Pricing

Rebates Best Practices Part 4: Putting Rebates to Good Use

By Colin Carroll
November 25, 2013

In my previous posts, I covered each type of rebate – now that you are familiar with those, the question becomes where to use each type of rebate? Rebates should be designed to drive a specific type of customer behavior.

What we find, across verticals, is that many companies have very complex rebate structures driving one, simple customer behavior: revenue. Rebates have become more and more complex over time, because they can, with Excel as the system of record. Yet, customer behavior has not evolved as an outcome of these increasingly complex rebates. In many settings, rebates become nothing but an additional driver of both price leakage and administrative complexity.

Every organization should evaluate rebate performance. Do you have a rebate strategy? Are the organization’s rebates a strategic tool or simply a cost of doing business, grandfathered from year to year?

Suppliers should review their rebate strategy and start by setting goals. For each channel, customer or segment, what behavior are you trying to achieve? For each desired behavior, establish which type of rebate to employ. Suppliers can and should create a set of rebate templates: a rebate playbook to help cut down complexity while insuring the right rebate is applied to the right customer objective.

Common customer objectives and rebate types are depicted in the table:

Customer Objective
Rebate Type
Increasing overall volume
Volume, Growth or Mix rebates
Adjusting mix within a particular account
Mix rebates with conditions
Discouraging over-promising / gamesmanship
Volume or Growth rebates
Price change hidden from the competition
Price Masking rebates

After establishing a rebate playbook and picking the right approach for each objective, suppliers should review rebate templates to ensure that rebate complexity and rebate value are aligned. The chart below depicts the Complexity of Rebate Structure on the vertical axis, which ranges from low to high. The horizontal axis depicts the Value of Desired Customer Behavior, which ranges from low to high.

Rebate Best Practice

The diagonal band represents the area of best practice. In the band, complex rebate structures foster specific and valuable customer behaviors, such as gaining incremental volume in selected product families and thus, are considered best practice. Rebates of low complexity are considered best practice when they achieve desired customer behavior.

Where possible, use rebates to accomplish your price realization objectives. But if that is not feasible, then increase your price efficiency by streamlining rebate mechanisms and processes.

Sounds simple, right? Maybe not. How hard can a volume rebate be to track and manage?

In semiconductors, where matrix pricing is very common, characterized by per part prices decreasing with anticipated volume over predetermined volume buckets, customer gaming and over-promising is endemic. Rebates are an effective way of dealing with this over-promising. But, rebates are considered to be more trouble than they are worth in many cases. Why would that be?

In my next post, I will outline the most common challenges posed by the use of rebates.

  • B2B Pricing , desired customer behavior , rebate , rebate best practices , revenue

    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.