For someone who cut their teeth in the merchant sector, Alan Timothy, CEO at Bubo.ai, understands the challenges faced by branches and management more than most.
Having started my career at a major merchant chain before successfully building up and selling a number of construction database management and field sales marketing software companies, I set my sights on sorting out the unmanageable discount rules faced by merchants.
Most merchants try to manage discount rules using excel spreadsheets, although this soon becomes unmanageable because they have to be allocated by customer/group of customers and product/product group, whilst sales teams regularly add new terms and/or discounts for individual customers, coupled with overrides for single sales transactions.
It soon becomes virtually impossible to manage; a merchant with 30,000 customers and 30,000 product lines would be faced with just under a billion potential discount/price combinations. It’s why merchants focus on growing sales whilst losing out on easy margin opportunities.
Identify discount rules that are being used
The AI technology developed by the company, in conjunction with scientific advisor Huseyin Seker, the leading professor in the subject at Birmingham University and backing from Intel and Microsoft, identifies redundant terms and eliminates them. It then scans the remaining discount rules to identify those that are ‘fair’ and those that aren’t, hence costing margin.
We worked with one merchant chain where they were trying to manage over 160,000 different discount rules using an excel spreadsheet. It simply wasn’t possible and with branches adding new ones all the time, it ended up costing them serious margin.
Following an analysis, we discovered that it was only 350 discount rules that were actually being used. Once we’d dealt with all the others, it suddenly made them manageable and put their branches in charge of their margin once again.
The remaining discount rules were then assessed in a price fairness index. Usually we find that half are good, a quarter are acceptable and the remaining 25% are unfair (offering too much discount).
We also identified that two branches were responsible for 80% of their discount. It clearly wasn’t working and, yes, it grew sales but at what cost? The fact that all the branches were adding around 500 new terms each week, meant that this anomaly could never have been identified using a spreadsheet.
A builder visits a branch for their usual large order of cement and receives their agreed 15% discount. On the way out they ask the price of three shovels (they don’t ‘know’ what the price of these items is, just that it will be around £10 each). They add the shovels to the same order and so receive a 15% discount on these items, too. For the branch, that is lost margin because the customer didn’t know the price of a shovel and would have been happy to pay the full, undiscounted price. The fact that the branch gave 15% away cost them £4.50 in lost margin. That is ‘unfair’.
Add the multiple tens of thousands of transactions like this throughout the year and you can soon see why those branches which find an effective way of getting control of their discount rules can increase gross margins by 3-5%.
Specials pricing
We work with merchants where a third of their standard products are being put through the system as specials, because salespeople know that the price won’t be challenged. What they don’t realise is that the difference between selling a product as a standard and a special can be as high as 10%. That’s why it’s important our technology identifies these anomalies.
Merchants know that their discount rules are unmanageable and regularly have to commission costly external pricing consultants to help get them sorted out, however, the fact that they use spreadsheets limits what they can do. Then there’s the cost aspect and at £40-50,000 it’s a significant investment especially as they can’t quantify the end benefits.
It was a real problem made worse by the fact that when the consultants leave, there isn’t a check on the system and more discount rules are quickly added, so merchants soon ended up back where they started.
We start by getting three months’ worth of a customer’s data. We then carry out an analysis that tells the merchant how much money we can find them by eliminating unfair discounts and how many redundant discount rules they have. Measuring it in this way allows us to clearly quantify how we can improve it.
So confident are we in our ability to sort out discount rules and increase customers’ gross margin that we offers this aspect of the service for free.
Moving with the times
Up to the early 1980s all businesses were using handwritten ledgers for their accounts. The advent of computers in the 80s saw businesses use spreadsheet which gave more scope for analysis although there is only so much information people can take in from a spreadsheet.
In the early 90s spreadsheets were replaced with dedicated accounting software like Sage and Xero that automated many of the process and made it much easier to manager.
I see merchants as still stuck in the spreadsheet phase when it comes to managing discount rules. Yet AI technology is now available that is equivalent to the shift from excel to accounting software and all the potential that gives them for improving margins.
If he sounds like a man on a mission, that is because he is. The old adage if you can't measure it, you can't control it, stands as true today as it always has. Applying AI technology makes taking back control of discount rules that much easier.
Find out more about Bubo.AI DBX AI-powered discount management, visit: www.Bubo.AI
