For many B2B industrial distributors, volume rebates account for a significant portion of their earnings before interest and taxes (EBIT), so it’s important to track and manage these deals. Manufacturers pay these rebates to distributors when the distributor exceeds certain quarterly or annual purchase thresholds. Sometimes these are referred to as ‘growth rebates’ because distributors have met a certain growth threshold and their relevant spend with a supplier has grown by a certain volume, value or percentage above a determined baseline.
There are several marketing/buying groups in the marketplace that promote and support volume rebates for their distribution members. If you are a member of one of these groups, it’s a step in the right direction. However, you still must have a hands-on approach to manage your rebates. Whether you’re a member of these groups or not, know that volume rebate opportunities exist and should be part of your strategic sales and profit plan for the year. Proactive distributors who plan, negotiate with their vendors, and implement a strategic rebate process end up building stronger channel partnerships and are successful in maximizing their year-end profits.
Plan: Develop a Plan That Will Maximize Your Rebates
Managing rebates to realize thousands of dollars in additional NET profit is not necessarily tricky, but it is time-consuming and takes a coordinated effort between management, sales and marketing. It is important for the senior team to set revenue and margin volume rebate goals annually. Once defined, communicating the goals to everyone in the company is paramount to its success. Departments who have primary responsibility for the program’s success will generally be Sales, Marketing, Finance and Purchasing. The team then needs a specific playbook to execute this plan.
Manage Your Rebates for Next Year by Planning Them This Year
Heading into the fourth quarter is primetime for budgeting and setting plans to execute the following year. During this season of planning, decide which manufacturers your company will partner with and consider market trends. Keep in mind the manufacturers’ position in the marketplace as you research potential partnerships and what kind of support you would have from them. Think about which vendors you partnered with during the previous year and customer demand for products and services compared to previous year volume. Researching vendors prepares you for negotiation opportunities with vendors and manufacturers that are sure to come.
Negotiate the Terms of the Deal with Manufacturers
Many distributors accept what manufacturers offer without much negotiation, especially as members of marketing/buying groups. If you have a manufacturing deal within a buying group, find out what is essential to the manufacturer and negotiate an additional deal over and above the buying group deal. Make sure you understand all the deals within your buying group because some are straightforward while others require planning and strategy. Review any big buys you placed year-end the previous year and negotiate them based on this year’s target. Use the KISS principle, “Keep it simple, silly.” Do not overcomplicate the deal and do make sure any agreements you make are trackable within your ERP system. Negotiate all deals so they pay back to dollar one, rather than negotiating solely based only on growth. Remember, distributors, you have the power to negotiate the contract deal.
Execute: Communicate with the Team and Delegate Tasks Aligned to the Rebate Plan
After planning and negotiations are agreed upon and completed, the next step is to get the organization involved. Each department plays a significant role at certain stages in the plan for rebates and revenue growth. Once you decide which manufacturers to create rebate plans with, announce the list to your organization and assign internal rebate responsibility to a senior member of the team.
Construct a comprehensive, cross-departmental committee that includes purchasing, finance, marketing, sales, project sales and pricing to oversee and manage the process. Create a platform (such as a spreadsheet) from which all deals can be evaluated and tracked against their individual goals and each other. You want your spreadsheet to become a forecast of sorts for your contract deals.
The marketing and sales departments will have the responsibility of developing a year-long promotional plan that supports the revenue growth of the rebate plans. Create and put together Sales Performance Incentive Funds (SPIFs) for the sales teams. Marketing and sales will report back with results of those promotional efforts during the rebate committee meetings.
Once team members have taken on their tasks, hold internal meetings throughout the year to keep the organization on track as you carry out your plans.
Track: Check Your Progress Throughout the Year
Monthly committee meetings allow you to monitor how your organization is performing and gives the team an opportunity to report to the internal rebate stakeholders. It’s important to have stages at which you check in with your vendors concerning rebates, using the information received from your organization during committee meetings.
Stage One (January – April)
Update spreadsheet with YTD numbers, monthly. Start projecting out the full year, using your historical norms to feed the projections. Monitor marketing activity to ensure it supports the rebate plans and then send monthly updates to sales on your progress. Make sure your project team is fully aware of these activities, as they usually have discretion on where to place through stock small project business. Review non-rebate manufacturers product sales and purchases to ensure you are not bleeding sales and purchases away from a rebate vendor.
Stage Two (May – September)
Continue the activities from the previous two stages. Where it makes sense, and to reach certain purchase thresholds, negotiate one-time end-of-year buys. Ask for lower into stock cost and don’t give these lower cost or discounts away. Treat this as a one-time PO discount, so you do not lower your COGS in your ERP. Ask about extended dating, if you are purchasing a 60- or 90-day supply ask for 90 days dating. Build additional marketing activities and sales promotions (SPIFFs) which will result in increased sales activity.
Stage Three (October – December)
Provide vendors with YTD progression. When you’re six months into the plan, compare your results to historical projections and if projections point to a shortfall of 20 percent or more, work to re-negotiate the plan. Make sure you have data that substantiates the shortfall. Here is when you ask vendors for additional “home run” targets. Hit a number 10 percent higher than the target number and they’ll add half a percent back to dollar one.
Using different volumes and rebate percentage scenarios, determine how you will reach your stated rebate budget. In other words, think about whether to focus more on vendor “A” verses vendor “B” because of rebate percentage or current YTD volume. Redirect sales and/or marketing teams, if need be. Double down on plans where either your performance has exceeded expectations, or where the vendor has offered additional incentives.
Go Beyond Marketing and Buying Groups to Manage Your Rebates
Careful planning and execution of your rebate management should ultimately support the strategic direction of your business. Managing your volume rebate programs will result in substantial increased NET profit dollars. Actively managing and tracking your progress on rebates ensures you leave no money on the table when it comes to your volume rebate deals. The extra dollars you receive from rebates flow directly to your bottom line. Distributors who actively work their buying/marketing groups to maximize their rebate return are the ones who realize hundreds of thousands of dollars more than their peers.