In this article, the authors explore proven, successful strategies for discounting profitably in B2B industries. Antoine Weill is a Partner at Simon-Kucher & Partners. His primary focus is topline growth, revenue management programs as well as pricing strategies. He can be reached at antoine.weill@simon-kucher.com. Patrick Valentin is Senior Consultant at Simon-Kucher. He specializes in (international) B2B sales and pricing strategies, product portfolio design and price model development. He can be reached at patrick.valentin@simon-kucher.com.

The Pricing Advisor, June 2017

Successfully and systematically determining adequate price levels for individual customers is difficult. That’s why companies often leave discounting for the sales force to handle individually during customer negotiations. As a consequence, discount levels given for the same deal typically vary immensely from one sales representative to the next. What’s more, incentive schemes often reward the sales force for growth and volumes rather than margin or price quality.

Let’s imagine a specialized equipment distributor called SpecialDeals proceeds as described. An initial analysis shows that this laissez-faire approach to discount negotiation leads to a large unexplainable variation in price and discount levels (Fig. 1), and essentially customers receive prices that are too low.

Fig. 1: Variation in price and discount levels, Simon-Kucher analysis (values anonymized)

In this case, there are essentially four key elements that should be considered in order to move towards systematic, explainable, and successful customer discounting.

Fig. 2: The four elements of customer discounting, Simon-Kucher

1. Separate the customer price from the product price

Organizations often mix product-focused and customer-focused thinking. While it’s necessary to consider external factors such as market dynamics or competitive landscapes when defining strategic directions for company prices, it is also important to clearly distinguish the roles of different price levels. The product price serves as the underlying baseline and should be mainly driven by overall product value, while the price a single customer is willing to pay should typically be separated from product-focused thinking and considered in the discount levels given.

2. Use discounts to reward customer value and steer behavior

Luckily our specialized equipment distributor separated these two price levels well. However, the magnitude of the gap between the two price levels could not be explained. Price differentiation is a good thing – if you know why it occurs. That means SpecialDeals should think about which customer behavior (e.g. payment behavior) and which deal characteristics (e.g. order channel) are valuable for their organization and proactively use discounts to reward and incentivize these traits. The secret is to minimize complexity while at the same time enforce positive customer behavior and reward value. Typically, around three to five meaningful characteristics are enough to determine a large portion of the discount that a customer or deal deserves. Let’s assume SpecialDeals define with their sales force that they would like to reward customer size, payment behavior, and the sales channel. Their simple and explainable approach keeps things transparent for customers. Furthermore, by involving their sales force in the design process, they lay the foundation for acceptance within the organization, which is essential for a successful change process.

3. Measure and enforce price and discount quality

Once implemented, this clear and structured discounting approach enables SpecialDeals to actively monitor the discounting performance (and as a result the price quality) achieved by their salesforce. By ensuring that the discount and price levels for each type of customer and specific deal situation are clear, they are able to actively benchmark the price and discount levels they give. Such a degree of transparency means that price quality can be used as an additional element in sales force incentive schemes. Furthermore, this clear knowledge of deserved discount levels also indicates how much sales representatives can deviate from this central recommendation. SpecialDeals decided to link different degrees of deviation to different sign-off levels (i.e. district sales manager, head of sales, etc.) and thereby dramatically increased discount enforcement.

4. Review and rethink your discounting regularly

In addition to enforcing price quality, measuring and monitoring discounting performance can be used to fine-tune and optimize the implemented discounting structure. Let’s revisit our specialized equipment distributor and imagine they have now gone live with their new discounting approach. After several weeks, they realize that sales representatives actually give two to five percent higher discounts for certain types of deals. While the initial reaction may have been to tighten the levels of additional discounts that sales can give, a more thorough analysis showed that all deals with these additional discounts actually had larger order sizes. The consequence: the distributor would go back to the drawing board and extend their discounting approach to also reward the desired order behavior.

Businesses that start changing and systemizing their discounting structure now will soon be rewarded. While each lever has a positive effect in itself, the impact is magnified when all are implemented together. Successfully implementing all four elements typically leads to a profit increase of one to three percent, as well as noticeable volume growth with target customers when incentives actively encourage the desired behavior.