In B2B pricing, incentive rebates are a pricing best practice.
Why? Because if you are not using customer rebates, you’re probably giving customers larger discounts than they deserve. Price rebate best practices ensure that rebates deliver the desired price, volume, and mix and that the complexities of rebate administration do not outweigh the commercial benefits.
This post provides a comprehensive overview of common types of rebates and uses cases, tips on putting rebates to good use, and suggestions for avoiding the common commercial and administrative challenges rebates can pose.
Price Rebates 101
When quoting prices, many sellers in B2B consider the sales volume associated with the opportunity, deal, quote, or contract. For example, if a customer says they plan to buy 100 tons of LDPE (low-density polyethylene), the seller will quote a lower price per pound than if the opportunity is for only 22 tons. Or, similarly, 100 parts vs. 5,000 parts.
This practice, common across a number of industries, is called volume-based pricing or volume-based discount guidelines. The commercial rationale for the seller is that larger volumes create production, sales, and logistics efficiencies which can be passed on to the customer as larger discounts.
But what happens when the customer who promised to buy 100 tons only buys 22 tons? Or when a price quote for 5,000 parts generates an order that turns out to be only 800 parts?
In these situations of ‘over-promised volume,’ the seller probably cannot retroactively change the customer’s price. And, because the realized price does not comply with the volume sold, the customer has, in effect, extracted a noncompliant price. For Six Sigma practitioners, this is known as a defect. And, the defect has cost the seller money. A customer rebate program is employed to limit the gap between promised and actual behavior.
The Cost of an Unkept Promise
Rebates are used to price on ‘actual’ rather than ‘promised’ purchases, instead of granting a discount upfront and accepting the responsibility to audit sales to the customer, or worse, not auditing, the seller grants a discount only for actual volume, thereby passing the risk of non-compliance to the buyer.
In addition to pricing on actual rather than promised volumes, customer rebates can be refined to drive specific customer behavior such as growth, retention, product mix improvement, or purchases of bundled offers. Like other forms of discounts employed to modify behavior, rebates allow sellers to communicate to customers how the customer receives the lowest price. The burden of realizing the lowest price falls to the customer with the rebate granted only for achieving the specified outcome.
Price Rebate Types
Rebates can be categorized by a business objective and customer type. Rebates are employed to manage incentive programs to achieve business objectives and to improve the effectiveness of selling through distribution.
Examples of incentive rebates:
Examples of channel management rebates:
Ship and Debit Rebates
Indirect Customer Rebates
Price Masking Rebate
Following is a brief discussion of each rebate type.
Volume rebates are the simplest rebate and are designed to limit customer gaming and over-promising. Instead of quoting a price driven largely by the customer’s ‘intended’, or ‘promised’ volume, the seller responds with tiered pricing where the Invoice Price is fixed. Still, the actual price varies with volume, and the difference is granted by rebate.
In response to a customer inquiry, the seller quotes these volume/price combinations.
The example follows a simple story where:
Quantity refers to the quantity of each order, rather than the cumulative quantity.
And the quoted price is not the invoice price, but the price, net of rebates.
In all cases, the supplier will invoice the customer at $100 per part
The time period is the calendar quarter
Because if you are not employing customer rebates, you are likely providing clients more discounts than they are due. Best practices for price rebates make ensuring that the intended price, volume, and mix are delivered via rebates and that the costs associated with rebate management do not outweigh the potential profits.
This article gives a thorough explanation of the most typical rebate kinds and use scenarios. It also offers advice on how to make the most of rebates and how to prevent the usual