Evaluating the Value of Channel Rebates
Overcoming the psychology of losing a price savings
Channel partner incentives, collectively and imprecisely known as rebates, are huge, addictive, and problematic.
How big might you ask?
A 2012 survey estimated total channel incentives in the U.S. at $55 billion, or 80 percent of all $69 billion channel management budgets. A Silicon Valley survey reported that the average factory respondent ran an average of 21 incentive programs annually with an estimated over payment of 6 percent.
Twenty-one incentives? Sure. Cash bribes get fast attention. Competitors understand indirect price cuts. And any of them can quickly follow, tweak, and escalate. But, without effective plans for disciplining, tracking, and exiting these initiatives, what happens? Factory list prices generally keep rising as back-end, channel incentive checks multiply.
For many distributors, rebates have become a big, itemized portion of profits. But, is there a free, extra, sheltered rebate-check? Bottom line trend numbers say, no, Associations’ financial survey reports show constant, weak financial returns over the past 15-plus years. But, the costs for both rebate management and mistrust that come with these programs are real.
THE PSYCHOLOGY OF LOSING A PRICE SAVINGS
Because rebate checks appear to be extra, in-hand savings, we may not see the larger economics. If one vendor had the courage to stop all incentives while lowering prices by the same amount, other competitors would exploit the psychological pushbacks. It’s easier to keep paying retention, growth, co-op, etc. dollars than to stop the rebate game. So, play it effectively. Here’s a rebate strategy analysis those in the HVACR supply chain should consider:
1. Distributors and their buying groups should check out cloud software offerings to promptly get all rebates due but don’t simplistically push one vendor’s goods over another because of a bigger incentive percentage. Do these analytical report steps first, which are available within the cloud service from waypointanalytics.net:
a. Rank vendors by rebate totals. Only a few big ones have rebate totals that matter.
b. Run separate profit and loss (P&Ls) for competing vendors. Fatter rebate percentages don’t necessarily correlate with lower prices, lower freight in, and profitable-customer buying habits. Which vendor has the better net profit total?
c. Run a year-over-year comparison for operating-profit growth trends. Which vendor has the best, last-five-year track record for supporting where you are growing to? And, the best next-five-year potential?
2. For the overall weaker vendors (with substitutable commodity SKUs), rank customers that buy the target SKUs. Then, what is your switch-over action plan?
And, don’t forget to do target-customer, service-value, team-selling wins, too. Partnering bigger shares of the best, growing accounts will grow all factory rebates the most.