This blog is about the Exceptions in the Salesforce CPQ Price Waterfall. This is part 4 and last in this sequence. If you want to read about other exceptions to the CPQ Price Waterfall then you can start reading my blogs on this topic here.
What is proration of Additional Discounts?
Additional discounts play a vital role in Salesforce CPQ Price Waterfall. They are deducted from Regular Unit Price to derive the Customer Price. Additional discount is basically a customer discount.
In order to get a understand Salesforce CPQ Price Waterfall you can start reading my blogs here.
Proration means when the List Price is prorated due to several conditions. For example, you can get to try a car for a week for a prorated monthly subscription price prorated for a week. Another example could be monthly trial of a software product at a prorated price which is available for a yearly subscription. Proration has been discussed in detail in my blog. I posted the blog on Proration last week and you can read it here.
In Proration, the List Price is prorated, and it has a downstream impact on the entire Price chain in the waterfall. All the discounts and other prices are calculated on the prorated list price.
Proration of discounts mean that with the proration the discount will also get prorated. This is possible in the case of additional discounts.
Why Should the Additional discount be prorated?
The additional discount should be prorated to avoid the customer to take double advantage of the Proration. This holds more meaning when proration is not a policy and is done on an exceptional basis. For example if there is a 15% discount running on an yearly subscription product and it is prorated for a month then the non-prorated discount will make the monthly prorated price negative and no company wants to charge negative price which means pay to buy scenario. Let’s take some numbers
- If a yearly subscription product price at $1200 running an additional discount og 10% is prorated for a month then the price comes to $100. If the discount of 10% ($120) is not prorated, then the price will turn to – $120 which will mean that the company will have to pay $20 to the customer for his to buy the one month proration.
- If the discount is also prorated accordingly the discount of $120 will turn to $10 on prorated basis for one month and the prorated customer price will be $100 minus $10 = $90. This is more realistic monthly prorated price. For the customer.
We will take another example further down in this blog and examine the impact on CPQ Price waterfall.
How to set up Proration of Additional Discounts?
Proration of additional amount is set up adding a field “Prorate Amount Discount” in the Quote Line object of CPQ Salesforce. This is a formulae field. Once this field is added and is set to return a value of 1, Salesforce CPQ Price calculation engine knows to prorate the additional discounts.
Proration of additional discounts is calculated by dividing the quote subscription term by the product subscription term, so if for example, if the product is a yearly subscription product and the subscription term unit is ‘Month’ and the product subscription term is “12” and the additional discount prorated for 2 months then Prorated Additional discount will be = (Additional discount * 2/12). So, for example if the Additional discount is 10% on List Price of $1200 for a product priced yearly then Proration will happen on an additional discount of $120. So, the Prorated additional discount will be = (120 * 2/12) = $20
Impact of Proration of Additional Discount on the CPQ Waterfall:
Let’s understand this from an example- Tango Foods is offering a one-year subscription of Lunchboxes. The list price of this yearly subscription is $2400. In this subscription customer will be offered 24 lunchboxes in a month, 6 every week. There is a system discount of 10% for 2-5 subscriptions. There is an additional discount of 10%. A partner discount of 5%. A few customers want to try this subscription for 1 month. Tango foods has to implement Prorated pricing for the same. The subscription term set in the system is Month. Let’s see the calculation of prorated pricing for the same for 2 subscriptions. Tango foods has also implemented proration of Additional Discount. Prorate precision setting for Proration of List Price is set to Month.
- – Let us first calculate the Prorated list price based on this setting and then we will derive the CPQ Price Waterfall. Since the subscription term unit is Months and the prorate precision is Month our proration factor will be 1/12. The prorate price in this case will be 2400/12 = $200.
- Prorated List Price is = $200. Total Prorated List price for 2 subscriptions is $200 * 2 = $400
- Regular Price is = $200 minus (10% of 200) = $180. Total Regular Price = $180 *2 = $360
- Customer Price in normal calculation is = $180 minus (10% of 180) = $162. Total Customer Price is $162*2 = $324. Out here the additional discount is also prorated. The additional discount of $18 will have a prorate factor of 1/12. In this case the prorated additional discount will be $ 18 divided by 12 = $1.5. Total prorated additional discount will be $1.5 *2= 3. The Net price in this scenario will be $360- $3= $357. Had the additional discount not prorated the Customer price would have been $324 but with proration it is $357. We can clearly see that the benefit of proration goes to the company.
- Partner Price is = $357 minus (5% of 357) = $338.15. Total Partner Price is $338.15 * 2 = $676.30
Net price in this case for 2 yearly subscriptions for 100 days with prorated list price is $676.30.
This scenario is an exception to the CPQ Price Waterfall and work is tandem with Prorated prices. I hope that I have been to able to simplify it for you. Your likes, comments and shares will motivate me to keep writing.