November 6, 2012
My colleague Colin Carroll recently gave a very comprehensive discussion of Rebate Best Practices at his blog. As pointed out in his article, rebates are a critical part of B2B pricing, but why use them at all? This was a question I got when shopping recently and I filled out a form to get a rebate from a manufacturer. My daughter asked why the shop just didn’t deduct it from the price.
I tried to list the many reasons that rebates are used. This should be read as an introduction to Colin’s article, which explains exactly how to use each of the types of rebates given below.
1. Intelligence from end user in a channel environment
Let’s start with one of the reasons that a manufacturer would include a rebate to a consumer like me. When I buy my product from a local store, I might be a long way down channel via a wholesaler and retailer.
Generally, very little information about me, the consumer, is obtained from such a transaction. And what information is gained stays with the retailer. How can manufacturers get information on their end customers? Answer: End-user rebates, such as the one pictured above.
These low value Rebates are often used to gather intelligence about who is buying the product, from which channel and at what till price. This is very valuable information to the manufacturer, and they are, in effect, paying for valuable market research.
2. Price masking
This is a different kind of rebate, designed to drive product mix and volumes without creating downward pricing pressure. This is very common in car dealerships in the US where consumers are asking to see the “factory invoice” from the manufacturer. So the dealer can show an invoice which says that the A4 cost him $22,750 from Audi. “So I couldn’t possibly sell it for less than that.” Sounds reasonable until you find out that Audi will give him thousands of dollars of rebate when he sells the car.
This is also why your plumber gets a rebate from Home Depot, so he can come back from the store and show you the (higher) invoice as his “cost.”
3. Channel support
Manufacturers want to be able to negotiate directly with their largest customers, but still have the customer serviced from a local distributor. In the building trade I might cut a deal with a large house-builder to provide bricks at £200 per pallet, instead of the distributor’s usual fee of £250. The distributor doesn’t want to mess about with multiple prices for the same item, so at the end of each quarter they send me a document listing how many pallets they sold to this house-builder, and I reimburse (via credit note) at £50 per pallet sold.
This is called “Ship and Debit” or “Proof-of-Sale” in the US.
It is really like “coupon clipping” for B2B. Same sticker price for all, but preferred customers end up paying less.
4. Encourage certain behaviour over time
Volume rebates fall into this category, a rebate which the customer can earn over time. This is better than offering a lower unit price up front on the hope that the customer will buy at the volume promised. This approach can also be used to train a customer to lower cost of sales, by earning a rebate for using an EDI Channel, or eliminating lots of small orders.
5. Making a transfer between departments at your customer site
I’ve seen this one where the supplier is using rebates to move funds from a branch to head office. Since the rebate credit is received by the centralised purchasing department, the head office is in fact grabbing some of the margin from the branch. For example, it the product cost a consumer 100, and the branch paid 60 then the branch makes margin of 40. If the supplier structures it so that the branch is charged 70, but the head office gets a rebate of 10, the total deal between the buying and selling organisations remains the same. But the supplier has moved 10 dollars from the branch to head office.
6. To prevent a public price war
Rebates hide the true price from my competition, so they appear higher than they really are. This can be a way of avoiding a price war.
– James Marland