Many industries around the world have complex pricing practices. These tend to become more and more complex as the industry becomes more and more competitive. Many creative programs have been created by businesses and their trading partners in order to provide maximum benefit to both parties involved and improve their competitiveness in the market place.
One solution to allow for trading partners to become more competitive and gain market share is back-end rebate or BECs. There are many examples of variables in these agreements, with some based on growth over a certain specified period, volume of product, value of product, certain locations or even a specific SKUs!
Sadly, we don’t have time to cover them all here, but examples of rebate agreements have been covered in detail in another of our blog articles.
Before delving into the logic of back-end rebates or BECs, it would be beneficial to get everyone on the same page and add some context to the discussion. So, what exactly are back-end rebates and BECs?
Back-end rebate and back-end credit (BEC) definition
Back-end rebate and back-end credits are both synonymous and are more commonly referred to simply as rebate.
A rebate is a retrospective financial payment — recognised as a credit in your accounts — which is used as an incentive to drive sales growth without simply reducing the quoted price by offering a discount. Unlike discounts, rebates are given after payment has been made and typically at the end of the agreement. This is why some industries use the terms back-end rebate and back-end credits.
Some people may define rebates as performance-based bonuses, and whilst some rebates are certainly structured to give incremental benefit and incentivize trading partners for helping the manufacturer reach their sales targets, rebates are not a bonus and are not always performance based.
It is extremely common for trading partners to offer guaranteed rebate rates in order to promote loyalty. These are guaranteed whether performance improves or declines. Also, rebates are agreed up front and earned by your activities, they should not be thought of as a bonus, but rather they should be accrued throughout the year when they are incurred as credit that you have earned.
Interestingly, and perhaps surprisingly, the existence of ‘back-end’ rebates or ‘back-end’ credits suggests that some companies deal with ‘front-end’ rebates or ‘front-end’ credits.
Front-end rebate explained
Increasingly, manufacturers are engaging in programs with their trading partners involving ‘front-end’ rebates. The distinction here being that payment is received at the beginning of the agreement, but still after the initial purchase of the products. The nuanced definition here is important, as front-end rebates are still considered a rebate and not a discount because they do not involve a cheaper quoted buy price from the manufacturer.
The benefit of front-end rebate is that it helps to significantly increase cashflow for some smaller trading partners, but conversely some manufacturers may not be willing to engage in front-end rebate agreements due to concerns about their own cashflow.
Another benefit of front-end rebate is that the agreement is over fresh in the minds of both trading partners, this means that disputes are rare, and verification of claims is a smooth process. However, having a dedicated system capable of storing these agreements accurately and facilitating an approval workflow involving your trading partner would help to alleviate these concerns anyway.
The problems with back-end rebate programs
Back-end rebate programs may seem like an easy win for vendors, however managing programs can be a huge obstacle in realizing the true benefit of an agreement.
Without an automated system, managing back-end rebate becomes a manual process with large resources spent reconciling sales of product lines included in the program with rebate claims and manually calculating the claim value itself. The difficulty of this is often increased by the fact that most rebate agreements can be complex, and their structure can vary from trading partner to trading partner, this leads to uncertainty about what is included and how each should be calculated.
With this, human error is a very real concern which can negatively impact profit margins or increase the volume of disputes slowing cashflow and causing your accruals to be inaccurate. This is why auditability in your rebate management process is vital. (Accurately managing accruals for rebate is an issue that requires a blog article of its own to explain properly!)
With this large resource purely dedicated to accurately claiming what is owed, many companies are unable or unwilling to dedicate yet more resource to analysis of the agreements which allows net net margins to be fully understood per location or product line. Without this information you can never be fully prepared to enter negotiations and cannot ensure that you are receiving the most benefit possible and can increase the amount owed in future.
While you may be involved in a back-end rebate program, a back-end credits program or a front-end rebate program, there is always room to improve your management of these processes and address some of the major problems that prevent you from maximizing the true intended benefit of the program. One of the key ways to do this is to introduce a dedicated rebate management software to your business and automate the tedious admin processes allowing resources to be dedicated to improving the benefit of rebate programs in future years.