Tier'd Billing Requirement
If you sell airplanes, heavy equipment such as bulldozers, or medical equipment such as sub-zero freezers, then you may have service contracts whose prices vary with the amount of usage. In this case usage is defined as tiers.
What is a Tier?
A tier is a typically a price band that includes an upper and a lower limit. Another way to say that, is for example the following:
- Tier-1 $100 per hour, the first 100 hours.
- Tier-2 $200 per hour for the next 250 hours.
Tier-1 is for flight hours between 0 and 100 hours. Each hour flown will cost the customer $100.00
Tier-2 is for hours flown between 101 and 350 hours, which get billed at $200 per those hours.
Usage Data Capture
Over time, the aircraft is flown: On a monthly basis, flight hours are collected via a data communication link interchange, or manually reported and keyed into the system. We know how many hours each aircraft has been flown.
SD Pricing Gap for Tier'd Pricing
Now, let's define the current limitation in SAP standard SD pricing.
Tier Pricing requirement will calculate correctly, until the order quantity exceeds the threshold of the tier.
For example, suppose there are two tiers:
$100 per hour, the first 100 hours.
$200 per hour for the next 250 hours.
Let's suppose several months of usage-type billings:
Suppose, aircraft is flown 80 hours, then the invoice for that month will be:
80 hrs x $100 = $8,000.
SAP SD pricing calculates the first invoice of 80 hours correctly.
Suppose, aircraft is flown 30 hours. If you think of our tiers, Tier-1 still has 20 hours to go, hence 10 hours will overflow into Tier-2. The system is calculating
20 x $100 = $1,000 that is correct, plus 10 x $0 = $0
as that overflow quantity went over the threshold of the 1st tier and 2nd tier isn't yet considered by SAP SD pricing. Within the standard setup a line item can only reference one tier.
Suppose a third month's flight hours is another 50 hours.
Creating a third invoice for quantity 50, the system correctly calculates that price at the tier-2 rate
50 x $200 = $10,000.
Flight hours flown in a hypothetical 4th month, consuming all remaining hours in tier-2 will price correctly:
Suppose a third month's flight hours is another 210 hours.
This will get us 10 hours past the tier-2 threshold.
200 x $200 = $40,000
With that last invoice, both tier's thresholds are reached, time buckets are consumed.
You can see the SAP SD pricing gap exists when usage goes over tier-thresholds. By not invoicing the overflow hours,- the gap would have cost the business 10 un-billed hours of Tier-2:
$2,000 in billings.
Now that we have defined the gap, let's talk solution.
Tier'd Pricing Solution
Long story short, this is a very complex requirement, a gap in SAP SD, discussed from many angles in Michael Romaniello's blog on SAP Cumulative Graduated Pricing and Discounts. For our Service Contract Billing Workbench (BWB) we implemented a fantastic and flexible solution to this problem.
Do you know if you have a tier'd pricing requirement within your enterprise?
Many of our customers do that is why we built this solution.
Need to discuss tier'd pricing?
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