Why It’s Vital to Measure Rebate Deal Performance
By Mo Barsema, Industry Principal at Enable
At a time when inflation and economic volatility continue to roil supply chains around the world, it has never been more important for manufacturers and distributors to implement mutually beneficial trading agreements that will help them mitigate risks, reduce costs, and drive sales. These deals should include rebate programs that help supply chain partners improve their margins by securing greater market share and increasing brand recognition.
But a rebate deal has limited utility if you’re incapable of measuring its performance. Partners have to know whether their loyalty programs actually make an impact on market share, brand penetration, and their bottom lines to help them make informed decisions about whether and how to adjust these programs. Effective measurements of deal performance require accurate forecasting on monthly spend (which can be based on spending in the previous year or current year trends), as well as the ability to track the success of marketing and sales efforts.
Many people are responsible for ensuring the success of a rebate deal: sales and marketing teams, finance specialists, purchasing and pricing teams, and company leaders. All of these stakeholders have to be aligned on the core goals and mechanisms of the deal, which means they need access to a single source of information that can drive joint decision-making. The data won’t lie – it will show you which aspects of the deal are working, which ones aren’t, and how you can enable success.
Structuring a Rebate Deal
When supply chain partners negotiate a rebate program, they should remember that the primary goal is to incentivize the maintenance of a productive, long-term relationship. While the deal should challenge both partners to increase efficiency and improve margins, it should also contain safeguards that provide support when targets aren’t met. Supply chain issues have certainly weighed heavily on partner relationships and these issues have impacted deal performance. The central purpose of rebate programs is to put those relationships on more solid ground.
There are several questions suppliers and distributors should ask as they structure a rebate deal. First, are the performance tiers reachable? It doesn’t make sense to sign-off on a rebate deal if targets aren’t attainable. Use last year’s performance as a benchmark for figuring out what’s feasible and consider the impact certain business had on that performance, as business climates change. Second, after identifying the earnings potential of the deal, partners must establish if their rebate tiers are based on all products and/or certain product groups, as well as whether they’ll use remittances or purchases as the basis for calculating earnings. And third, partners must determine how cash discounts will be applied and which payment terms will work best.
Once this foundation is in place, suppliers and distributors can focus on performance goals and how to measure progress toward them.
Measuring Deal Performance
One of the clearest trends in the supply chain sector is the move toward end-to-end visibility, as it allows suppliers and distributors to identify pain points, replicate what’s working well, and improve planning. According to a global survey of supply chain leaders conducted by McKinsey, the top three targets of digital investments are: visibility, specific planning tools, and end-to-end planning. One likely reason for these investments is the fact that there’s a direct connection between measuring performance and strategic planning.
A critical element of performance tracking is the ability to forecast spend, which allows you to align purchasing decisions with business opportunities and track actual spending alongside what’s budgeted. Spend should be automatically adjusted on a monthly basis to perfect real time forecasting. Where there are misalignments between forecasts and real volume, calculated rebate earnings will adjust accordingly. Without robust data on past and future spend, it will be extremely difficult to accurately accrue rebate earnings and determine whether your rebate strategy is working.
It’s vital to understand the mechanics of your rebate deals right at the outset. When a deal is first negotiated, the details will affect everything from how payments are made to which performance metrics are used in tracking progress toward which goals. Your sales, marketing, procurement, and pricing teams will need this knowledge to help them maximize your rebate strategy across as many links of the supply chain as possible.
Bringing All Stakeholders Together Around Your Rebate Strategy
The implementation of your rebate deal requires a concerted effort across the supply chain. Beyond the company leaders who negotiate the deal, for instance, the marketing and sales teams are responsible for driving performance by promoting and selling the products that are included in the deal. Companies have to decide which marketing resources to use (such as MDF/co-op programs), as well as which markets and customers to target, how to capture market share from competitors, and how to measure these marketing efforts.
On the sales side, you have to train sales professionals to drive deal performance and determine how their efforts will be measured. You also have to decide if a separate incentive program is necessary to optimize rebate deals – such as rewards for selling high-margin, low-volume products. Once your rebate deal is negotiated and your sales strategy is in place, prepare to measure the key metrics: sales growth, gross margin, rebate growth, tier achievement (where applicable), and so on. When all internal stakeholders understand the goals of your rebate strategy – and have the digital resources they need to track performance – it will be easier to work toward those goals.
Rebates are essential for building more resilient and agile supply chains – the two central goals of professionals in any sector. But supply chain partners can’t simply implement a rebate strategy and hope for the best – they have to be capable of figuring out whether that strategy is working and making changes along the way. This is why suppliers and distributors have to take performance measurement seriously if they want to fully leverage their rebate deals.
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.
