The Critical Role of Executing Rebates, Allowances, and “Dead Net Pricing” There’s an old pricing related joke that goes like this: A customer walks into a deli asking for the cost of a dozen bagels. The proprietor responds with $5.50. The prospective customer responds, "but the deli down the street sells a dozen bagels for $4.50". "Why don’t you buy the bagels there," the proprietor asks. "He’s out of bagels today," the customer replies. The proprietor retorts, "When I’m out of bagels, I’ll also sell you a dozen for $4.50". The customer pays $5.50 and receives the 12 bagels. Not only did the proprietor of the store know his competitor’s pricing, but he also knew the market price, as well as his competitor’s product inventory status. What’s surprising in today’s business-to-business markets is that many sellers don’t understand the market price, have little knowledge of competitive pricing, and sometimes don’t even know what price they’ve charged their customers. Now wait a minute, you’re thinking, how is it possible not to know what price a business has charged its customer? Isn’t the price obvious? Didn’t the customer agree to, get billed for, and pay a "price" for the product? Can’t the company’s multimillion dollar financial system report the price the customer paid? In many cases, the answer is no. To understand why, one must first understand what is meant by price. In "Pricing Making Profitable Decisions," Kent Monroe defines price as: Price = (quantity of money or goods and services received by seller)/(quantity of goods and services received by the buyer) In the introductory example, the quantity of money received by the seller was $5.50 and the quantity of goods received by the buyer was 12 bagels. In business to business markets calculating the price isn’t as simple. There are several reasons for this: • Unlike the bagel example, which involved a single exchange, business-to-business trades frequently incorporate multiple transactions. • These transactions may span long periods of time making it difficult to aggregate the transactions to calculate the price. • The "amount due" presented or invoiced to the customer frequently doesn’t reflect the sum of money the seller ultimately receives. The invoice also doesn’t always reflect all the discounts or rebates the seller provides. The "true" price or dead-net price for a product or service must reflect the value of all the goods and monies exchanged over time. Let’s illustrate these complexity factors with the following real world examples: A manufacturer of consumer goods sells through two types of distributors, those that resell to the business market, and those that resell to the consumer market. The manufacturer offers rebates based on quantity purchased. Rebates offered to the business market differ from those offered to the consumer market. Because the manufacturer’s rebate system is disconnected from the pricing and billing systems, the manufacturer has no way of automatically connecting a rebate to a distributor’s order. Reconciling prices involves hundreds
of person-hours per month. Since a rebate is money subtracted from the numerator of the price formula, the manufacturer can’t effectively calculate the dead-net price, the price the distributor actually paid. A second example of not understanding the dead-net price is a large pharmaceutical company that contracts directly with hospitals and also with distributors. When distributors sell to hospital customers at prices below MSRP, the distributors are sometimes entitled to a credit or charge-back from the pharmaceutical company. Because of its disparate pricing information systems, the pharmaceutical company has difficulty computing the deadnet price to either the distributor or the hospital. A second manufacturer of consumer goods sometimes offers sell-through incentives to distributors. Distributors receive credits to sell old-model goods in distributor inventories at a discount. This ensures that...
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