From Counting to Measuring and Managing Vendor Funds
Vendor monies that support reseller sales are big business. US-based research conducted in October 2018 estimates that, at top performance levels, distributors, dealers, and retailers use $600+ Billion (USD) in vendor funds. Projections from the EU find that approximately €500 Billion (EU) in vendor funds are similarly spent. These vendor funds are found as four primary types including:
- SPAs - Special Pricing Agreements used by sales to compete with a competitor’s special pricing to a customer
- MDF - Marketing Development funds used by marketing and sales for a specific vendor. Typically, these are used to launch new products, introduce existing products to a new segment, etc.
- Co-op Funds - These are funds where the vendor matches (co-ops) reseller funds for a variety of marketing and sales events
- Rebates or Volume Rebates - These are funds based on a predetermined purchase volume where funds, normally over a threshold, earn a percentage of volume during a time period.
SPAs, MDF, and Co-op funds are called "front-door funds" as they are used to increase sales whereas rebates are termed "back-door funds" as they are based on purchase volume during a time period. There is a movement by vendors from "back-door" to "front-door" funds, however, volume rebates are significant and preferred by resellers as they are often kept out of the product cost file and hence don’t end up in customer pricing decisions. These monies, used for decades, are undergoing changes in policy and usage. As e-commerce has grown, the end customer’s research on pricing, availability, and application have soared. Today it is estimated that 8 in 10 products are researched before purchase. Our research finds that these funds are forecasted to increase by resellers. Any increase in these funds falls back on the vendor for accuracy, timeliness, efficiency and effectiveness of use. The sheer size of these funds in today’s channels means that slight missteps in their usage can cost significant damage to profitability. New thinking, measurement, and management of channel funds is needed in the Digital Age.
Counting vs Measurement and Channel Transparency
Most attempts to track vendor and reseller funds has been a mix of spreadsheets, ERP software, and proprietary solutions. The funds were, primarily, counted by vendors and resellers with little, if any, benchmarking on fund usage between companies. This is contrasted to accounting performance ratios, compared anonymously, for decades, between distributors for insight into performance. We literally know of no benchmarking regarding vendor fund expenditures even as their usage increases. As funds move from "back-door" to "front-door", vendors become increasingly in need of information regarding their effectiveness. There are also considerations of proportional fairness for issuance of funds as vendors should not give greater assistance to one reseller over another for the same competitive event. As the need for pricing exceptions grow, so does the need for accurate tracking of funds, their usage, and effectiveness. This will grow as B2B E-Commerce grows which, today, is approximately 15% penetrated; there is a need for significant improvement in vendor funds’ measurement. The upshot is that vendors need accurate Point of Sale information for the products sold, their price, and customer demographics. Our 2018 research finds substantial differences in vendor fund performance, depending on the way that they are treated. In fact, our survey shows that managing Special Pricing Agreements is linked to higher margins. We used the annual COGS (cost of goods sold) as a denominator and asked distributors about their usage of fund types. Top performers used vendor funds at the rate of 16% COGS, average performers at 7% COGS, and below average at 3% COGs. As most distributors have a ROS (Return on Sales) of somewhere in the 3% to 6% range, the difference in fund performance can be critical. Our further research found that firms who used specialized software to track funds had a full 5% COGS advantage over their competitors (12% vs 7%) in combined SPAs and Volume Rebates.
Turning POS Data to Informational Advantage Across the Channel
The stakes for fund maximization, effectiveness, and return on investment are high and growing. Today, most vendors and resellers look as these funds as “shadow monies”. They are counted as received in a variety of accounts including reductions from COGS, other income, etc. They are becoming of critical interest to distributors and manufacturers. The movement of commerce online and the increase in competition between mature, established channels and new online competitors is driving traditional resellers to seek additional funds to compete. Manufacturers, who are the majority source of these funds, have much at stake:
- First, they can overcompensate a channel for its value; both increasing grey-markets and creating a profit destroying path to market.
- Secondly, they can issue funds for competitive bids to one reseller and not another—for the same event.
This runs afoul of pricing legislation that, however lightly used today, is always present and costly. Lastly, manufacturers fail to learn the market demographics of their reseller’s success or failure which, eventually, impacts their success. Profitable channel policy cares not only what the reseller purchases, but what they sell, who they sell to, and at what price level. And resellers find that sharing POS information creates a better relationship where factual data is accurate, timely, and is significantly stronger than data that is experience-based or stale and questionable fare from the field. We’ve illustrated the need for timely, accurate, and transparent information flows across the channel in Exhibit I.
