Per Gartner's research, the demand for rebate programs has expanded beyond large enterprises to include small and midsize businesses (SMBs). This shift has led to sourcing, procurement and vendor management (SPVM) departments in organizations of all sizes showing interest in rebate offerings and actively seeking them from suppliers. Previously, customer rebate programs were mainly provided by solution providers to a limited group of high-level clients.  

Consequently, solution providers find themselves in a position where they must be able to address end users' inquiries about their eligibility for a customer rebate program. They need to decide whether to offer such programs on a broader scale and, if not, be prepared to explain to customers why such a program is not available.  

What Is a Net Spend Customer Rebate Program?

The Net Spend Customer Rebate Program is an official agreement between a service provider and a customer, designed to offer rebates based on predefined volume incentive targets or tiers of spending. These rebate programs have gained popularity and are increasingly sought after by customers of all sizes, often being mentioned in requests for information (RFIs) or proposals (RFPs).

Certain service providers extend customer rebate programs exclusively to clients with the highest net spend, such as their top 5% of customers. Others offer more inclusive customer rebate programs that cater to all customers who actively seek rebates, while some providers do not offer any customer rebates at all. When deciding whether to implement a customer rebate program, service providers must carefully weigh the potential benefits and risks associated with such programs.

The Benefits of a Customer Rebate Program

According to Gartner, offering a customer rebate program can provide several advantages for businesses:

• Differentiation: Not all solution providers offer rebate programs, so having one can set your business apart from the competition. In an environment where cost reduction and consolidation are major concerns for sourcing and procurement professionals, a rebate program can be a distinguishing factor.
• Customer Retention: Organizations are focused on optimizing costs, and rebates that increase with higher spending can incentivize customers to consolidate their spending with your business to maximize their rebates. Implementing a rebate strategy can increase customer retention and wallet share.

• Meeting RFP Requirements: As strategic sourcing departments consolidate their vendor and solution provider relationships, some Request for Proposals (RFPs) now include requirements for a customer rebate program. Answering these RFPs successfully may depend on having a well-defined rebate program that addresses questions about different rebate tiers, eligibility for hardware/software/services spend, and utilization of rebate credits.

By offering a customer rebate program, businesses can differentiate themselves, retain customers through increased consolidation, and meet the requirements of RFPs that seek rebate programs.

Potential Risks of Customer Rebate Programs

Implementing customer rebate programs can also come with certain risks and considerations:

• Lower Margins: Offering rebates to customers may reduce the margins of solution providers, especially if customers negotiate high product/service discounts and cost-plus pricing. This can potentially lower VAR margins to unsustainable levels, impacting profitability.

• Dependency on OEM/ISV Rebates: Back-end rebate programs provided by OEMs/ISVs can change periodically, such as quarterly, semi-annually or annually. Solution providers that commit to long-term customer rebate programs assume that the anticipated funding from OEM/ISV rebates will remain available throughout the program's duration. There is a risk that these rebate amounts may fluctuate or even be discontinued.
• Expectation of Continuation: Once customers are enrolled in a rebate program, it becomes challenging to reduce or eliminate rebates in the future. Customers often expect the program to continue, and any changes may lead to dissatisfaction or loss of loyalty.
• Price Focus Over Value: Rebate programs can shift the focus of customers towards obtaining the highest discounts, lowest markups and most aggressive rebate offerings. This may result in customers prioritizing price over recognizing the value-added services or solutions provided by the solution provider. Such customers may have lower loyalty and may be more likely to switch to a competitor with a better price offer during the renewal process.

It's important for solution providers to carefully assess the potential risks and evaluate the financial implications, long-term sustainability, and impact on customer perception before implementing customer rebate programs. Proper planning, clear communication, and a focus on demonstrating value beyond price can help mitigate some of these risks.

Customer Rebate Programs: To Offer or Not to Offer?

Currently, customer rebate programs are limited to a select few solution providers who primarily target top-tier or global value-added resellers (VARs). However, a vast majority of organizations, approximately 90% with revenue under $250 million, do not have access to such programs, as reported by Gartner. It is worth noting that larger providers may still offer rebates, giving them a competitive edge.

Gartner's research reveals a growing recognition and interest in customer rebate programs among end-user organizations. This is evident through the rising number of requests for proposals (RFPs) pertaining to VAR consolidation or rationalization, specifically inquiring about rebate programs. Therefore, if your business decides not to implement a rebate program, it is crucial to prepare a well-considered response to explain this decision to potential customers.

If you choose to offer rebate programs, it is crucial to conduct thorough market research to design a customer rebate program that stands out as competitive among other VARs/solution providers. Additionally, it is essential to evaluate whether you have the necessary tools and systems in place to efficiently manage these programs.

If you find that you lack the appropriate resources, Enable's rebate management software offers a comprehensive solution that can streamline and automate the entire rebate management process, ensuring accuracy, efficiency, and effective program administration. By leveraging such technology, you can maximize the benefits of your customer rebate programs and drive success in meeting sourcing and procurement expectations.

Ultimately, the decision to offer customer rebate programs should be based on a thorough understanding of sourcing and procurement expectations, market dynamics, and the potential benefits and risks involved. By carefully considering these factors and taking the necessary steps, tech companies can position themselves strategically and meet the evolving demands of their customers in the highly competitive tech industry.

Download Gartner’s research: Meet Sourcing and Procurement Expectations for Net Spend Rebates as a Tech CEO to help make your decision.