Channel-partner incentives, collectively and imprecisely known as rebates, are huge, addictive and problematic programs for distributors.
One 2012 survey estimated total channel incentives in the U.S. to be $55 billion. That’s 80% of the reported $69 billion in total channel management budgets. A Silicon Valley survey reported the typical factory respondent ran an annual average of 21 incentive programs with an estimated overpayment of 6%.
Twenty-one incentive programs annually? Sure! Cash bribes get fast attention. Competitors understand indirect price cuts and can quickly follow, tweak and escalate with their own programs. But without effective plans for disciplining, tracking — and in some cases exiting — these initiatives, what happens? Factory list prices generally keep rising as backend channel incentive checks multiply.
For many distributors, rebates have become a large, itemized portion of profits. But, are there extra, sheltered rebate check profits? No!
Financial surveys from several associations show consistently weak financial returns over the past 15-plus years. But the costs of both rebate management and the mistrust that comes with these programs are real.
The psychology of losing a price savings
Because rebate checks appear to be extra in-hand savings, we might be somewhat blind to the larger economics. If one vendor had the courage to stop all incentives while lowering prices by the same amount, other competitors would exploit the psychological pushbacks. These programs boost retention, growth, cooperation, etc. Clearly, it’s easier to keep paying dollars than to stop the rebate game.
So, play smart! Here are a few rebate strategies.
Clean up rebates: Distributors, their buying groups and producers should check out cloud software offerings to promptly and most efficiently settle all rebates due.
Put your own data to work: Instead of simplistically pushing one vendor’s substitutable SKUs over another’s because of a bigger incentive percentage, make smart, strategic plans. Here’s how:
Rank vendors by rebate totals. Only a few big ones have rebate totals that matter.
Identify which vendor has the better net profit total by running separate profit-and-loss statements for competing vendors. This should show you that fatter rebate percentages don’t necessarily correlate with lower prices, lower freight-in and profitable customer buying habits.
Run a year-over-year comparison for operating profit growth trends. Which vendor has the best previous five-year track record for supporting where you are growing to? Make a list of the top five.
Create your action plan
For the overall weaker vendors who have substitutable commodity SKUs, rank customers that buy the target SKUs. Use this to create your switchover action plan.
Lastly, don’t forget to also pursue target-customer, service-value and team-selling wins. Partnering for a bigger share of the best-growing accounts will grow all factory rebates the most.
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