More on rebates

What is a rebate program?

Rebate programs including vendor rebates, customer rebates, volume pricing,

retrospective discounts and the like are a way of giving individual customers the
‘right price’ without driving the price downwards.

In our experience, any single contract can have multiple deals within it, and each
of them needs to be monitored, measured and of course accounted for correctly.
The rebate earned would then be claimed by generating a rebate invoice or
credit note which comprises some details of the rebate program and the amount
owed.

Rebate programs are essential to operations in various industries

including building supplies, electronics, retail, and wholesale distribution and can
be offered to certain locations, on certain products or product groups and on
certain types of transaction. This means that they can get rather complex, which
begs the question, if they are so complicated then why do all these industries
need rebate programs in the first place?

Why do manufacturers give rebates?

Let’s suppose you supply bathroom suites to building supplies companies. If you
simply lower your price to become more attractive, one of two things could
happen:

 All your other customers will expect the same (lower price), and/or;
 Your competitors will react by lowering their prices thus creating a
downward spiralling price war.

Either option impacts profit margins for both you and the building supplies
companies.

So, the answer is often found in clever pricing strategies that seek to reward
those who sell more by giving them the best margins. The business reasoning
stands up — those who sell more cost proportionately less to service (sales time,
logistics costs, admin costs), and those who help the manufacturer to be in a
position to produce more are therefore contributing towards economies of scale
in production and shipping costs too.

What is an example of an incentive rebate?

A more complex example of a rebate can be used to encourage buying groups
and distributors to make purchases across a range of products where they would
usually only buy a few. This incentive is used to try and switch them away from
competitors for purchases other product lines.

Another example could be a tiered growth-based rebate where the rebate

earnings due to be paid are calculated via various incremental targets based on
a growth rate on top of last year’s turnover.

1 — Product launches

When introducing new products, it is common to link spend on the new range to
discounts on regular purchases.

For example, a supplier might offer an extra 1% discount across the entire
product range in exchange for a spend of $x on the new product. This type of
deal is also a great way to move people from placing the same ‘regular’ order
month in month out.

For the company who wants to stock the latest products anyway, this deal is
enticing. Until, that is, it comes to reconciling money spent on one range with
discounts achieved on another. Most standard purchasing systems can’t help
with this, but unless accurate records are kept the deal can fail to be realized.

2 — Growth incentives

Where the supplier is keen to increase the total volume not just the individual
order volume, a rebate based on incremental growth in orders is often used.

This could take the form of a year on year target, with a supplier rebate applying
if the purchased volume exceeds the growth baseline. That in itself can cause
problems for buying groups or multi-branch operations who sometimes find it
difficult to aggregate the total spend by product line from the previous year.

3 — End of life promotions

As old versions are being phased out, suppliers might plan to ship as much of the
remaining stock as possible before the new version appears. This is sometimes
achieved through extra volume discounts on the old lines. The same thing
happens with changes to packaging design — buyers are encouraged through
specific time-based discounts to shift quantities of the old design before the new
one is released.

4 — Product mix incentives

To encourage buying groups and distributors to make purchases across a range

of products, suppliers might provide a rebate based on total spend over a period.
Where the buyer usually buys only a few lines, this incentive is used to try to
switch them away from other suppliers for other product lines.

Suppose you supply veterinary products and a buying group buys only medicines
from you, and tends to get pet toys and accessories from elsewhere. The buying
group may have a relatively fixed demand for your medicines, and therefore little
in the way of negotiating power. However, by offering a reduction if they include
other product lines into the mix, they get a discount on their medicine purchases
and the supplier gets larger orders across the whole product range.

5 — Central distribution centre rebates

In order to cut logistics costs, some suppliers prefer to deliver to a central

distribution centre (CDC). This leaves the buyer with the cost and task of
distributing to their branches / buyers from their CDCs. For those companies who
have existing transportation routes between their CDC and branches anyway,
this can be an attractive proposition.

In these cases, whilst the purchasing company isn’t adding too much to their own
costs by agreeing to ship from their CDC to branches, they can benefit from the
discounts offered. In fact, we know of at least one case where the total value of
central distribution centre rebates funds their own transportation division!

6 — Marketing funds

Whilst these are not rebates per se, the provision of marketing funds conditional
upon actually carrying out the marketing activity does impact financial reporting
and needs to be accounted for — usually because the promised funds need to be
accrued and claimed for after the event has taken place. The difficulty is that
most purchasing systems don’t provide the means to collate all the evidence that
is needed for a claim.

Want to know more? We’ve blogged previously about how MDF funds work.
 7 — Conditional discounts

Any number of conditions could be applied to drive purchase decisions in support

of the suppliers’ commercial and financial goals. Some examples include:

1. A volume discount across all products.

2. A rebate on a product range, provided the volume purchased exceed x in y

months.

3. A discount on one product range dependent on purchases of another. If

you buy x of these you will get a discount of y off those.

Conclusion
So there you have it. We’ve listed our top 7 types of rebate deal, but as
mentioned earlier we have actually mapped out over 300 different types of deal
in our DealTrack software to help suppliers and customers alike to record and
manage rebate contracts.

https://enable.com/blog/pricing-strategies-top-7-types-of-rebate-deals/