these two worlds can collide sometimes a little bit inelegantly and how maybe we want them to collide in a more beautiful way that drives business the way we want.

I’m glancing across. I’m not seeing questions right now. So if some pop in, we’ll we’ll look at them.

But otherwise, you can continue the story. You can contact me directly. You can come back to this webinar on our website.

Contact us for more information, access our website for more webinars and more content, and, of course, contact me directly if you if you have any kind of follow on questions or if you want to rant and tell me I’m an idiot and I’ve got everything wrong. That’s fine too. Just let me know.

Thank you, everyone, and goodbye.