Note 50: Discount Calculation

Posted: 17 April 2008

Products contributing to and eligible for discounts

Billers with a diverse product range may offer discounts on one product based on the amount purchased of another product. This approach can be used to encourage the purchase of a new product with discounts offered against products already being purchased, or calculate the discount based on retaining purchases of an older, declining product. The first approach encourages new products to be tried, the second retains sales in a product that may be commoditised and sold by competitors.

Overlapping discount plans

Customers may qualify for many discounts for their individual charges. For example, a phone call may qualify for a discount based on the day of week (Sunday), destination (Ireland), negotiated discount plan (ABC Pty Ltd), and duration (over sixty minutes).

The biller must consider how and if to apply discounts to each charge:

Plan precedence: A predetermined priority can be associated with each discount plan. Each charge may be eligible for different discounts. The discount plan's priority will decide in what order they are applied.
Single or multiple discounts: Will only one discount be applied based on the predetermined priority associated with the discount plans? Or will multiple discounts be applied? When multiple equivalent discounts qualify, only one per type may be applied.
Discount limits: Minimum and maximum levels can limit the discount amount calculated per plan, per charge, or (in aggregation) the total amount discounted against a charge. This can be used to avoid discounting more than 100% of a charge. The discount amount may be capped at a maximum amount, but it can also be used to ensure that a minimum discount is applied.
Discount the gross or nett charge amount: Each discount plan must apply its qualification criteria and discount against either the original charge amount (gross) or the discounted, reduced charge amount (nett). Multiple discounts can be calculated from the gross charge and result in a rebate of more than 100% of the original charge (unless capped). Discounting based on the nett charge, and using percentages rather than fixed amounts, will reduce the opportunity to over-discount a charge.
Price capping at the bill level: Based on the customer's total spend, the biller may choose to cap the maximum amount that will be charged, or only restart charging once a much higher amount is reached. For example, an ISP may charge for data downloaded but limit (cap) the additional charges to $30, after which data downloads are free. Customers with lower downloads receive a lower total price, but high-powered users have their maximum charge capped. Another example is a mobile phone network that bills customers for the calls they make, but when their charges exceed $99 allows them to make calls up to a value of $500 before beginning to charge the customer again. This limits the cost for less frequent callers, attracts customers who call often, and provides the mobile phone network with some additional revenue from their most frequent callers.

The details of each discount plan applied can be noted and stored on the charge's transaction to assist the biller's staff if problems occur. These hints can also be used to explain a bill to the customer even when the calculated results is correct. Calculating what happened for a small bill can be complex; calculating a large bill after the fact can be near impossible without hints stored as the bill was calculated.

Cross-product pricing

A telecommunications biller may offer lower monthly recurring access charges for phone services to customers with higher call volumes. For example, the basic monthly recurring charge may be $40 per month, but it may reduce to $30/month if the customer makes $50 of calls in a month, and reduce to $20/month if the customer makes $75 or more of calls in a month. This example can use one of two different approaches to achieve the same pricing outcome:

Discounted at billing: The customer's monthly charge may be initially calculated at the standard rate of $40/month as it is for all customers regardless of their call spending. When the specific customer is billed, her actual call spending in the month will be calculated and can be used to determine a discount percentage.

Threshold-based discount plan (based on $ of calls made)

$0 to $49.99 - 0% off the recurring charge (Base: $40/month)

$50 to $74.99 - 25% off the recurring charge (Now: $30/month)

$75 or more - 50% off the recurring charge (Now: $20/month)

This is also an example where the quantity of one product (phone calls), is used to determine a discount on another product (the monthly recurring access charge).

Transaction pricing: The correct, final price applied to the customer's monthly recurring charge may be calculated by using a threshold method to select the correct rate based on customer's spending. In this case, further discounting is not required.

Threshold-based rate plan (based on $ of calls made)

$0 to $49.99 - $40/ month recurring charge

$50 to $74.99 - $30/ month recurring charge

$75 or more - $20/ month recurring charge

The recurring charge could be (re)calculated as the customer made calls through the month. This could be useful if an accurate estimate of the customer's next bill was required prior to their next billing cycle, or the recurring charge could be calculated within the billing cycle based on the network usage extracted to the bill.

Tags: Billing, Cross-product, Discount