Discount policies help businesses reach more customers and maximize sales potential. But they can also be tricky—offering discounts too much or too often can cut margins, limit profits, and potentially harm a company’s perceived value.
Dynamic discounting is one of the most straightforward ways to offer discounts without risking a company’s bottom line.
What is Dynamic Discounting?
Dynamic discounting is a payment option that enables suppliers to receive payments earlier than the agreed-upon net terms.
The process works by incentivizing customers with discounts if they agree to pay early. This gives suppliers more control over their cash flow, allowing them to improve liquidity and company profitability.
Dynamic discounting has similarities to supply chain finance, but it differs in that the buyer is responsible for financing instead of a third party.
For example, a supplier can offer a 10% discount to customers who pay within 15 days instead of the 30-day payment terms. This incentivizes customers to pay early while still allowing the supplier to make money on the transaction.
Dynamic discounting is a win-win for vendors and buyers alike—suppliers can take advantage of lower-cost funding and use their working capital for investments and development. Buyers, meanwhile, are rewarded with a risk-free return on their unspent funds.
- Early Payment Discounts: Discounts offered to customers who pay before the agreed-upon payment date.
- Accelerated Payments: Payments made in advance of the agreed-upon payment date.
How Does Dynamic Discounting Work?
Early payment discounts aren’t a new concept—2/10 net 30, for example, has been around for a long time and is common practice in the billing process.
What makes dynamic discounting different is that the discounts are customizable and automated.
Suppliers have full control over their discount policies, allowing them to tailor incentives to individual customers or transactions.
Dynamic discounting can be used in a variety of ways—from offering tiered discounts based on payment options to creating special offers for high-volume or high-value transactions. But it generally follows these basic steps:
- A buyer purchases goods from a vendor or supplier.
- The vendor sends the customer an invoice via a dynamic discounting platform (i.e., a specialized software provider).
- The buyer approves the invoice and sends payment to the vendor.
- The vendor can see what offers are available based on payment dates and decide whether or not to offer a discount.
- If the customer chooses to accept the discount, they can pay early and receive the agreed-upon discount amount.
- The supplier receives payment on the agreed-upon date, minus the discount.
Since this process is mostly automated, it allows businesses to add a flexible pricing element to their billing process where payment terms used to be rigid.
Dynamic Discounting Benefits
A dynamic discounting program offers many benefits for both buyers and vendors.
Benefits for Buyers
Dynamic discounting provides several advantages for buyers, including:
- Risk-free returns: Since buyers already have the funds to pay, they can use dynamic discounting as a risk-free way to earn returns on their unspent funds.
- Cost savings: Dynamic discounting allows buyers to save money on the cost of goods by taking advantage of early payment discounts.
- Faster receipt of goods and services: When buyers can receive their goods and services faster, they can move on to the next project or transaction quickly.
- Improved supplier-customer relationships: On-time payments make suppliers happy to do business with buyers, leading to improved relationships, an easier dunning process, and better service.
- Better supply chain health: When buyers can receive the goods they need more quickly (from satisfied vendors), the risk of supply chain disruptions decreases.
Benefits for Suppliers
Sellers also benefit from dynamic discounting. The most essential advantages include:
- Improved cash flow for vendors: By accepting payment early, suppliers can decrease their DSO (days sales outstanding) and speed up the process of converting sales into cash, improving their working capital position.
- Increased efficiency in the payment process: Traditional sales discounting (i.e., static discounts) is usually stringent and makes complex billing processes more time-consuming. Dynamic discounting simplifies the process, making it faster and easier to manage.
- Low-cost funding option: Through dynamic discounts, suppliers can access funding at a more cost-effective rate than any other option. This allows them to cover unexpected expenses while also investing in their development and innovation.
- Better forecasting for future cash flows: With dynamic discounting, suppliers can decide when they want to get paid, ensuring that they can accurately plan for upcoming and unplanned expenses.
- Greater control over payments and finances: Dynamic discounting enables companies to choose whether to apply a discount rate to a single invoice, multiple, or all invoices. This helps them maintain control over their finances and also helps them to avoid cash crunches in the future.
Features of Dynamic Discounting Solutions
Dynamic discounting is a complex process, and the software powering it is similarly complex. Dynamic discounting solutions generally have a few key features.
Dynamic discounting solutions automate discount management by allowing users to create, approve and send invoices quickly.
They also offer automated payment reminders and discounts on a recurring basis, reducing the administrative burden of managing payments.
Vendors can set rules for percentage discounts ahead of time and can customize discounts based on the creditworthiness of their customers.
Like most software solutions, dynamic discounting solutions offer a degree of integration with other software programs.
They can be integrated with balance sheet accounts, payment platforms, and ERP systems. This allows companies to keep track of their financial data in one place and to reduce manual labor by streamlining processes across departments.
Dynamic discounting solutions offer reporting capabilities that provide financial intelligence to users.
The reports make it easier for companies to monitor their cash flows, accounts receivable, and supplier performance.
This visibility helps businesses make better decisions about how and when to pay invoices. For example, vendors can use the reports to track profit margins and update their discounting policies as needed.
Configure, Price, Quote (CPQ)
CPQ software helps businesses create and manage accurate customer quotes. CPQ has flexible billing, rules-based discounting, product bundling, and payment options built into it can be used to streamline the entire configuration and payment process.
CPQ systems have dynamic discounting built-in and vice versa, so businesses can generally take advantage of both features.
Billing operations involve many different activities, including discount management. Companies need a billing system that can handle multiple payment options and a variety of discounts for each customer.
The best billing platforms offer automated invoicing, payments, and credit card processing in addition to customizable discounting options and intelligent reporting capabilities.
Dynamic discounting solutions will have a billing platform integrated into the software, allowing users to manage their invoices and payments efficiently.
People Also Ask
What is dynamic discounting vs. factoring?
Dynamic discounting is an arrangement between two parties (buyer and supplier) in which the supplier offers a discount for early payment of an invoice. Factoring, on the other hand, is when a third-party lender purchases invoices from suppliers and then advances them money against those invoices.
Factoring is typically used by companies that have difficulty obtaining financing from traditional lenders. Conversely, dynamic discounting is used by companies that have sufficient working capital and want to optimize their cash flow.
What is the difference between dynamic and static discounting?
Dynamic discounting is a term used to describe a system where discounts are applied dynamically based on the payment terms and creditworthiness of customers. Static discounting, on the other hand, involves setting fixed discounts for all customers regardless of their payment terms or creditworthiness (e.g., 2/10 net 30). The latter is more stringent than the former but is still used in many business contexts.