In our experience with businesses managing complex rebate agreements, we have come across multiple different styles of rebate deals. Some of these deals are rather self-explanatory, such as a fixed monetary amount or a fixed percentage of total turnover over the term of the deal.
However, as the area of rebate grew, rebate agreements became more complex and specific in order to provide maximum benefit for everyone involved. Why get a low rebate rate on all products (some of which you may never stock!) when you can negotiate a higher rebate rate on one of your most traded products?
Incentive rebates explained
What are they?
Incentive rebates are used to encourage purchases across a specified group of products. The incentive offered by the manufacturer or supplier means that the more you trade with this partner over the course of the deal, the better the rebate rates you receive. This helps to promote loyalty with certain trading partners and protects the supplier from the risk of their trading partners engaging with the competitors about similar products.
Obviously, suppliers also benefit from the larger quantities purchased which help them to leverage economies of scale and increase their presence in the market place.
Types of incentive rebate
Typically, incentive rebate can also be referred to as tiered rebate or targeted rebate as the incentives are often arranged in an order of incremental benefit. Incentive rebates themselves exist in three main varieties, namely:
- Volume rebate
- Value rebate
- Growth rebate
These themselves can then be differentiated in several ways as earnings can be a fixed amount, a per unit rate or a percentage when incentive targets have been met.
You may or may not currently deal in these types of rebate agreements, but a better understanding of how they work and why they exist can help to improve your rebate management processes and inform you heading into negotiations.
Do you want to learn more about the different types of rebate deals? In our pricing strategies blog post we looked at the top 7 types of rebate deals.
So, what exactly is a rebate?
Rebates are retrospective payments used to drive sales growth without simply reducing the quoted price by offering a discount. The essential element being that rebates, unlike discounts, are given after initial payment of goods.
Rebate agreements tend to specify which products, locations and types of transaction are included. For example, purchases delivered direct to site may be excluded from eligibility for any rebate earnings.
Volume incentive rebate example
In volume rebate agreements, rebates are earned when volume based turnover targets have been reached. This means that spend has surpassed a certain volume of product units.
For example, a volume deal could have incentive targets of:
- 5,000 units
- 7,500 units
- 10,000 units
Each tier of this volume deal could equate to earning certain per unit rebate rates, for example:
- $1 per unit
- $2 per unit
- $3 per unit
If your relevant spend with this supplier equated to 8,000 units of the included products, then you would have reached the second tier of the target bands and this would earn the second tier of the rebate rates. This means you would earn $2 per unit of rebate on all 8,000 units (equating to rebate earnings of $16,000).
Of course, volume deals could be simpler, earning a fixed amount at each target band rather than a per unit rate. They could also include percentages rather than per unit rates.
Value incentive rebate example
In value incentive rebate agreements, rebates are earned when value based turnover targets have been reached. This means that spend has surpassed a certain monetary value of product.
For example, a value deal could have incentive targets of:
Each tier of this value deal could equate to earning a specified percentage of the turnover that applies to this deal. For example:
If your relevant spend with this supplier equated to $3,500,000, then you would have reached the final tier of the target bands and would earn at the corresponding tier of the rebate rates. This means you would earn 10% in rebate on $3,500,000 (equating to rebate earnings of $350,000).
Growth incentive rebate example
In growth incentive rebate agreements, rebates are earned when certain growth thresholds are met. This means that your relevant spend with this supplier has grown by a certain volume, value or percentage above a specified baseline (where the growth baseline is determined with respect to the previous year).
For example, a growth deal could have incentive targets of:
- 2% above the baseline
- 4% above the baseline
- 6% above the baseline
Each tier of this growth deal could equate to earning a specified fixed monetary amount. For example:
If your relevant spend with this supplier was $1,000,000 last year and equated to $1,010,000 this year, then you would have reached the first tier of the target bands and would earn at the corresponding tier of the rebate amounts. This means you would earn $50,000 of rebate earnings.
The various different types of incentive deals offered typically depend of the specific manufacturer involved, some may deal exclusively in volume deals, some may only offer volume deals to buying groups.
A better understanding of the different types of incentive deals available — how they’re structured and calculated — can benefit the management of your company’s rebate.
That deeper understanding should put you in a better negotiating position going forward.