Rebates - Strengthening Commercial Rigidity

What is a Rebate

From a buyer's perspective, rebates are a useful way to extract greater value from suppliers. Connecting any repayment to 'actual' spend or volume thresholds gives the customer greater opportunity to negotiate a more significant saving than an upfront discount. In tandem with this, some buyers may use rebates to keep cash on hand within their function for additional expenditures.

Most of us have received a welcome rebate when overpaying a tax or utility bill and rebates between suppliers and customers operate in the same way. Broadly speaking, rebates are a retrospective payment from a supplier to a client that reduces the cost of a product later through a partial refund. Unlike a discount allotted before the sale, rebates are retrospective and typically employed by suppliers as a marketing tool to strengthen commercial ties. 

In this sense, rebates returning from a supplier operate as an additional budget to be used. One way organisations typically put such funds to use is by increasing marketing spend, with a view to increases sales and demand for the product, so it can easily be positioned as a 'win-win' scenario.

Bearing this in mind, it is worth understanding some further reasons why suppliers are often keen to set up a rebate structure that both parties would recognise as a success:

• It incentivises the client to push greater volume to the supplier, especially if the rebate rate is ratcheted to increase with greater volume. It is a key lever to increase sales and thereby penetration within the business.
• It gives supplier greater control to push specific product lines. In targeted programmes a supplier can offer preferential rebates for products which are 'end-of-life' and subsequently rebates are also effective for launching new products successfully. 
• Rebates can protect a supplier against changing order volumes. To give an example, a margin level that a supplier could maintain at 10,000 units may not be feasible at 10 units. This gives a greater level of protection than straight discounting as rebates are usually dependent upon hitting certain minimum quantities. 
• Rebates are often structured retrospectively, which supports supplier liquidity. Rebates are stored over a significant period, reimbursed, and frequently spent with the same supplier on additional product, a new product line, or capital expenditure/innovation to improve processes. 

Setting up a 'Rebate Programme' utilising several different types and thresholds can create a 'cottage industry' that demands significant administrative support. We at 7 Steps are experienced in designing programmes that meet your objectives, whilst ensuring the efficiency of ongoing administration requirements.

For guidance on setting up an effective rebate programme within your supply chain, please get in touch using this link admin@7stepsolutions.co.uk.