What are customer rebates?

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What are customer rebates?

The Deal EconomyOctober 10, 2019

Introduction

Rebate agreements come in all shapes and sizes. Depending on your specific trading partners you may only be aware of a fraction of these or you may be deep in the detail of each and every one — from the simplest to the most complex.

With this myriad of rebate agreements, there is often a lack of consensus around terminology and processes. Some of this is down to individual businesses being unique and having their own internal deviations, but some can be down to misunderstanding the difference between vendor and customer rebate.

The distinction between the two types of rebate is vital if you happen to be involved in both, but due to the subtlety, many people involved in rebate may be unaware that rebate can be classified into these two forms.

What is customer rebate management?

For most, rebate is rebate, but for a select few involved in both styles, the difference between vendor rebate and customer rebate is a subtle, but crucial detail that their rebate management process or system must be able to handle.

At a high level, rebate is the return of a portion of a purchase price by a seller 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. A customer rebate is this transaction from the seller’s point of view. A vendor rebate, or supplier rebate is this transaction from the buyer’s point of view.

Fundamentally, all rebate agreements can be viewed from these two perspectives. The perspective that you view your rebates from will determine whether you are engaged in vendor rebate or customer rebate.

Customer and vendor rebates

What are the differences between vendor and customer rebate?

The type of rebate you deal with depends on your perspective in one singular agreement and should be assessed on a per agreement basis. In every rebate agreement, one party will be dealing in vendor rebate and the other party will be dealing in customer rebate. The amount of 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. Of course, in reality this is rarely the case and disputes often creep into the discussion.

A good analogy of this 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 of the same value.

Typically, merchants and distributors deal with vendor rebate as, from their perspective, they are receiving rebate from a particular vendor as a result of earning this through purchasing that vendors’ products.

This means that manufacturers and merchants, who are the vendors selling their products out, deal in customer rebate. They are paying out rebate to a particular customer of theirs as a result of that customer earning the rebate.

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.

Customer and vendor rebates

What other customer rebate management concepts should I be aware of?

As you may have surmised, some merchants can be involved in both vendor and customer rebate. This is because they are neither the creator of the product nor the final customer of the product, this means they must purchase the product and deal in vendor rebate and then must sell the product on to customers and deal in customer rebate.

For these companies, managing both types of rebate can cause great difficulty. To avoid becoming tangled in the mess of these 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 vendor rebate and customer rebate. This is because these are tripartite agreements involving a vendor, a merchant and a customer. The merchant as the middle man inherently deals with supplier and customer rebate in these situations.

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

What should I keep in mind when managing customer rebate?

While the agreements and therefore the rebate calculations are the same whether you deal in customer rebate or vendor rebate, the accounting approach differs. For vendor rebate, accounts receivable are involved whereas for customer rebate, accounts payable are involved. Quite vitally, in one situation you are posting profit to the P&L and in the other you are posting a loss.

For many, customer rebates can be even harder to manage than vendor rebate 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 clear knowledge of just how much rebate this customer is owed.

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

Conclusion

Customer rebate and vendor rebate go hand in hand in the rebate world. Understanding the difference is essential if you are involved in both the purchasing and selling worlds. Even if customer rebate isn’t something you are 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 styles of rebate and can identify which one of the two styles your company operates in. If you’re looking to implement a rebate management system, its essential to know that your chosen system can support the different nuances that each style contains.

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