Best Practices for Better Rebates in Distribution

How many rebates did your distribution company leave on the table last year? It’s an important question when you consider that even a tiny percentage of earned rebates can boost your bottom line. Rebates are without question a significant part of any distributor’s profit margin. For some distributors, it makes up most of their net profit.

Most manufacturers offer rebate programs, yet only 2% say they are as effective as they’d like. Distributors would likely express a similar sentiment regarding these programs.

There’s no question that distributors face challenges in handling their rebate programs. Fifty-seven percent of distributors in buying groups admit they don’t really know how much they’re getting from individual manufacturers. That’s because most distributors still manage their rebates manually, although new software tools have begun to positively affect rebate program efficiency.

Still, most distributors still manually manage manufacturer’s rebates, with significant financial risk from miscalculation due to human error or data loss.

How can distributors overcome the complex, multi-faceted challenges of managing rebates to maximize their bottom line?

The Problem with Rebates

Rebate management is a complex process for distributors. Manufacturer rebates to distributors may be small when examined on a transaction-by-transaction basis, but in high volumes these programs add a significant amount to a distributor’s profit.

Rebate programs also tighten the loyalty between manufacturers and your company, building a better bond with critical revenue sources for your business.

We know rebates offer distributors a chance to pad their earnings. Rebates have been around since the 60s, so most distributors have leveraged these programs for years. Typically, two-thirds of a distributor’s sales come from manufacturer’s rebates. Yet one-quarter of all distributors confess they don’t know how to measure their rebate goals.

Distribution Challenges in Rebate Management

Admittedly, rebate programs are a lot of work for the return if you’re manually handling your programs. While the industry doesn’t talk much about the numbers, the anecdotal evidence says 40% to 60% of the distribution industry’s bottom-line numbers are attributable to rebates.

Yet tracking, communication with manufacturers, pricing complexities, and more all add to the challenges of rebate management.

Tracking and Management

Distributors benefit from accurate rebate tracking and reporting. The problem is that most distributors still track their rebates in an Excel spreadsheet. Because every manufacturer has a different way of calculating and processing rebates, this manual process isn’t agile enough to accurately capture and maximize every rebate.

Distributors must track rebate-agreement requirements in a way that benchmarks their progress and directs sales and marketing action. Effective rebate management requires analytics and data visualization software to pinpoint your progress toward the rebate goal.

Communication

When it comes to rebates, there is frequently a gap between distributor and manufacturer communication. Distributors need a way to effectively communicate their needs and have an efficient method for negotiating terms for the best possible rebate deals. It doesn’t help when ambiguously worded rebate programs or unclear procedures create uncertainty about how to achieve these goals.

Complex Pricing Structures

Each rebate program has its own complex structure. Tiered discounts and volume-based incentives are two. Manually calculating this data takes time and contributes to human error.

Then there is the issue of communicating complex agreements to your sales teams. Tracking these incentives in real-time to be sure they’re applied correctly could result in cash flow you may have missed. It also allows you to maximize rebate opportunities.

Time is Not on Your Side

Time is a huge issue when manually tracking rebates. There are many kinds of rebate programs, each with its own rules. Some manufacturers offer multiple rebates on multiple products, which can include:

• Supplier rebates
• Product launch rebates
• Customer rebates
• Volume discounts
• Growth incentives
• End-of-life (discontinuance) discounts
• Product-mix incentives
• Retrospective discounts

Rebate management grows more complex if purchasing is decentralized or made through a buying group. Many companies rely on manufacturers to perform rebate calculations without double-checking the math. Managing and processing these complexities by hand almost certainly result in human error.

Manual processes almost always ensure trading agreements are forgotten or lost and valuable rebates are unclaimed.

Even a 1% increase in rebate fulfillment can positively impact a distributor’s bottom line. This logic argues for new practices to improve rebate management.

Can Technology Improve Your Rebate Payouts?

New technologies allow the adoption of better tracking, analytics and evaluation of rebate programs for distributors. These technologies can improve the percentage of net profit from manufacturing rebates. Even better, the latest tools for rebate management can automate data tracking. Forbes says, “Automated rebate management drives channel revenue by providing insights on incentives that optimize sales, maximize volume and profits and mitigate partnership misalignment risks.”

Microsoft Dynamics 365 Finance & Supply Chain Management recently added functionality for automated rebate calculation and tracking on vendor- and customer-facing transactions. These features reduce the time spent chasing down and securing the rebate.

In addition, data analytics are imminently more rewarding than an Excel spreadsheet when you collect high volumes of information on what’s hot and what’s not in your distribution channels. Reviewing the data to spot trends sales teams can capitalize on should not be a manual exercise.

Dynamics 365 can spot where and what products are moving and correlate them to rebate agreements to track your progress toward volume kickbacks. This insight allows you to shift internal strategies to maximize rebate revenues at critical times. The data can inform a more strategic approach toward maximizing rebate revenues.

Technology is just one tool in your rebate-management toolbox. But there are also best practices for rebate management to consider apart from the necessity of a technology upgrade.

For example, passing a manufacturer rebate through to customers to drive buying behaviors is a generally accepted best practice. A 4% manufacturer’s rebate with 2% translated into a customer price drop could drive sales to your company while still helping you meet the terms and conditions of a rebate program.

This customer discount also builds loyalty between you and your target market. It’s an effective reward to encourage repeat customers and steal buyers away from your competition. A similar approach could apply to using rebates to incent sales teams to improve their behaviors and close more deals.

Why Better Rebate Management, Now?

A well-run rebate program can significantly enhance the traditionally low margins of a distribution business. Rethinking your strategic approach to manufacturer rebates is the first step toward maximizing these revenues.

But why should we be talking about changing our rebate management programs right now?

An article in Electrical Trends may shed light on the urgency behind improving your rebate management in 2023. They point out that many distributors saw significant rebate income growth since COVID that helped drive greater profitability.

Calling it a “black swan profit event,” the article from David Gordon reminds us that what goes up must come down, predicting, “Expected revenue decline and manufacturers changing the rules and managing their rebate programs tighter will undoubtedly negatively impact your volume rebate income and potentially your net profit, percentage-wise, over the next 12 to 24 months.”

Now is the time to look closely at how you manage your rebate programs. Margins are too thin, and markets too volatile to continue business as usual.

Have questions about how technology and other best practices can improve your rebate revenue management? Contact our experts to find out more.