What is a Rebate Agreement?

A rebate agreement is a financial arrangement between a buyer and a seller where the seller agrees to refund or return a portion of the purchase price to the buyer after the sale. This refund is typically based on certain conditions or criteria outlined in the agreement. 

Rebate agreements are often used as a sales promotion strategy to incentivize customers to make a purchase by offering them a discount or cash back after the transaction.

Rebate agreements come in all shapes and sizes. Depending on your trading partners, you may only be aware of a fraction of these deals, or you may be well versed on each and every one – from the simplest to the most complex.

With the diverse array of rebate agreements out there, there is often a lack of consensus around common terminology and processes. Some of this inconsistency comes down to the unique interpretations and internal deviations of individual businesses, but much can be attributed to a widespread misunderstanding of the difference between supplier and customer rebates.

Understanding the difference between these two types of rebates is essential if you happen to be involved in both, but due to the subtlety of the distinction, many people involved in rebates may be unaware of this crucial division.

What is Customer Rebate Management?

For most businesses, rebates are rebates. But for a select few involved in both sides, the difference between supplier rebates and customer rebates is a subtle yet critical detail that their rebate management process or system must account for.

At a high level, rebates are the return of a portion of a purchase price from a seller back to a buyer, usually on purchase of a specified quantity, or value, of goods within a specified period.

Such a transaction has two points of view: the seller and the buyer. From the seller’s point of view, this is known as a customer rebate. From the buyer’s point of view, this is known as a supplier (or vendor) rebate. All rebate agreements can be viewed from these two fundamental perspectives.  

What are the Differences Between Supplier and Customer Rebates?

The type of rebates you deal with depends on your perspective in each individual agreement, and should be assessed on a per agreement basis. In every rebate agreement, one party will be dealing in supplier rebates and the other party will be dealing in customer rebates. The amount of the rebate due to be paid and the amount due to be received will be the same regardless of perspective, because they concern the same agreement; however, this is rarely the case in reality, and disputes often creep into the discussion.

A good analogy for the two sides of any given rebate agreement would be a coin. You can view a coin from two sides; the heads or the tails, but both sides -- whilst different -- are part of the same coin and of the same value.

Typically, merchants and distributors who are purchasing products and claiming rebates deal in supplier rebates. On the other side, manufacturers and merchants who are selling products and paying out rebates are dealing in customer rebates.

When managed effectively, customer rebates offer huge value to both the seller and buyer. The seller can build a strong relationship with their buyer through an effective loyalty incentive, and the buyer gets a better price overall.

What Other Customer Rebate Management Concepts Should I Be Aware Of?

As you may have surmised, some merchants can be involved in both supplier and customer rebates. When you are neither the creator of the product nor the final customer of the product, you must purchase the product and deal in supplier rebates before selling the product to customers and dealing in customer rebates.

For these companies, managing both types of rebates can cause great difficulty. To avoid becoming tangled in the mess of multiple agreements, these businesses must have a firm grasp on their rebate management processes or implement a capable rebate management system.

Further to the above, special pricing agreements (SPAs) — colloquially known as contract support or contract claims in the UK — can be thought of as a combination of both supplier rebates and customer rebates. These tripartite agreements involve a supplier, a merchant and a customer; as the middleman, the merchant deals with both supplier and customer rebates in these situations.

In many industries, it's common for sellers to have customer rebate agreements with businesses who don't buy from them directly. For example, a pharmaceutical company may provide rebates to a veterinary practice, even though they only purchase its product through a wholesaler. In these cases, the seller needs to collect data from a third party (i.e., the wholesaler) to calculate the rebates that the end customer (i.e., the veterinary practice) is owed.

What Should I Keep in Mind When Managing Customer Rebates?

While the agreements – and therefore the rebate calculations – are the same whether you deal in customer or supplier rebates, the accounting approach differs. Accounts receivable is involved in supplier rebates whereas accounts payable is involved in customer rebates. In one situation you are posting a profit to your P&L; in the other, you are posting a loss.

For many, customer rebates can be even harder to manage than supplier rebates due to the complication of customer accounts. If customers join or leave buying groups throughout the course of agreements, this needs to be communicated and managed effectively to ensure you have a clear grasp on just how much the customer is owed in rebates.

Managing customer rebates efficiently means mastering a number of different processes – from setting up, adjusting and renewing agreements, to analyzing margins and profitability. If implementing a rebate management system or investing in rebate management software, it's useful to be aware of these processes.

Use Customer Rebates Strategically with Enable

Customer rebates and supplier rebates go hand-in-hand in the rebate world. Understanding the difference is essential if you are involved in both purchasing and selling. Even if customer rebates aren’t something you’re usually involved in, an understanding of the complexities that your trading partners or competitors may be involved in can help to foster better relationships and inform negotiations.

Hopefully you're now aware of the difference between the two types of rebates and can identify which your company operates in. If you're looking to implement a rebate management system, it's essential to ensure that your chosen system can support the different nuances that each style contains.

Learn more about Enable's Customer Rebate offerings.