The Exhibit depicts a traditional two-step building supplies channel of manufacturer to distributor to end user (contractor).The information in the channel is held by the title owner of the goods under the heading "Traditional Channel Flows". In essence, the manufacturer has information on the sale to the distributor and the distributor has information on the sale to the contractor. It is likely that the contractor found out information about the product from the manufacturer’s site as some 80% of all products are researched before they are purchased. This is especially true if the product is new on the market or the technology is unfamiliar to the end user. In this channel configuration, much is left to “guesswork” on marketing and sales policy. Manufacturer efforts to help distributors secure customers is likely to fall on heuristics and, in a dynamic market, the information is often stale and policy is ineffective which means marketing funds to resellers have a poor ROI. In the second “horizontal” half of the Exhibit, titled Point of Sale Channel Flows, information from the end user sale is funnelled back to the manufacturer. This creates advantages for all channel members. Vendor funds become more accurate to drive sales including specific programs for thin-sliced market segments. Distributors can funnel information back to the manufacturer which creates usable information for marketing and sales planning for the distributor. Additionally, distributors can secure better vendor partners; the vendor who dissects the point of sale information is a more successful partner in both sales-growth and channel efficiency. Managing across the channel with “transparent” information may seem like many business concepts; more utopia than practical. However, many world class manufacturers have long used POS information with their resellers including Parker-Hannifin, Emerson Electric, and 3M. Today, however, the transparency of information is becoming a necessity as fund monies increase and competitive reactions change with increased frequency as e-commerce grows.
The Role of Software and Marketing Fund Performance
Information sharing and transparency in the channel quickly runs into logistical issues. The type of data needed, its frequency, and analytical framework needs consideration. This, along with the number of vendor to reseller relationships makes it a daunting task to secure and successfully use POS data. Our research and experience in channel management using POS data, yields several best practices including:
- Vendors and resellers should agree on how the data is to be used, what is expected, and expected outcomes before a POS project is engaged
- Fund monies should be based on performance from POS information. If sales and profits increase because of better information, funds should increase. If sales and profits decrease from shared information, funds should be carefully reviewed before further expenditure.
- Software, common to both vendor and reseller is the best solution in gathering, sharing, and analyzing POS information.
Common software in making channels transparent is, more often than not, unusual if not rare. Most vendors and resellers are independent as are their software decisions. Our research, however, points to a significant performance gap for distributors who use specialized software to track, manage, apply for, and reconcile vendor monies. In the research, vendor monies’ usage was some 40% more for distributors who used specialized funds tracking software. Based on this and our experience, it is recommended that for the Pareto vendors (20% of vendors accounting for 80% of total purchases) resellers should, as much as possible, insist on a common software platform. Today, a common software platform across the channel is an uncommon request. However, as e-commerce grows at 8% per year in the B2B sector and will reach 30% of all transactions in a decade, the need for POS information sharing is real and growing. Today, far too many vendor monies are used without a proper accounting of their effectiveness (ROI) and the processing and administrative costs (efficiencies) are poorly understood but often significant. They are inclusive of lost funds, denied claims, and opportunity costs relating to visibility and speed to market. Because of increased variability in price and availability in the Digital Age, the need and future for funds tracking and management software is significant and can, rather easily, offer a timely payback on its investment.
Future of vendor funds
The advent of e-commerce, especially in B2B sectors has created a much more dynamic environment for resellers and their vendors. Pricing, availability, and changes to existing policy are commonplace and rapid. Hence, vendor monies for reseller market and purchase growth are significant and forecasted to grow. The tracking of these monies, and their reimbursement, and reconciliation is only part of their expenditure. As front door monies grow, so will the need for a more detailed understanding of their marketing and sales demographics including customer information, segment information, competitive information, as well as information of the individual sale. Channel Partnerships in the Digital Age will be defined less by product functionality and application, and more about the sharing of information about the sale and the customer. The stronger partnerships will have better information transparency across the channel. This information need will be ongoing and voluminous. Rebate management software specific to the task has been shown to be highly effective within the reseller efforts to manage these vendor monies. Shared common software for the vendor and reseller will do much to develop winning partnerships as e-commerce increases its growth.