Purchasing decisions must factor in two important elements: the first is how to increase customer loyalty while maximizing profit margins. The second is negotiating the best pricing agreement with suppliers. Achieving this balance is the underpinning of an effective rebates program.
Having the ability to account for every dollar is critical when margins are tight, yet rebate programs can be complex and difficult to track. This blog explains how to simplify the process of managing rebates across your business.
What is a rebate?
A rebate is different from a discount. A discount is a price reduction that is applied at the time of sale. A rebate is a refund of the purchase price that is applied after the sale is complete. A rebate is intended to promote products or reward customers who purchase more by offering them better margins. As such, it is typically limited to a specified period of time and only for orders that satisfy a value or quantity requirement. Rebates are considered price adjustments rather than taxable income. Some financial experts believe that a rebates program is a best practice in pricing.
Who uses rebates?
Manufacturers typically offer rebates to drive the sale of certain products, as well as to offer value to customers. Rebates programs have evolved from an effort to boost sales quickly to a long-term strategy to reinforce customer loyalty. Distributors, on the other hand, see rebates as a way to save money and consider them a part of their overall revenue. In today’s competitive marketplace, it is essential that distributors take advantage of vendor rebates to reduce their costs, ensuring their profitability.
However, many purchasing department’s find it challenging to manage numerous rebates with differing requirements and terms. To be successful in capitalizing on rebates, distributors must be able to track how and what to claim from a variety of vendors. Due to the complexities involved with managing rebates, some distributors choose to avoid them and will instead negotiate alternative pricing strategies. Yet, the ability to take advantage of rebates can be far more advantageous over time.
Types of rebates
- Volume Rebates: Volume rebates are the simplest rebate. This rebate is designed to limit over-promising by customers. Instead of quoting a price based on a customer’s promised order volume, the price is tiered and varies with the actual volume of the order placed. These rebates are typically paid quarterly.
- Growth rebates: Growth rebates are a variation on volume rebates and are designed to drive the volume growth of a particular product group. The rebate is paid on the condition of a targeted percentage in volume. For example, 10% more batteries are purchased than usual during a specified amount of time.
- Retention rebates: These rebates are offered to reward customer loyalty. They are usually accrued over time and paid at the end of the year. For example, a rebate is earned for every monthly order throughout 2019 and then is paid in December. The rebate can take any form-volume, growth, or mix. Retention rebates are an incentive for customers to place consistent orders over a specified time frame.
- Mix rebates: This rebate is used to encourage a distributor to sell a larger volume of products with a higher profit margin.
- Percentage rebates: This is a rebate offered as a percentage of total revenue such as a rate of 2%. Percentage rates should be variable or they may be mistaken for a discount. Offering these variable percentage rebates enable a seller to leverage them strategically to drive improvements.
When margins are tight, the need for visibility and accuracy in your rebates program is critical. Complex management of SKUs, customers, suppliers and transactions is only complicated by trying to juggle a variety of rebate programs. With this in mind, Phocas has created the Phocas Rebates solution to simplify the task of tracking your accounts payable and receivable. With accurate, accessible information, manufacturers and distributors can easily manage complex rebates programs for a wide variety of products with multiple vendors.
Phocas customer, WD-40 has started using the program for its complex rebates program across Europe and has yet to find a nuance that Phocas can't handle. With more than 100 different programs, Phocas Rebates allows WD-40 enter all the rules across timeframes, percentage change, fiscal year vs calendar year whereas previously this was done manually by numerous people over a few days each month.
Phocas Rebates allows you to enter rules related to your sales or purchasing to give you a clear view of your profitability. Use the automated rebate performance dashboard to negotiate better contracts without giving away too much. And instantly see what you currently pay, as well as accurately forecast what you might pay over the next month, quarter or year. Simply adjust your rebate brackets to work within your budget. Conversely, Phocas Rebates can help you track earnings and identify purchasing opportunities that increase your bottom line.
Rather than relying on complex spreadsheets, your information is captured automatically from your purchasing database, eliminating the potential for errors and lost revenue. Phocas Rebates saves time by automating day-to-day administrative activities. Set up the rebate rules you want, from percentage, volume, growth, or a mix. Once set up, it’s easy to track your rebates down to the individual transaction level. Bring simplicity and order to your rebates program with Phocas Rebates and eliminate the guesswork from your bottom line.
For more information about our Rebates product, visit our Phocas Rebates page here.