Why you should be managing your discounting policy as a part of your pricing strategy to grow sales and profitability in a smarter way.
Discounting is a bigger problem than you may think
Pricing and discounting are two sides of the same coin. In fact, you could argue that discounting is actually a part of pricing strategy. You need to get both right to grow your profitability.
Yet, while some businesses take time over their pricing strategy, details pertaining to the discounts applied thereafter are often left to accounting or, more worryingly, sales.
Why should you be concerned?
- The ability to price well and get that price is of limited value if you simply give away those gains as part of an unstructured discounting approach. (In fact, giving a discount could be regarded as pricing incorrectly for the client in question right from the start.)
- Discounts given to clients can be broken up into two key areas – on-invoice discounts and off-invoice discounts. What is the implication? The on-invoice discount is it least observable and measurable, while the off-invoice discount is a less well known entity.
Problems therefore come to the fore under at least two circumstances:
- You may be losing money on clients that you thought were profitable, or
- You may be providing a greater discount to clients who spend less with you.
Both present problems ranging from business continuity to possible difficulties with the competition authorities, depending on how dominant you are in your industry.
Approach the discounting challenge from a different perspective
These problems are unnecessary if you just have an approach to discounting that is well integrated with the rest of your pricing strategy. Areas that one would typically investigate could include:
- Understanding what the prevailing discounting methodology is. This may sometimes take a while to achieve as varying interests within the business are not always keen on making the extent of various discounting levers evident, or measurable. Once the exercise is completed though it tends to be quite an interesting view of how discounting works in practice in your business.
- Understanding how this discounting methodology came into being and who created it. We have found that this methodology often grows in fragments over time through several contributors of sometimes unknown origin. Due to this, and other sensitivities, there is often a lack of understanding as to why the structure is precisely the way it is. This is a significant lost opportunity for improvement.
- Getting an idea of how often the discounting methodology is reviewed. Due to a lack of understanding of motivations behind the methodology applied, and a general lack of enthusiasm to fix what seemingly works fine, we have found that revisions are infrequent. This can create serious complications with far reaching effects in inflationary environments.
- Understanding what the norm in the industry is when it comes to the discounting methodology that is applied. Industry norms can be necessary to adhere to, but they are worth questioning if they make no sense. We have encountered industry norms that very few industry insiders understand and whose origins they cannot explain. This can lead to nonsensical decisions and problematic margins over time. It may also invite scrutiny from regulators that can lead to other difficulties if not amended.
- Investigating opportunities to integrate the discounting methodology with the rest of a coherent pricing strategy so that these two approaches are not in conflict with one another. This must happen to get the greatest possible benefit, and to be able to rationally explain why pricing and discounting policies are the way that they are.
- Getting an understanding of the data so that one can best understand how the discounting methodology is in fact impacting the business, and what the areas of greater risk tend to be. It is even more interesting when actual data is run through the structure showing how much profit is lost to the business. This stage usually raises a few eyebrows and engenders disbelief.
Once you understand these issues, you are better placed to reconsider the structure of the discounting methodology in a way that incentivizes sales and other forms of positive client behaviour.
We are able to make recommendations around how this methodology should be reviewed and updated on an ongoing basis, and which parts of the business should take part in this process.
Should it be a necessity, one can also develop tools to enable sales to advise their clients on how specific client behaviour could be adapted to achieve different discount levels. Prevailing methodologies often lack imagination. There is much opportunity in this arena to be more creative than your competitors so as to drive higher sales and profitable outcomes. Most importantly, do not be so focused on discounting that you ignore the appropriate pricing for the client in the first place!
About the author
Alan Ohannessian started WisdomInc in 1999. WisdomInc focuses on Pricing Strategy, Brand Strategy and Analytics. He has consulted to over 70 global and local brands across 15 industries during this time.
Prior to this, he started a Customer Relationship Management consultancy within the Ogilvy Group in the mid-1990s and worked within the Ogilvy Group over a 5-year period. He was also lecturing Marketing Strategy, Consumer Behaviour and Retail Marketing during the early 1990s at the University of the Witwatersrand, Johannesburg.
He has a B Comm. (Hons) from the University of the Witwatersrand in Manufacturing Strategy where he focused on how to mass customise products at competitive prices. He also has a Master of Commerce degree from the University of the Witwatersrand which focused on distribution channel strategy and logistics.