RA Quick Insights: Using Discount Curve Analysis to Evaluate Pricing Behavior

This week, I wanted to show you another simple yet effective revenue analytics technique to steer sales behavior in the right direction and drive Gross Profits.

Discount Curve Analysis (DCA) is an essential but often underused method that summarizes the % of Units (or Cumulative % of Units) sold at each 1% Price Discount (from 0% to 100%).

We can build a DCA at various levels, including Company, Region, Product Family, Sales Territory, or Sales Rep. It gives us insight into our company's pricing behaviors, such as:

• What % of my product is sold at List Price (0% discount)?

• What is the Discounting Behavior of my sales organization, and how does this differ by Region, Sales Manager, etc.?

• Is the Sales Org strategic about giving discounts, or is there a tendency to go to the highest discount level that my skip-level Sales Director / VP can approve?

• How much free product are we giving away to Customers?

The elements of Discount Curve Analysis (along with Price Elasticities) can also serve as the foundation for more robust Scenario Analyses that your Revenue Management or Finance teams can run as part of an annual or quarterly planning process:

• What are the incremental Net Sales, Gross Profit, and Operating Profit impact if we decrease the Sales VP level Discount Authority from 50% to 45%?

• What is the business impact if we limit free product giveaways from $2,000 to $1,000 per annum for non-strategic customers?

• How many Sales and Profit upside can we drive by reducing our Customer or Product-level discount outliers to be in line with the top 25th percentile for the organization?

• What are the results if we close the gap only halfway?

Look at the below DCA for a fictitious manufacturing company. What stands out to you? Let's look at a few things:

1. Only ~ 20% of our units are sold at List Price. Knowing how this compares to Last Year or our plans would be good.

2. Our sales organization tends to give price discounts in 5% increments (notice the unit uptick at 10%, 15%, 20%, etc...Discount levels).

3. We see a considerable jump in units at a 50% Discount. 50% is the maximum Discount level a Sales Director can approve. If we tend to give this to only our largest Customers, perhaps it's acceptable. But if there's a wide dispersion of Customer volumes at a 50% Discount, that means our sales reps frequently ask for the largest Discount that can be approved within the Sales org.

4. We give away 6% of our unit sales for free. Does that align with our plans, or are there excessive product giveaways?

Analyses like DCA are quick and easy but powerful. As a next step, we could collaborate with Sales & Finance leaders to pilot a modified Discount Authority structure for a particular Channel or Region.

For example: lowering the Sales Director Discount Authority from 50% to 40% could yield little to no change in unit sales and a substantial lift in Net Revenue and Gross Profits. Or we could introduce another Discount Approval level underneath the Sales Director (e.g.: 35% for a Sr. Sales Manager).