By Chanan Greenberg, SVP, General Manager High Tech
“You took the chip, and you took a bite and then you dipped again. That’s like putting your whole mouth in the dip!” For those not familiar with this classic Seinfeld scene here is the link.
Dipping etiquette and current health concerns dictate that double-dipping should not be allowed. And yet there is another form of double-dipping that takes place every day through the hallways, offices, emails and tools used by High Tech companies that is causing them to double-dip incentives over discounts, credits claims over price protection, causing a revenue loss of 1% to 3%. A soon-to-be-released survey from dimensional research , 2020 State of Revenue, that interviewed 306 C-level executives, demonstrates these issues are widespread across many companies.
How Do High Tech Companies Double-Dip?
In my blog “How Does High Tech Move From Analyzing Gross-to-Net to Managing It?” we covered the impact of managing pricing in silos and the overall impact of this leading to as much as 5% of revenue leakage.
In this blog I will focus on one specific area – how high-tech companies unintentionally double dip into the same revenue stream with overlapping discounts, incentives and financial settlements and what they can do to avoid that. Double-dipping takes many forms – here are the most common scenarios:
Stacking Discounts – pricing discounts come in many shapes and forms. Discounts can be based on volume breaks in price books, negotiated pricing captured in a contract or price agreement. Also, discounts given by sales reps during quoting processes and they can come as on off-invoice price concession in the form of a discount rebate or Special Price Agreements (SPA) / Debit. The problem is these different types of discounts can be applied to the same deal by different people using different tools and as a result price concession are stacked together. They may not violate a Floor Price or minimal margin requirements, but they do not produce an optimal outcome. This issue is rampant especially when prices are negotiated directly with specific customers who then fulfill through channels.
Compounding Performance Incentives on top of Upfront Discounts – another way companies double-dip is by separating the deal negotiation from incentive programs. For examples, if a channel partner asks for a 10% discount for a specific customer, and that channel is eligible to get a 3% incentive payout on an incentive program, logic (and math) would dictate that a 7% upfront discount on the deal would satisfy the channel’s ask.
However, most companies are incapable of linking their deal negotiation and incentives processes and tools. The typical outcome is a 10% discount further compounded by a 3% performance payout. Managing this consistently is very complex given the high volume of deal negotiations and the reconciliation process against hundreds of thousands and sometimes millions of transaction lines used to calculate performance payouts and above all the fact that these processes are done by different people using different tools.
Stacking Credit Claims or Discount Rebates on top of Price Protection – financial settlements introduce more complexity and opportunities for revenue loss. Companies offer their channel partners Price Protection programs against changes in Inventory value. In most companies this process is handled separately from the SPA / Debit or Discount rebate process. This means that when channels submit claims to be paid their due credit claim or discount rebate, they submit it against the original invoice value of the inventory they held. The fact that money has already been paid out in the form of Price Protection and therefore a different (typically smaller amount) should be paid in the form of the credit claim or rebate – is causing a literal double-dip. Some companies have invested heavily in making sure inventory gets repriced periodically in their ERP systems to avoid this, but few companies avoid the 7 figure over payments.
These scenarios lead to 3% of total revenue lost. In any market condition, and especially today’s markets, this should not be acceptable to any executive. Being able to recoup even of portion of this lost revenue has a material impact on organic growth, profitability and company valuation.
How Do You to Stop Double-Dipping?
Some companies may think their channels are gaming their systems, however, this is mostly not the channel’s fault. Most of the issues described are internal and driven by disconnected processes and disconnect tools used by different people. These silos institutionalize the inability to manage these processes effectively and prevent this unnecessary revenue leak.
So, what can be done?
- Size the problem – high tech industry benchmarks measured across dozens of publicly traded companies has shown that stacking discounts and incentives and overpaying on SPA/Debits and price protections is costing companies as much as 3% of total revenue. How much would that mean for your company?
- Socialize it within the Sales & Business Operations, Deal Desk and Finance teams to get consensus it is worth solving
- Explore and research solutions that can help your company:
- Assure contracted prices are enforced systematically across channels and regions
- Enable your company the ability to balance upfront discounts with post deal incentives at the time of deal negotiation
- Help manage changing values of inventory and factor price protection payments into the calculations of credit claims and discount rebates.
Bringing these capabilities together through an integrated platform has repeatedly helped high tech companies capture a material portion of lost revenue.