Rebate Programs in Distribution

Many segments of the wholesale business use rebates as a plan to modify and reward distributor behavior. While the roots of these end of year rebates and similar programs are mostly lost to history, they have become an important part of the distributor financial sheet. For example, Electrical Distributors typically report around 40-60 percent of their bottom line comes by way of rebates. Other lines of trade indicate similar numbers. This information is not anecdotal. This is not beer talk, the Profit Reports published through groups like NAED and others back up the statement. Without rebates, the channel could be in serious trouble.

Marketing and Buying Groups help drive the rebate dollars
Many independent distributors receive their rebates through 

marketing groups. Organizations like IMARK and Affiliated Distributors (AD) in the electrical industry come to mind, as

do groups in other lines of trade. Here is a short list (mostly top of mind):
• Distributor Partners of America (DPA) in the Industrial Space
• Safety Marketing Group in the Safety Industry
• Evergreen Group in the Industrial and Contractor tools and supply group
• IBC in the Industrial and Bearing business
• The Embassy Group in plumbing and HVAC/R industry
• The Blue Hawk Group in the HVAC/R industry
• The Virtual Rain Group in Lawn, Turf and Irrigation
• IWDC in the Welding Industry.

Further, AD has expanded into the following industries: Power Transmission, Building Materials, HVAC, Industrial Products, Pipe Values and Fittings and Plumbing Supplies. What’s more, Industrial Supply Magazine has a page devoted to the groups here. 

These groups list their mission as helping independent distributors better compete with the much larger national chains. They do this in many ways, including benchmarking, networking and marketing assistance, but make no mistake, the rebate check drives the membership.

So why are we talking about this?
While rebates are important, they are seldom discussed in the rank and file of our industry. Sadly, many supplier salespeople have the attitude shared by a mid-level salesperson I recently interviewed. He said this, “My company writes some big rebate checks to the owners of the distributors I work with. And, for the most part, I don’t understand why. The distributor sales guys who work hard to sell my stuff don’t get commission, so it doesn’t incent them. From where I sit, these things are basically a slush fund for distributors to buy their next boat or vacation home.”

We have already hit on the financial importance of rebates. Without these incentives, distribution, which is already a low margin business, would become unsustainable. Typical bottom line numbers for many of these companies already stand in the low three percent range. Dropping that margin (not gross margin, but real bottom line margin) to a one or two percent mark would equate to distributor owners putting their money into low interest, no risk savings accounts.

This still leaves my young friend’s comments about commission payments not being tied to rebates. First, I believe commissions are obsolete for a number of reasons; mostly tied to a belief they no longer drive the type of behavior required in distribution. Since most distributors have yet to see the light and switch to a new system, let’s drill into some of the issues tied to rebates and commissions.
First, few companies calculate commissions on rebates. About the closest we can think of are those organizations who pay a slight commission premium to sales made of suppliers who are part of their buying group. In my opinion, these are mostly feel-good programs that rarely drive behaviors during the adrenaline rush of selling.

Second, most companies have built their compensation model around the gross margin number with little or no real concern for costs of doing business. Costs have been rising faster than gross margin production at many distributors. This is complicated more with the addition of new selling resources, which are rarely, if ever, factored into commission rates.

Finally, there is strong evidence that when special pricing is provided to distributors “the salespeople give it away” (not my words but I agree). Countless stories of special one of a kind into stock specials exist. Most of these end with the same story line, distributor receives 15 percent lower price than anyone in the market and within months the new sell price has followed the cost down by 15 percent. But, rebates are hard to give away.

We need to talk about rebates
What’s the moral of this long-winded story? We need to bring rebates and program dollars out of the shadows and into the open. Distributors who don’t discuss them are destined to have employees who question their fairness and ownership’s intentions. Distributors who don’t talk about them with their suppliers will always have vendor salespeople thinking, “These things are buying the owner’s dude ranch in Montana.”

Finally, for the enlightened suppliers who happen to be reading this. Here are four points:
1. Regardless of how they started or whether you like rebates or not, they are a part of our industry. You need to understand how your competitors use them. If you do and they don’t, pushing the conversation forward is in your best interest. Conversely, there need be a solid financial reason why you do not provide. Saying it is against your principles is not a good excuse.

2. Programs and rebates must be well thought-out and tested against future scenarios. No one complains when you begin providing a rebate. However, if you change the program after three years, you will create pain, suffering and disharmony.

3. If your rebates are based entirely on growth, think about this. Eventually, every distributor has a flat year. Rebate programs heavily skewed in the growth direction take revenue away from your channel when they need it most for driving your sales forward. Progressive distributors gain market share during periods of flat or negative growth in their territories.

4. The best rebate programs are built around distributor behavior. If you want distributors to provide quality Point of Sale (POS) data, tie it to rebates. If you want to displace niche competitors on the distributor’s shelf, link the rebate to being the only product line on their website. Want better visibility in their showroom, base the rebate on being the only product line displayed. We could list a dozen more points like this but, you get the picture.

A final note
My writing gets interrupted often. My parents trained me to answer the phone in three rings or less. I literally just hung up from a conversation with the regional manager of a manufacturer. Our conversation covered several topics. One of which was a distributor incentive program. His words for the program was “(distributor) owner kickback.” I hope he reads this…