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Pricing strategies: top 7 types of rebate deals

Posted by Andrew Butt on September 26, 2018 14:53:00

In our dealings with businesses who have to manage complex rebate deals we have come across over 300 different types of deal… AND we’ve mapped all of those options into our DealTrack software.

Whilst it is important to have all those deal types to give ultimate flexibility, we thought it would be fun to share the top 7 most popular scenarios.

First though, if rebates are hard to manage — which is why we created DealTrack in the first place — why are they so popular?

Vendor rebates, volume pricing, retrospective discounts and the like are a way of giving individual customers the “right price” without driving the price downwards.

Let’s suppose you supply bathroom suites to building supplies companies.  If you simply lower your price to become more attractive, one of two things could happen:

a — all your other customers will expect the same (lower price) and/or

b — your competitors will react by lowering their prices thus creating a downward spiralling price war.

Either option impacts profit margins for both you and the building supplies companies.

So the answer is often found in clever pricing strategies that seek to reward those who sell more by giving them the best margins.  The business reasoning stands up — those who sell more cost proportionately less to service (sales time, logistics costs, admin costs), and those who help the manufacturer to be in a position to produce more are therefore contributing towards economies of scale in production and shipping costs too.

The reward should be in the form of discounts against actual volumes not promised volumes for obvious reasons.

So, here’s our round-up of the 7 most popular types of rebate agreement:

1 — Product Launches

When introducing new products, it is common to link spend on the new range to discounts on regular purchases.  For example, a supplier might offer an extra 1% discount across the entire product range in exchange for a spend of £x on the new product.  This type of deal is also a great way to move people from placing the same “regular” order month in month out.  For the company who wants to stock the latest products anyway, this deal is enticing.  Until, that is, it comes to reconciling money spent on one range with discounts achieved on another. Most standard purchasing systems can’t help with this, but unless accurate records are kept the deal can fail to be realised.

2 — Growth Incentives

Where the supplier is keen to increase the total volume not just the individual order volume, a rebate based on incremental growth in orders is often used.

This could take the form of a year on year target, with a supplier rebate applying if the purchased volume exceeds the growth baseline.  That in itself can cause problems for buying groups or multi-branch operations who sometimes find it difficult to aggregate the total spend by product line from the previous year.

3 — End of life promotions

As old versions are being phased out, suppliers might plan to ship as much of the remaining stock as possible before the new version appears.  This is sometimes achieved through extra volume discounts on the old lines.  The same thing happens with changes to packaging design — buyers are encouraged through specific time-based discounts to shift quantities of the old design before the new one is released.

4 — Product mix incentives

To encourage buying groups and distributors to make purchases across a range of products, suppliers might provide a rebate based on total spend over a period.  Where the buyer usually buys only a few lines, this incentive is used to try to switch them away from other suppliers for other product lines.  Suppose you supply veterinary products and a buying group buys only medicines from you, and tends to get pet toys and accessories from elsewhere.  The buying group may have a relatively fixed demand for your medicines, and therefore little in the way of negotiating power.  However, by offering a reduction if they include other product lines into the mix, they get a discount on their medicine purchases and the supplier gets larger orders across the whole product range.

5 — Central Distribution Centre Rebates

In order to cut logistics costs, some suppliers prefer to deliver to a central distribution centre. This leaves the buyer with the cost and task of distributing to their branches / buyers from their CDCs.  For those companies who have existing transportation routes between their CDC and branches anyway, this can be an attractive proposition.  In these cases, whilst the purchasing company isn’t adding too much to their own costs by agreeing to ship from their CDC to branches, they can benefit from the discounts offered.  In fact, we know of at least one case where the total value of central distribution centre rebates funds their own transportation division!

6 — Marketing funds

Whilst these are not rebates per se, the provision of marketing funds conditional upon actually carrying out the marketing activity does impact financial reporting and needs to be accounted for — usually because the promised funds need to be accrued and claimed for after the event has taken place.  The difficulty is that most purchasing systems don’t provide the means to collate all the evidence that is needed for a claim.

7 — Conditional discounts

Any number of conditions could be applied to drive purchase decisions in support of the suppliers’ commercial and financial goals.  Some examples include:

  • A volume discount across all products
  • A rebate on a product range, provided the volume purchased exceed x in y months
  • A discount on one product range dependent on purchases of another. If you buy x of these you will get a discount of y off those.

So there you have it.  We’ve listed our top 7 types of rebate deal, but as mentioned earlier we have actually mapped out over 300 different types of deal in our DealTrack software to help suppliers and customers alike to record and manage rebate contracts.

In our experience, any single contract can have multiple deals within it, and each of them needs to be monitored, measured and of course accounted for correctly.

To find out more about managing the complexities of your rebate contracts, download our guide.

How to manage complex rebate contracts effectively

Topics: Procurement Excellence