What are Special Price Agreements and Rebates Costing You?
For distributors in many industries, receiving special cost support from their vendors is critical in winning price-sensitive, end-customer or project business while maintaining profitability. In industries such as electrical, plumbing/HVAC, automation, and power transmission, vendors commonly provide distributors with lower costs than their everyday, standard into-stock (SIS) costs. These special lower cost levels are commonly delivered via Special Price Agreements (SPAs) or rebates.
In many industries, 25 to 50 percent or more of a distributor’s revenue may have cost supports from vendors, and that cost support may average a 10 to 20 percent reduction in product cost (vs. SIS). For this reason, it’s important to master the vendor cost support process and to identify and remediate missing and/or underperforming SPAs and rebates.
The Importance of Vendor Cost Supports
Vendor cost supports are critical to both the manufacturer’s and the distributor’s ability to win in highly competitive markets, and are critical to the distributor’s ability to earn a profit at customer sell prices that are often below their everyday SIS costs. Without vendor cost supports, the distributor likely cannot win the business at a profit. When the distributor can’t win project or end-customer business, they are likely to also miss out on related, higher-margin stock/flow add-on sales. It’s fair to say that a distributor’s ability to master the dynamic of vendor cost-supports is a central driver of their competitiveness, market share and viability.
While we can easily see the strategic and financial importance of SPAs and rebates, it’s not as easy to master this process. To begin with, a typical distributor has dozens of key vendors with hundreds of product lines and thousands of SKUs. In addition, they may have hundreds or thousands of customers and projects that are receiving — or could be eligible to receive — vendor cost support.
All of this adds up to thousands or even millions of potential vendor/product/customer/project combinations, each with different levels of potential and actual vendor cost supports. And, when we add in the time pressures to quote quickly (for customer and competitive reasons), the potential for errors and omissions grows further. Finally, each vendor has its own rebate-request process and/or platforms, creating workflow challenges for distributors, in terms of requesting cost support as well as certifying and claiming eligible payments across a diversity of rules sets and platforms.
Where Do Profit Leaks Occur in SPAs and Rebates?
A given vendor’s cost support for a specific product family — controlling for sales-opportunity type — varies dramatically. This is often due to a lack of analytics or systems and/or the variability of vendor pricing teams’ decision-making processes. The variability of COGS support for many such combinations may be 25 percent or more. For example, one distributor branch receives a cost support of 10 percent, while another receives 5 percent or 15 percent for an essentially equal sales opportunity. These variations may seem individually small, but their cumulative impact is huge: often 25 to 50 percent or more of a distributor’s baseline rebates and cost supports.
All of this complexity and variability produces sales and profit leakage for both manufacturers and distributors. Let’s look at the distributor side.
The four broad categories of rebate leakage distributors face:
1. First, there are customers or projects that are look-alikes to other customers receiving cost support, but not eligible cost supports from a given vendor (missing-customer rebates to existing customers).
2. Secondly, there are customers who receive cost supports for some of their products, but not for all their eligible products (missing-product rebates to existing customers).
3. Thirdly, there are customers who receive cost supports from a given vendor, but not at an optimized level that is appropriate for the type and size of opportunity (under-supported customer/product combinations).
4. Finally, there are non-customers or non-quoted opportunities that should be supported and quoted that were never identified or pursued (net-new market opportunities). All of these types of leakage potentially sacrifice revenue and long-term profitability for both vendors and distributors.
For a distributor to receive maximum vendor cost support to improve win rates and profitability, it’s critical to provide front-line seller and buyers with prescriptive analytics that identify for any given customer/product combination the appropriate range of cost supports to request. Buyers and sellers need more than a crystal ball to ensure this process works consistently and effectively.
The Next Step is to Leverage Your Data and Optimize SPAs and Rebates
For each SPA/Rebate vendor/customer/project combination, it’s important to identify and request the optimal cost support. The distributor’s buyers and sellers need to identify and remediate all the customer/project combinations for a given vendor/product family that were either not supported or supported at a sub-optimal level.
The “last-mile” requirement is to push the prescribed actions into front-line buyer/seller workflow to ensure the requests are made, and to track and quantify the outcomes. The impact is typically an improvement equal to 25 to 50 percent of baseline rebates, in addition to the increased market share and strategic positioning.
SPAs and rebates are a critical lever for manufacturers and distributors to grow revenue and profitability today. Those who leverage data, analytics, and workflow tools to optimize them will be well-positioned to outperform their peers. If you’d like to explore your SPA and rebate opportunity, let’s talk. Your sales team and stakeholders will be glad you did!