What are distributor rebates?

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Forging stronger relationships through distributor rebate

The Deal EconomySeptember 26, 2019

Introduction

Distributor rebate agreements have been a staple of many large industries for decades, but are rarely understood by people outside of the few who operate deep in the detail. Whilst it’s hard to pinpoint where the invention of the rebate concept began, it’s easy to see the impact that this has had on trade throughout some of the most vital industries around the globe.

For example, electrical distributors report that up to 60% of their bottom line relates to rebate.


Stronger relationships

High stakes: rebates can be the difference between profit and loss

Whatever your interests as a business, incentivizing growth of sales or purchases and promoting loyalty are essential to successful long-term operation. This is where rebate proves to be the most invaluable tool imaginable.

Whether you are a distributor involved in paying rebates out to your customers, or a distributor involved in receiving rebate from your vendors, accurate rebate management must be a priority. This is because the successful and efficient handling of rebate fosters better relationships with trading partners and can be the difference between profit and loss for some companies.

The big idea behind today’s article, is to turn the concept of rebates on its head:

Improved trading partner relationships shouldn’t be seen as a happy consequence of effective rebate management, but should instead be thought of as the main goal.

What do we mean by that? Read on to find out!

The ‘man in the middle’

There are two main types of rebate. Typically, distributors are the middle man in most operations as they neither manufacture the product nor are the end users of the product. Due to this position, distributors can uniquely be involved in both types of rebate agreement as both a customer and a vendor.

The usual terminology in the world of rebate is to call any rebate which is paid out by the party concerned a customer rebate. This is because they are paying rebate to their customers in order to incentivize a growth in purchases and loyalty.

On the other side, any rebate received by the party concerned is referred to as vendor rebate. This is because they are receiving rebate from their vendor (who in this case would be the manufacturer) as a reward for their increased purchases.

Distributor rebate agreements tend to be based on volume, value or growth of purchases or sales of specified products from specified locations over the course of a specified timeframe.

Beyond finance: the power of collaboration

Looking at rebates superficially it would be easy to think that the benefit of effectively engaging with distributor rebate programs is purely financial, increasing the profit margin on specific products. However, you may be surprised to learn that collaborating with your trading partners around mutually beneficial distributor rebate agreements can provide the most benefit.

When all of the obstacles are removed and disputes become infrequent, resources will not be spent chasing after payment or arguing over details. With a single version of the truth stored in an independent system, trading partners have a frictionless route to the rebate they have earned.

In time, trading partners come to value frictionless trading and negotiating, perhaps offering beneficial rebate rates in the future or being more inclined to discuss potential amendments to agreements. Further to this, commercial teams can spend more time using their soft skills to form longer lasting relationships with trading partners.

How it’s done

Clarity

A rebate management system may well and truly be the missing piece of your rebate management puzzle. With it in place, you will be able to clearly see the full rebate picture for your business and solve many of the basic problems faced by those still in the dark ages of rebate.

Communication

One of the main blockers between strong trading partner relationships when concerned with rebate agreements is poor communication.

The negotiation process is often a disjointed procedure involving many internal and external stakeholders, with each having their own concerns about a particular agreement. Between the two trading partners this process is handled on different systems and often involving different product codes. This makes understanding the contents of a particular agreement a basic challenge with each revision of an agreement having to be translated.

Communication is further clouded by the fact that products move between categories or groups, are discontinued or added typically without informing trading partners.

Workflow

To solve the communication problem, a system could be used to facilitate negotiation and approval of the agreement from both sides. This system should also allow for each trading partner to supply their product codes and for these to be matched or translated automatically so that it is clear what is being agreed.

With a direct link to ERP systems this product file can constantly update to ensure that products shown are accurate in real time. This system can also act as an auditable store of signed agreements so that when payments are owed disputes are non-existent or easily resolved when both sides can consult the same version of the truth which has an extensive audit log confirming the validity of the agreement.

Automatic calculations

Another benefit of systemising rebate management is that calculations can be run automatically, more accurately (down to multiple decimal places using real time data) and more reliably (without the risk of human error).

This again will reduce the number of disputes and difficult conversations that are required between trading partners allowing them both to focus on analysing agreements and negotiating.

With proper analysis, the net net margin of distributor rebate programs can be understood and used to influence negotiations. Modelling future proposals can help both trading partners to identify what is most beneficial for themselves, allowing them to enter negotiations and model agreements that work from both sides. With the combination of benefits provided by a rebate management system, distribution rebate can reach another level in your business.


Conclusion

A rebate program for distributors can be extremely beneficial if handled correctly, but can also be a large drain on resources when handled incorrectly. The fine line between the two can often be the difference between profit and loss for smaller businesses.

In large-scale operations, even small percentages lost in rebate can be large amounts lost in pound value which could have been easily avoided with an efficient process. However, these mutually beneficial agreements can be extended and improved when commercial teams are given the information and freedom to negotiate properly and forge greater relationships through a dedicated collaborative rebate management tool.

This collaboration isn’t limited to just basic rebate and should even be extended to special pricing agreements (SPAs) — also known as contract support — and ship and debit agreements.

If you’re still looking to learn more about rebate for distributors, please check out some of our other blogs as well as our webinars and books.

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