Why your company needs a rebate program
By: Mark Gilham, Director and Evangelist at Enable
Profitable supply chains are built around healthy relationships between manufacturers, distributors, and all other relevant stakeholders. To fully leverage these relationships and make them as profitable as possible, companies focus on availability, agility, reliability and product support to create a trustworthy relationship. This is coupled with pricing and joint marketing strategies, typically offering discounts and promotions to encourage sales growth.
A common objective of these strategies is developing the ability to encourage volume through the supply chain using discounts. However, offering discounts may reduce the market perception of the value of your goods, which can be difficult to undo once created and will have lasting effects on the supply chain for those goods. In other cases, marketing & promotional efforts can become stale and therefore ineffective. Companies may also struggle to encourage changes to sales mix towards higher-margin products without excessively diluting margin in the process. In these cases, companies should consider developing and implementing a rebate strategy.
Unlike discounts and promotions, which are often blunt force pricing instruments, rebates are much more subtle and can be designed to meet a partner’s unique needs. For example, they can help companies get the sales mix just right by rewarding increased activity on specific products or ranges.
Rebates are among the most effective tools for building and sustaining relationships between supply chain partners because they give companies compelling reasons to continue doing business together. Rebates can also help partners track performance on a more granular level, which leads to accountability and better decision-making. These are all significant competitive advantages — especially at a time when economic contractions and supply chain disruptions are putting immense pressure on business relationships.
How rebates improve relationships across the supply chain
It’s often critical for new product lines to gain sales traction quickly to achieve market penetration. For this to happen, customers must clear out potentially large quantities of existing stock. For example let’s say you’ve just launched an environmentally friendly range that aims to improve your margins and improve environmental credentials. However, this range is more expensive and currently less popular than your current products in the marketplace.
One option is to discount, but that may create an irreparable price point, it may also affect pricing of your other ranges which is the last thing you desire. Alternatively you can offer a rebate — such as annual incentive targets which are banded — whereby customers who purchase more of the new range receive a rebate on either just the new range or everything. Alternatively, the company can offer a ratio incentive which pays out a rebate when the customer meets a requirement, e.g. 25% of purchases must be in the new range, this can be tiered too. The key is to model your desired outcome and do the math, monitoring is then key to understand how effective the rebate terms are.
Rebates also allow partners to reconcile forecasts with reality — if a company orders too much or too little of a product based on faulty assumptions about how the market is behaving, retrospective rebates can ensure that the financial consequences aren’t as severe.
One central purpose of a rebate strategy is to help companies build more sustainable relationships by providing incentives to continue working together. These incentives can be customized to account for a wide range of sales strategies, market volatility, and overall business goals. Rebates also help companies navigate economic crises like the one we face today by enabling them to quickly adapt to changing market conditions through pricing adjustments that can lead to new volume dynamics.
Measuring the performance of your rebate strategy
Although supply chain executives say end-to-end visibility is the top factor in creating a successful supply chain, just 6 percent are “very confident in their systems and capabilities” for securing this level of visibility. Operational visibility is essential for any effective rebate management strategy, as it allows companies to determine whether rebates are helping them meet sales targets and make adjustments accordingly.
Other forms of visibility are crucial, too. One way to make rebates more profitable and minimize the possibility of disputes is to improve your ability to produce accurate forecasts. While the right rebate strategy can help supply chain partners correct for unanticipated market developments and economic turbulence, this strategy should be much more than a financial safety net. When companies make informed decisions about how products will perform, which market segments should be targeted, etc., they will be able to develop creative rebate solutions that allow them to generate demand and optimize their sales mix.
It’s no surprise that 69 percent of supply chain professionals regard predictive analytics as a high priority. After years of pandemic-driven supply chain bottlenecks and disruptions — and with soaring inflation and geopolitical tension causing a new round of economic problems — the ability to gather and analyze accurate data about shifting consumer sentiments and other market forces is invaluable. This ability is also vital for the development of your rebate strategy.
Maximizing your rebate performance
Rebates are powerful tools for generating revenue and building healthy relationships with supply chain partners, but they must be deployed properly or they can be damaging to business. Companies should use a digital rebate management platform to negotiate and track deals, provide a single source of information for all stakeholders, and centralize rebate processes. An Enable survey found that more than one-third of companies still use cumbersome and error-prone manual tools like spreadsheets to negotiate and document rebate deals.
Companies must be strategic about how they negotiate and manage rebates. For example, if you’re using rebates for the first time, start with a couple of clients — it’s likely that you won’t get the terms perfectly right, so do some testing and refining before moving on to your large accounts. Once you have a promising rebate strategy, clarity and transparency are critical at every stage of the implementation process. It’s impossible to build trust and keep your partners engaged if you don’t maintain open lines of communication, and this includes sharing performance data in both directions. Visibility is everyone’s responsibility — you can’t make informed decisions about what you haven’t measured.
As relationships between supply chain partners continue to suffer amid economic turmoil and disruptions, rebates are only going to become more important. Companies face surging supply costs and an unpredictable demand environment. Rebates won’t just help supply chain partners mitigate the risks posed by these factors — they’ll uncover new pathways to value creation and forge stronger relationships between companies.
Mark Gilham started out his career at major financial institutions Barclays Bank and Royal Bank of Canada where he qualified as a chartered accountant. From there he progressed to senior finance roles in the construction industry, most recently being at Grafton Group PLC for nearly a decade where he witnessed first-hand the strategic value of rebates. Becoming an expert in the world of rebates has led him to being quoted by Harvard Business Review and to his newly appointed role at Enable as a Director & Evangelist. There he will be responsible for helping businesses use rebate as a strategy to drive growth and trust between trading partners.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
