A Perspective on Pricing and Discounting

April 10, 2008 – 5:39 pm by Alex Saghatelian

High tech companies face continuous price pressures associated with technology innovation that lead to shortened product lifecycles.  Couple these product lifecycle pressures with company lifecycle pressures, and maturing high tech companies face the challenge of sustaining or improving sales growth rates with less than optimal margins and overall profitability erosion.  Effective pricing and discount management is critical to driving profitable sales growth by helping minimize discount leakage and enhancing overall sales and customer productivity and experience.Many high tech companies face some of the following pricing-related challenges:

• Suboptimal promotion utilization by direct and channels sales teams creates an excessive volume of deals requiring manual price concession approvals, which increases sales support costs and hinders scalability
• Lack of holistic (list to net price) pricing concession visibility, governance, and enforcement across lead, opportunity, quote, and order processes drives inconsistent discount application and order processing delays
• A lack of linkage between a deal and customer-specific contractual discounts during the deal negotiation and approval cycle, which results in the over-utilization of upfront deal-specific discounts and the under-utilization of back-end discounts such as rebates and volume purchase-based agreements
• Additional sales and revenue accounting cycles are spent addressing inherent pricing complexities associated with bundled deals comprised of multiple offerings (hardware, software, services)
• Sales commissions often do not account for the full list of discounts applied against the deal or toward the customer account overall, resulting in over-compensation of the sales force

Leading high tech companies are applying a holistic policy, process, people, reporting, and systems lens to drive the implementation of strategic pricing initiatives focused on addressing these challenges.  The perspective below outlines the importance of governance models in navigating and achieving transformational change in the pricing space.

Pricing and Discount Management: Some Key Considerations for Success

Promotion Governance
Promotions, rather than ad hoc discount approval, provide an opportunity for companies to drive reduced sales cycle times and operational support costs related to pricing concessions while allowing Sales to be proactive in addressing market segment needs.  Designing, implementing, and governing an effective promotion requires strong cross-functional collaboration and alignment between business units, product development, marketing, sales, finance, operations and information technology teams. 

Many successful high tech companies have established cross-functional promotion governance bodies on global and regional levels to ensure the business case is sound and the operational capabilities are in place to support proposed promotions.  Promotion-specific success metrics with a 360-degree feedback loop back to the promotion governance committees are critical to ensuring that course corrections can be made regarding existing promotions, and lessons learned can then be applied to new promotions.

Holistic Customer View: List-to-Net Visibility and Management
When considering promotion eligibility or approval rules for ad hoc discount requests, a holistic view of the customer account is critical to ensure aggregate discount stacking does not exceed target ranges for profitability.  Creating a holistic view for margin-stacking rule governance entails full list-to-net price visibility accounting for contractual discounts, back-end rebates, promotions, and non-standard deal discounts.  This visibility is critical for the sales and finance teams approving non-standard discount requests to ensure sound economics of deals.  Moreover, this visibility is critical downstream in the quote-to-cash cycle to limit order processing delays, as operational support teams validate sales orders against approved contractual and/or deal level discounts.

Therefore, governance bodies should cover the gamut of pricing considerations to ensure list-to-net price discount implications are considered in aggregate.  Figure 1 below visualizes this approach.

Figure 1

Promotion Execution: Enablement and Relevance
With appropriate pricing governance facilitating the development of relevant promotions, the usability of promotions is where success or failure is determined.  During the deal negotiation process with customers, if direct and channel sales teams cannot easily identify and apply appropriate promotions, they will quickly turn to high-touch manual pricing exception approvals, which increase the total cost of sales.

The seamless identification and application of promotions is best enabled through automated, rules-driven workflows to verify eligibility against customer, partner, and promotions data sources.  These automated workflows can be configured to provide metrics in support of the 360-degree feedback loop to maximize the relevance of promotions available.

New Product Introduction (NPI): Pricing and Stock Keeping Unit (SKU) Management
Pricing and discounting administration requires sound process, policies and systems infrastructure to deal with the enablement of new SKUs across different price-list and promotions as they become available.  With the increasing integration of hardware, software, and services, the ability to enable bundled pricing around related SKUs is a critical component to support solutions-oriented selling in the marketplace. However, because of the lack of process and systems capability, this activity is done manually in most high tech companies, resulting in a loss of revenue as different price lists might only include certain SKUs until Sales/Partners identify the need when dealing with a specific customer situation.

Pricing Analytics: Intelligence for Continuous Decision Making
Within the high tech industry, companies that drive proactive and continuous pricing and discount management throughout their fiscal year cycle are able to manage and adjust to trends in the marketplace on a near real-time basis to maximize profits.  A key component of this ongoing management is the development and application of formalized pricing analytics capabilities to provide the necessary intelligence for proactive pricing decision-making that accounts for company, competitor, and industry trends.

Bringing it all Together: Delivering Results
Industry market dynamics regarding discounting pressures cannot be fully addressed through effective pricing and discounting management.  Operational cost reductions in key functions such as an organization’s supply chain can help offset top line pressure through improved operating efficiencies.  However, many high tech companies are unnecessarily giving away profit margin due to pricing and discounting disconnects across policy, process, people, reporting, and systems components of their sales value chain.

From promotion governance to execution, the end-to-end promotion lifecycle must have cross-functional collaboration and feedback to balance sales growth with profitability targets.  Looking beyond promotions to include all pricing concessions is critical to driving profitable sales growth.  This requires list-to-net pricing transparency from a customer account level down to deal-specific transactions.  List-to-net pricing transparency is only effective if the associated discount stacking governance is in place to prevent unnecessary leakage.  By establishing a pricing analytics function, many leading high tech companies have been able to gather the necessary business intelligence that enables the successful implementation of strategic pricing initiatives.

Contributors: Sanjay Shitole, Mark d’Oliveira, Kristie Korneluk, and Kreisler Ng

PDF of Article: A Perspective on Pricing and Discounting

Posted in Sales and Channel Operations | Permalink |