What are market development funds (MDFs)?

Image

What are market development funds?

The Deal EconomySeptember 12, 2019

Introduction

Market development funds (MDFs) — sometimes referred to as ‘marketing development funds’ — are funds made available by the manufacturer to pay for marketing activities carried out by the vendor. Typically, this is to support the promotion of a new product or brand.


The basics

The timing of payments

Claims against MDFs usually come in the form of volume incentive rebates or retrospective fixed amount payments so should be included in your rebate management process. However, it is not uncommon for some MDFs to be paid at the beginning of the agreement due to the cash flow considerations from the vendors perspective.

Reliable tracking

Some MDF agreements often provide a fixed monetary amount and state certain activities that the manufacturer is willing to fund through this fixed amount, for example in store promotions or product launch events.

Manufacturers may exclude radio advertising, email campaigns and other activities at their own discretion if they do not deem them to be effective. In some cases, the manufacturer will claim back any of this fixed amount that remains unused after the agreement is complete. A reliable software system is required to provide proof to the manufacturer that marketing activities have been carried out.

MDFs can affect cash flow in different ways

Cash flow can be a point of difference in many MDFs that follow the above example. In some cases, the manufacturer may pay an amount and then claim back what is unused, in others the manufacturer may allocate a limited monetary amount for the vendor to use and the vendor claims each event from this amount when the event is complete. The difference is that in some cases the vendor receives cash to directly fund the marketing activity, whereas in others the vendor must fund the activity themselves and then are able to claim back against an available amount.

MDF scenario

Claim-backs

In other situations, the agreement may give the vendor the freedom to spend whatever they like in marketing the specific products, whilst providing a certain limited amount of this amount that can be claimed back. This claim-back is usually based on sales of the promoted items, allowing the vendor to gain maximum reward for the effectiveness of their targeted marketing campaigns. For some this could fair outweigh the advantages of a fixed fund amount.

MDF scenario

How do MDFs differ from co-op funds?

Many businesses may be dealing with both MDFs and co-op funds, but struggling to discern the differences between the two. While both are extremely similar — in fact some industries and business use them interchangeably as a synonym for one another — it is typical for MDFs to be a specific fund for vendors to use and co-ops to be incentives based on the revenue driven by these marketing activities (i.e. a proportion of sales of the marketed products).

From an accounting perspective this means that accurately accruing for co-ops can be another challenge.

In some industries the distinction between the two is as simple as co-op funds being for long term, perhaps annual, marketing campaigns and MDFs being used for short term marketing campaigns. However, the distinction between the two is not entirely clear-cut and varies from industry to industry and from manufacturer to manufacturer.


How to utilize market development funds in your business

The benefit of MDFs

Utilising MDFs helps manufacturers drive demand for their products through incentivising their trading partners. It also provides vendors with motivation to begin marketing campaigns for certain products as well as providing them with a safety net. With this approach, manufacturers hope that designated funds for marketing will drive customer demand for certain products which will drive vendor demand for the very same products from the manufacturers. This has the side effect of increasing the manufacturers market share.

From the other perspective of MDFs, vendors benefit from greater demand themselves. With this greater purchase volume, the vendors may benefit indirectly as customers are driven to them allowing for the opportunity to upsell other related products which are not being marketed. The marketed products and the other products may both be subject to rebate agreements also, meaning that vendors could potentially have lots to gain from a well-structured and effective marketing campaign funded by an MDF.

Another benefit of MDFs is that they can be targeted to certain geographical locations or times of year. These factors are often vital in determining whether a specific marketing campaign will be successful or not.

The benefit for both trading partners can be worth the time and investment required to effectively manage this process. With a system that can automate the management of MDFs, companies would be more able to focus time and resources on specific marketing activities themselves.

The challenges of MDF marketing

Some basic challenges of MDFs are tracking the amount spent on marketing activities against the amount available and having a record that MDF agreements exist in the first place! In some cases, a business needs to know whether they have market development funds outstanding that need to be refunded to the manufacturer as they haven’t been spent.

For the MDF style based on sales revenue of promoted items, the main challenge is having accurate information in which to base your accruals on. Having an automated system to accurately calculate the amount expected from trading partners will greatly assist with this.

Perhaps the most glaring challenge of MDFs is in reporting on their effectiveness in order to model and compare any future proposals. Having the power to identify the impact of time, location and other variables can help you to negotiate more beneficial deals. This can impact rebate agreements also, allowing you to target rebate agreements to include products that supplement the marketed products. Thus, providing maximum impact on upselling related products. Unfortunately, many businesses just do not have this information to hand and are not fully empowered heading into negotiations. This means that they do not request the most beneficial MDF agreements.


Conclusion

Having the ability to automate calculation of MDF earnings and assess their effectiveness and value to your company via forecasts, modelling and comparisons provides huge benefit.

Freeing up resources to focus on gaining maximum impact from marketing activities and negotiating the most beneficial types of marketing support based on accurate historic results allows both businesses and their trading partners to improve on the earnings MDFs help to stimulate. This in turn can improve trading partner relations and help both businesses to grow their market share.

Read other articles from our blog

Latest

Research at Enable

We use a dedicated research process to ensure that new opportunities to improve both our clients’ products and our own standards aren’t missed.