What is a discount policy ?

Pricing and discount policy: are they different? What do they really mean?

Pricing: definition

Pricing, or tariffing, as its etymology indicates, comes from the tariff which appeared with the concept of trade and commerce. In 1572 it was a feminine word in French spelt tariffe which defined the total duties payable or a list of prices set for certain goods or services. In 1929 it was defined in similar terms as the price of a commodity or work.

However, in 1605, it was defined as a system of evaluation by Ph de Marnix de-Ste Aldegonde in his work Le tarifiste de Dieu (God’s Tariff Setter) for esoteric rather than business purposes.

Nevertheless, the latter definition best corresponds to the modern vision of a pricing policy. The price proposed must correspond to a perceived value proposition. As such, the value of the price is evaluated and this depends on individuals, the extent of their need, their immediacy and their ability to create additional value when a B2B or B2B2C relationship is involved. The buyer therefore views the price subjectively, which makes setting it difficult and sometimes unsuitable.

Discount policy: definitions and applications

Discount policy are based on principles which appear to be more straightforward. In their most basic form, they involve rewarding a client for his purchasing behaviour. In most cases this has to do with volume or loyalty, but it is often applied with hindsight and is rarely visible before the purchase. These rewards take the form of discounts applied either on future purchases or retroactively on the overall volume generated over a specific period of time

These discounts are therefore a positive surprise but also often a bit of encouragement from the salesperson to the client to place a larger order at the end of the year.

That being said, the motivational power of a discount policy communicated to all clients at the start of the performance cycle – the year, final quarter or month depending on each company’s needs and particularities – can prove to be a source of performance that is still underused today, just as employee remuneration can be.

In both cases, it is a question of encouraging your clients’ or employees’ behaviour to change in line with the performance expected by the company.

Why optimise discount policy?

The policy of commercial terms or applicable discounts is an extremely attractive way of changing your clients’ purchasing behaviour.

For this to happen, three conditions must be met:

The sales team must be fully aware of the ins and outs
Your clients must know about the system from the start of the concerned period, which is often annual but could be shorter depending on the sector
The trade terms must be communicated, so they must be the subject of discussions, particularly at the start of the period. (See Innovation / Commitment.)

How can they be optimised?

Often the criterion used to trigger a discount is the purchase volume, i.e. the turnover, sometimes the margin, but rarely both combined. (See Innovation / Surface.)

However, the challenges that can be supported by the conditions are broader:

Favouring a product range
Encouraging clients to order from the entire range
Favouring stock rotation and therefore the number of orders.

But also, and above all, the client’s turnover needs to be made predictable according to the commitments they make at the start of the period to obtain the most favourable and sustainable conditions over time. The commitment must be as specific as possible and it must always be in the client’s interest to place more volume even if there is an error in anticipating the volume. (See Innovation / Commitment.)

What is the benefit for your client?

A B2B or B2B2C client relationship must be a win-win partnership. It is not just a motto, it must become a business argument.