Rebates are a powerful tool for Vendors to use to boost sales, lock in buyers for the long term, encourage incremental growth in order volumes and increase repeat purchases.
Naturally, discounts of any kind affect profit – and rebates are no exception. And so, rebate structure is paramount to ensuring your vendor rebate management programme is profitable.
Rather than granting discounts upfront, a vendor rebate programme mandates that the buyer has to earn the discount. And the truth is that many businesses are more concerned by the loss of a sale than by ensuring every sale is profitable. An effective rebate management programme should be designed to both boost business and protect margins in the process.
Rebate Structure Examples
Rebates should be designed to drive a specific type of customer behaviour. There are many different types of rebates – each of which should be employed with a specific business objective in mind.
Volume rebates: For example, if you want to offer a buyer a competitive price on a certain line of products based on them buying 1,000 units, your rebate programme ensures that they only get it once full purchase of the agreed-upon volume has been made. In this way, the risk of the buyer only purchasing 500 units at the discounted price you initially offered is eliminated. In other words, rebates reward “actual” rather than “promised” buyer behaviour. But a discount is still a discount – even when it’s applied retroactively.
The scenario outlined above is an example of a volume rebate and has two key objectives. The first is to limit buyer over-promising, thus reducing margin erosion on low-volume orders. The second is to incentivise larger purchases – the more units the buyer orders, the bigger the rebate they will receive. Volume rebate structure is based off tiered pricing, where, though the invoice price remains fixed, the actual price varies with volume, with the difference granted by rebate.
Value incentive rebates: Instead of granting rebates based on volume, your buyers earn rebates based on the value of orders. For example – purchases between £1,000 and £4,999 receive a 2% rebate, purchases between £5,000 and £9,999 receive a 4% rebate and so on.
You may wish, however, to use a retrospective rebate structure – a rule which, as the buyer breaks through each purchase threshold, changes the rebate factor for additional purchases as well as all the purchases to date within the rebate agreement life.
What’s important to consider here is how increases in purchased amounts impact your margins. The higher the value of the order, the bigger the rebate and therefore the lower the margin across all sales made above £1,000.
Value rebates do not have to be calculated as a percentage – they can instead be based on flat amounts. Flat rebate amounts can either be prorated or not prorated – and this is another important consideration, as again, the choice will affect your margins. For example:
So, here, if total sales were £7,500, the rebate would be £350, i.e. £100 + 50% of £500 = £350).
If the flat rebate amount is not prorated, on the other hand, the rebate granted for the same value of sales is higher:
|£5,001-£10,000||£500 not prorated|
So, if total sales were £7,500, this time the rebate would be £600, i.e. £100 + £500 = £600.
Optimise Your Rebate Programme with e-bate – The Ultimate Rebate Management Solution
Other types of rebate include product mix rebates, growth incentive rebates and rebates where, instead of cash, products are offered free of charge (FOC). You can read more about these in our blog: The 7 Best rebate Examples
All rebate structures can be tiered to foster specific and valuable buyer behaviours, such as increasing purchase volume or encouraging buyers to make purchases across a wider range of products. However, while rebates have many proven benefits, as your vendor rebate management programme grows and you start to introduce different rebate types – all with different rules and calculations – they can be extremely complex to manage and to understand what is to be paid to the buyer.
Tight margins make effective rebate management even more important. Only by having access to the right data at the right time and the ability to track, calculate and analyse your rebates in real time can you start structuring rebate programmes that drive value for your business and bring more certainty to your profitability. To do that, you need powerful rebate management software at the helm.
e-bate’s intuitive rebate management solution is a purpose-built platform delivered as a SaaS, designed to help companies structure and optimise their rebate management processes and overcome the complexities of managing rebate and pricing schemes. Our rebate management software comes with a built-in calculation engine that will help you calculate all types of rebates while allowing you to track and analyse all data against your agreements in real time. e-bate is your single source of all rebate information, providing you with the insights you need to make proactive decisions that drive business value.