Shaping Customer Behavior through Commercial Policy
How does your company want to engage customers? When can it give customers a little bit more? When must it say “no” to a customer request? And, most importantly: How are these decisions made? These are the issues of commercial policy.
Tactical or Strategic
There are two basic approaches businesses take to managing commercial policy. For most, the default approach is tactical decision making. For some, they take the leap and add strategic decision-making.
By tactical, we are referring to the multiple times in the year that a salesperson negotiates with a customer, offers a special discount or rebate, and then closes the deal. The special discount and rebate may be tied to some customer behavior, like co-marketing, volume, wallet share, or payment terms. But it is still deal specific. The decision is made on an ad hoc basis. What is arranged for one customer isn’t necessarily the same as what is arranged for another customer. As such, it is classified as tactical for it is a tactic used to close a deal.
By strategic, we are referring to a set, predefined policy. A policy which is available to all customers who meet pre-defined criterial, and one which delivers a discount or rebate according to a predefined schedule or is determined through a predefined process.
These two categories, strategic vs. tactical, drive very different behaviors, both internally and externally.
Tactical Discounts and Rebates
Internally, tactical discounts and rebates lead to a constant battle between sales and its counter parts in marketing and finance, especially when sales incentives are tied to revenue and not profit. Salespeople will ask for a special price variance with their “strategic” customers which, as it turns out, is almost every customer. Unfortunately, finance, marketing, and even pricing won’t really be able to say if it is a good or bad idea. Because a decision must be made almost immediately or the deal will be lost, all that can really be analyzed is the cost of the discount or rebate, whether it is “in budget” or not, and whether it leaves the deal still profitable. It may sound good, but is it? How does it compare to others? And how will it drive customer behavior in a manner that the company wants to reward?
Externally, tactical discounts tell customers that if they bargain harder, they will get a better deal. This drives customers to set up procurement processes that pit one vendor against another, reduce the time allowed for vendors to deliberate, and focus on the bottom line cost, not the value of offering or relationship with the vendor.
Move over, externally, customers will learn that different customers got different deals. They will learn. Take it as a fact. Whether it is from buyers moving from one company to another, mergers and acquisitions, or simply buying panel data, they will learn. When one customer learns that they got a raw deal even though they are big and important, we both know what that customer will do: either end the relationship or insist on getting a better deal. Either way, profits go down.
And, externally, it puts the customer in charge of the relationship. The customer drives the decisions, the discounts and rebates, and the overall commercial policy of the company.
This isn’t good enough. Companies can do better.
Strategic Discounts and Rebates
Internally, strategic discounts and rebates are a different beast altogether.
Strategic discounts and rebates are, by definition, predefined. Meaning, the size of the discount or rebate is predetermined by a required customer behavioral to get the discount or rebate—the conditions, under which it is offered or paid, are all predefined.
This implies that, prior to the release of a strategic discounts and rebates, sales, marketing, and finance have all examined the policy and found it sound. Moreover, the soundness of the policy will be determined by the goals and metrics of that policy elements, and the anticipated profit impact of reaching those goals.
By goals, we mean it will specify the desired customer behavior, such as “buy more per order” or “pay within 90 days.”
These goals will be translated into metrics which determine if the policy element is hitting its goals or not, such as “increase average pallets per order from 4 to 5” or “reduce days sales outstanding from 121 to 110,” respectively.
The profit impact of meeting those goals will be forecasted and used to determine the allowable size of the discount or rebate. For instance, “increasing pallets per order from 4 to 5 will reduce shipping costs by 150,000 USD and the anticipated cost of the discount or rebate is 90,000 USD, therefore such a policy is profit enhancing” or “reducing DSO from 121 to 110 will reduce financing costs by 75,000 and the anticipated cost of the discount or rebate is 60,000 USD, therefore such a policy is profit enhancing.”
Internally, strategic discounts and rebates align the interests of sales, marketing, and finance.
Externally, strategic discounts and rebates tell customers what they must do to receive a better deal. They clarify the behaviors they must have to be eligible for a better price, and the value of meeting those behaviors to them.
This kills three identified pitfalls of tactical discounts and rebates.
One, bargaining behavior is reduced as the room for gaining advantage through bargaining is reduced. The deal is more or less predefined rather than in constant flux.
Two, different prices offered to different customers is a result of differences in clear behavior, and are therefore defensible in negotiations. Thus if one customer got a better price than another, then all that first customer has to do to get the same better price is the same thing as the second customer, and voila.
Third, and most importantly, it shifts the control of the relationship from the customer to the company. The company is coming to customers stating: “we want to pay you to do this…here is how we will pay you…so will you do it?” It results in a proactive customer engagement, rather than reactive.
How does your company want to engage customers?
Commercial policy can have both strategic and tactical elements. Adding strategic policy elements to an otherwise tactical commercial policy may be rather difficult because it requires a different way of thinking and hasn’t been done before, but it is doable with patience and persistence. (It often takes us weeks to get it done to everyone’s satisfaction.) But it is important. Strategic commercial policy defines how your company wants to engage its customers. If you don’t do it, customers will—and customers rarely have your best interest in their heart.