September 11, 2013
As mentioned in my last post, rebates are employed to manage incentive programs to achieve business objectives and to improve the effectiveness of selling through distribution. Following my description of incentive rebates, I will continue to highlight common rebate types this week by providing an overview of channel management rebates, including: Ship and Debit Rebates, Indirect Customer Rebates, and Price Masking Rebates.
Ship & Debit Rebates
Ship & Debit rebates are a special use case. They are rebates, in that they represent an off-invoice discount which camouflages the actual price, but Ship & Debit Rebates are associated with a sale made through a stocking distributor.
A typical scenario of a Ship & Debit Rebate:
1. Manufacturer sells to a stocking distributor
– Distributor buys roofing tiles from Manufacturer
2. Distributor buys to hold in inventory, purchasing at either List Price or a negotiated “Into Stock” price
– Manufacturer invoices distributor at Into Stock Price of $100/case
3. Distributor competes for specific large job: Cal Tech’s new Earthquake Center
4. Distributor calls Manufacturer for price support
– The Cal Tech job is large, very competitive, and Distributor needs to match a competitive situation
– The end-user price is $90/case, a price lower than the Distributor’s Into Stock Price
5. Distributor wins the Cal Tech job
– And ships 200 cases of roofing tiles from their inventory to complete the job
6. Distributor files a Ship & Debit claim
– 200 cases x [Into Stock Price – End-User Price]
– 200 cases x ($100 – $90)case = (200 x $10) = $2,000
7. Manufacturer pays a Ship & Debit rebate of $2,000 to Distributor
In many cases, a manufacturer may have volume, mix, and growth rebates with the same distributor, and have volume rebates with the end-user, and pay Ship & Debit claims on the same transactions. The net price for these sales would be the calculated net of ALL rebates.
Best Practice: Pay Rebates on Net or Pocket Price Points
In complex channel environments or when selling to large customers, a supplier may have multiple rebate programs on every transaction. The best practice is to pay rebates, not on invoice price, but on pocket price.
a) A supplier has monthly, quarterly, and annual rebates with a “big box retailer” and pays a co-operative advertising discount of 2%. The supplier should pay the annual rebate on the price net of monthly and quarterly rebates, and net of the cooperative advertising, if possible. The dollar impact of the difference is significant.
b) Another supplier has rebates for the distributor, end-user, and buying group. The buying group rebate should be paid on the end-user price, and net of freight, if possible. This is not always commercially possible, but at the very least, the supplier should make this point as a begrudging concession during negotiation.
Indirect Customer Rebates
Indirect Customer Rebates, sometimes called end-user rebates, are rebates between a supplier and an indirect customer: that is, the seller never invoices this customer. Despite selling through the channel, the seller has visibility into major end-users, the supplier’s indirect customers, and wants to reward or motivate specific end-user behavior despite not having a credit or billing relationship with that customer.
Indirect Customer Rebates are an effective tool for maintaining a strategic supply relationship with an end-user, and driving mix and volume objectives, despite the absence of a billing relationship. In most cases, Indirect Customer Rebates take the form of a check, as opposed to a credit memo, which would be the case when a billing relationship exists. The servicing of “national accounts” often involves rebates of this kind.
Indirect Customer Rebates and Ship & Debit Rebates often apply to the same transaction.
Price Masking Rebates
The other common driver of rebate use is the desire to keep the “real” price from being visible in the market. Because a rebate is, by definition, an off-invoice discount, use of a rebate allows the supplier to issue an invoice at a price that isn’t the actual, or net, price paid by the customer. Price Masking rebates, sometimes called shelter upcharges, are designed to allow invoicing at a price that is artificially high.
Price Masking rebates and shelter upcharges stem from a desire to avoid self-induced downward pricing pressure in competitive and transparent markets. In these situations, a supplier agrees to a price for a given customer, but does not want to risk having that price become visible in the marketplace, rightfully believing that a price that low will cause market erosion. If other customers learn of that price, they too will want it. Instead, the supplier invoices at a nominal price and then employs rebates to bring the customer’s price down to the agreed net price. In this case, rebates are an effective method of quoting a low net price while invoicing at a higher price. The supplier recognizes that rumors of low net prices are one thing, but a low price on an invoice is the kind of evidence that can move markets.
Note: Price Masking rebates and shelter upcharges have been determined to be anticompetitive and illegal in some forms. Shelter upcharges are not a best practice, but you should be informed should they come up.
Similarly, when a corporate office does not want its regional offices to have visibility into true cost, the corporate office will often ask the supplier to issue all invoices at one price and then rebate the difference. National distributors frequently request this type of rebate from their suppliers, effectively masking net price from their regional branches.
Avoiding any action that will create downward pricing pressure is a very good reason to employ rebates. But, if a supplier’s organization has trouble with the administration, management, or analysis of rebates, these tactical pricing options will be unavailable to them or more trouble than they are worth.
Whether you are using rebates to reward incremental volume, avoid customer gamesmanship or mask your true price on an invoice, rebates are a strategic and tactical pricing tool. Every element in the price waterfall of a business should, therefore, be for a specific purpose. This is especially true of rebates. If your business uses rebates, it should employ a set of rules for when rebates are applied, how they are evaluated, and a detailed definition of the process for applying them.
We’ll assume that if you are reading at this point you do have rebates. The question for you then is: Are rebates helping you accomplish your stated pricing goals? Check back next week to learn how to put rebates to good use!