Effective rebate management is integral to any good pricing strategy – that is, when your company’s objective is to protect and grow its profit margins. Rebates are one of the last strategiesavailable to your business on the pricing waterfall to achieve its commercial goals, but one of the least visible to track due to being off-invoice agreements. And when your company isn’t clear on the “why” and the “how” behind its rebate agreements, it will be your margins that take the biggest hit with each misstep.
At Pricefx, after over a decade helping businesses improve their pricing capabilities using our cloud-native pricing solutions, we’ve seen rebates come up again and again as an area in need of optimization – and gaining better visibility on their performance is the minimum requirement to make it happen.
In this article, we’ll outline why visibility in rebate performance is key, what good visibility looks like, and how you can achieve visibility with data-driven tools.
What is Rebate Performance and Why Visibility Is Important
The importance of measuring rebate performance is directly connected to the reason rebates exist in the first place.
Companies offer rebates for several purposes depending on the market or industry; they’re most used to reward priority customers, maintain long-term collaboration, introduce or sell off products quicker and in higher volumes, and more generally to incentivize customers to achieve their agreed business targets. If managed well, rebates offer mutual material benefits to both the company offering the rebate agreement and the sellers on the other end of the deal.
However, a lack of visibility on rebate performance, or the ability to track how well a supplier meets the conditions outlined in the rebate agreement, will inevitably cause some profit leakage that is left unaccounted for (and historically, this disproportionately affects the company paying the remuneration).
Worst case, a company’s ignorance of a partner’s rebate underperformance can set a precedent for future rebate agreements that continue to drain profits – and leave little room for re-negotiation.
Apart from margin leakage, another negative impact of low visibility on rebate performance worth noting is strained customer relationships. If you can’t justify your payment logic with real numbers, your customers may lose trust in your business when their expectations for remuneration differ from what you offer at payout.
What Good Visibility on Rebate Performance Looks Like
The most successful companies know why a given rebate exists and can track it well. If the commercial goals driving the rebate are unclear, that rebate is of little use to those setting them – and may either give sellers more than they were promised or the wrong encouragement to achieve common commercial goals.
In order to achieve successful outcomes, your company will need to clearly understand the following components of its rebate structure:
The commercial goal driving the rebate (e.g. revenue generated, volume sold, market representation or penetration)
The rebate logic calculation
The conditions for receiving remuneration
How the goal achievement is measured
The last point, which speaks to having the right methods to measure rebate performance, is especially difficult for many companies.
This is in part due to a lack of tools at their disposal; many still use manual methods (such as spreadsheets and email) to manage their rebates, which don’t allow for the same degree of efficiency afforded by data-driven systems. If your rebate tracking and calculation processes give murky outcomes, there’s little way of knowing whether your customer has met your expectations.
With that said, let’s get into how your company can achieve better visibility into rebate performance with the help of pricing software.
Creating Visibility in Your Rebate Performance Using Pricing Software
1. Automatically Calculate Rebate Performance
Automating rebate calculations for items like accruals or credit notes (i.e., rebate payments) using data-driven tools enables a more uniform and reliable approach to measuring overall performance, unlike manual methods which tend to feature disconnected systems and cause margin leakage due to inconsistent calculation logic.
Having a system to clearly calculate performance supports more transparency around how your company arrived at a given remuneration, which makes any misalignment with the customer’s expectations for payment easier to justify for your pricing team.
2. Measure Financial Impact of Rebates
Even if everything across your rebates is measurable, you’ll still need to understand whether your rebates are profitable.
An assessment of margin gain or leakage on each rebate pulls in multiple variables at once; to calculate net profitability, you should have the means to easily differentiate between your various invoices, agreements, payment periods, customers, and products. This level of analysis is tricky to carry out with spreadsheets or isolated systems when there are hundreds of products in your portfolio (and as is often the case, out of every 100 products, only 50 may have rebate agreements attached to them).
Pricing software helps simplify this process by segmenting your rebates across all categories and calculating exactly how much each subsegment is bringing in. In doing so, your company has improved visibility on which rebates are working in their favor and which rebates need to be revised.
3. Optimize Future Rebates
From a broader perspective, having enough data – and a way to visualize it clearly – to analyze the performance of your pricing strategy is integral to choosing the best strategy for each customer and product type, including your rebate strategy.
By using a pricing optimization engine to consolidate all your transaction data and easily segment it by customer and product, you can work backwards through the elements of your pricing waterfall starting from pocket price to determine which kinds of rebates for which customers are most conducive to achieving a specific business goal. From there, you can design your rebates and corresponding agreements and price lists to best support that outcome.
4. Strategically Position Your Rebates using Market Simulations
To stay competitive, decisions around rebates shouldn’t be made in a vacuum, disregarding changes in the market. There is where weighing your options using market simulations makes sense.
By modeling different rebate scenarios and testing their effectiveness under different market conditions, your company can pinpoint the best rebate structure for its commercial goals and minimize the risk of margin erosion.
Optimize Your Rebates with Rebate Management Software
Rebate management is a tricky business that’s often easier to get wrong than right. Your company’s ability to achieve visibility into its rebate performance is directly connected to the tools you use, with manual calculations, insufficient or scattered data, and isolated systems among the biggest roadblocks.
Luckily, with the right rebate management tools, these challenges can be addressed using the capabilities we’ve outlined in this article, allowing for greater visibility – and more mutually beneficial rebate agreements as a result.
Curious to learn more about how rebate management software supports your business to make more strategic, data-driven decisions around its rebates? Consider checking out our complete guide below:
Isaias Jaramillo-Rojas is a Solution Strategist at Pricefx, where he provides guidance in the sales process by creating suitable and custom solutions for companies that are looking to boost their pricing performance through data supported decisions. Working in the past years as a Pricing Manager in the DACH Region, he focused on the development of omni-channel distribution strategies and automatization of end-to-end pricing business processes.