Tags: Incentives & Rebates
Before we dive into some examples of rebates, let’s define what a rebate is. Rebates are a retrospective payment from a seller to a buyer, given after the agreed upon incentive is met. The purpose of a rebate is to motivate the buyer to purchase more goods, as well as build customer loyalty. There are multiple different types of rebate incentives sellers will use, which are strategically placed based on the industry, the involved trading partners, and the desired outcome.
The desired outcome of the rebate agreement ultimately determines the type of rebate deal that will be implemented. For example, if a seller’s objective is to promote an individual product launch they would most likely implement a fixed rebate deal. Whereas, if a seller’s objective is to increase the overall volume of products sold, they would most likely implement a growth-based rebate deal.
Types of Rebates
There are two categories the different types of rebates can fall under, vendor rebates and customer rebates.
Vendor rebates are typically used by merchants and distributors. The rebate agreement payments are paid by the supplier. These types of rebates are used when accounts receivable is involved.
Customer rebates are typically used by manufacturers and merchants. The rebate agreement payments are paid to a buyer or customer. These types of rebates are used when accounts payable is involved.
Fixed rebates come in multiple forms. From a fixed monetary amount or a fixed percentage amount, to a fixed volume-based amount or fixed value-based amount. Fixed rebates are typically simple, as they all work somewhat similarly.
For example, a rebate agreement states if a customer purchases 1,000 units of product, then they can claim a 5% rebate. Each unit is $100, so if the buyer purchases 1,000 units, the buyer can claim a rebate reward of $5,000. This would be a volume incentive rebate. Fixed rebates are often tiered, meaning that the 1,000 units purchased can earn you a 5% rebate, but 2,000 units purchased can earn you a 10% rebate.
Growth-based rebates can be more complex. Rather than being based on a single purchase, it is typically based on a year-to-year basis. The objective of growth-based rebates is to generate incremental growth.
Let’s say a rebate agreement states that a customer must have a baseline growth of 10% from the previous year to claim a rebate reward of $1,000. If that customer purchased $10,000 worth of product from the seller in year 1, they would need to purchase $15,000 worth of product in year 2 to claim the $1,000 rebate reward. Depending on the program, the rebate reward amount could also be increased each year. In this example, if the customer reaches that same baseline growth of 10% in year 3, the rebate reward could increase to $2,500.
There are so many variations of growth-based rebate programs, but the overall goal is to increase total sales on a year-over-year basis, while simultaneously building customer loyalty to incentivize them to return each year.
Let Group O Help You Design a Rebate Program
In conclusion, rebate agreements come in many different forms. Choosing the best rebate program for a company depends on the desired goal, the products being sold, the customers purchasing the products, and so forth. A type of rebate program that is beneficial for one company, may not be beneficial for another. Implementing the best fitting rebate program will lead to successful sales growth and customer satisfaction.