Pricing

Rebates Best Practices Part 2: Incentive Rebates

By Colin Carroll
August 26, 2013

Following last week’s post introducing rebates, I will now shift to highlighting some common rebate types, which can be categorized by business objective and customer type. Essentially, rebates are employed to manage incentive programs to achieve business objectives and to improve the effectiveness of selling through distribution.  For this post, I will focus on examples of incentive rebates, which include: volume rebates, growth rebates, retention rebates, and mix rebates.

Volume Rebates

Volume rebates are the simplest rebate and are designed to limit customer gaming and over-promising. Instead of quoting a price driven largely by the customer’s “intended,” or “promised” volume, the seller responds with tiered pricing where the Invoice Price is fixed, but the actual price varies with volume and the difference is granted by rebate.

Example: In response to a customer inquiry, the seller quotes these volume/price combinations.

chart 1

Table 1

The example follows a simple story where:

– Quantity refers to the quantity of each order, rather than the cumulative quantity.

– And the quoted price is not the invoice price, but the price, net of rebates.

– In all cases, the supplier will invoice the customer at $100 per part

– Time period is a calendar quarter

chart 2

Table 2

Then, at the end of the agreed time period, supplier will measure the customer’s actual purchases and issue a rebate equivalent to the calculation based on volume depicted in the table below.

chart 3

Table 3

Growth Rebates

Growth rebates are a simple variation of volume rebates, Growth rebates, designed to drive revenue or volume growth in a particular product family, are like volume rebates with one condition: that the rebate is paid on incremental volume, rather than on all revenue or total volume. Growth is effectively a condition attached to a volume rebate.

Retention Rebates

Retention rebates are rebates paid to reward continued business, or customer loyalty. Retention rebates can be rebates of any form, volume, mix, growth, but are usually end of year or “cliff” rebates, paid upon realization of a condition. Example: purchase from Company A every month in 2010 and receive the following rebate at the end of the year. Similarly, rebates can be used to smooth volume, by giving customers with “lumpy” consumption a financial incentive to smooth purchases.

Mix Rebates

Mix rebates are a best practice, designed to help improve the customer and product mix of a supply relationship. A seller uses mix rebates to encourage a distributor to sell more volume of higher mix, or margin, products, or sell more to selected end-users or end-user segments. Rebates should rarely be a constant percentage, for example, 2% on all revenue. A constant percentage risks misinterpretation as a discount. Paying different rebate rates or amounts on different product families and segments allows the seller to use rebates as a strategic lever and drive improvements to product mix.

Mix rebates may be used with end-users, and absolutely should be used with distributors and buying groups.

The term conditional rebates refers to any rebate type coupled with a set of conditions.

Examples:

a) $2 rebate per chipset on all volume above 2 million units, paid if and only if handset ASP > $100
b) 2.2% rebate paid on all volume subject to maintaining customer share of wallet >=  60%

Check back next week for an overview of best practices for channel management rebates!

  • High Rebates , Vendavo Profit Advisor

    Colin Carroll

    Colin Carroll has over 15 years of experience helping manufacturers implement and automate price and margin management best practices. Colin is currently a Pricing Expert at McKinsey & Co. Prior to joining McKinsey, Colin was the VP of Business Consulting at Vendavo. Before joining Vendavo, Colin was a pricing strategy consultant in addition to eight years at International Paper Company in a series of sales and marketing management positions, including Marketing Manager, Catalog Segment and Marketing Director, Publication Papers. Originally from Buffalo, New York, Colin has an MSE in Operations Research and Industrial Engineering from the University of Michigan and a BA in Mathematics from Binghamton University.