Why Vendors and Distributors Should Care About Back-End Credits and Rebates

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An Introduction to Back-End Credits

Pricing through the channel has never been so complex. No more so than in highly competitive industries, where there are a multitude of promotions, reseller programs and end-user or special pricing agreements in the mix. Reseller programs alone can include, incentive rebates, deal/lead registration rebates, higher discounts for volume/performance, demo/lab products to name just a few.

 

With these types of variable pricing/discounting programs in place and product/services being sold via Distributors, the issue of back-end credits / rebates comes into play.

 

So what are Back-End Credits and Rebates?

A Distributor’s buy price from a vendor is always the same when they purchase into stock. Therefore, it’s rarely guaranteed to offer adequate margins to absorb fluctuations. Fluctuations that may be required to support Resellers in all the possible pricing/discount variations demanded by a competitive market.

The mechanism to compensate Distributors for supporting higher than standard discounts to Resellers is called a ‘Back-End’ credit/rebate. This is usually implemented via the Distributors Point-of-Sale (POS) reporting, but can take many forms, including credit requests to the vendors Finance team to reconcile the balances.

When a vendor has a large product portfolio, multiple distributors and a complex pricing/discounting structure in place, the volume of claims can become overwhelming to manage effectively.

 

The Types of Issues that can arise for the Vendor include:

• Lack of management visibility into what is effectively margin erosion (impacts the bottom line)
• Lack of effective validation/controls on claims
• Difficulties reconciling credits (which are discounts) to the correct product line/family, as credits may be calculated/created via bulk payments
• Audit issues due to a lack of end-to-end traceability of the credits, to the discount authorization
• Cash-flow forecast issues, due to large or inaccurate accruals for credits falling due
• Exposure to the risk of “overclaims” by distributors. There are a number of reasons for this including complexity, mistakes in manual data entry/calculations and a lack of a scalable credit validation/tracking system
• If the credit claims process is not tightly aligned with the POS and inventory reporting process, there is a risk of claims not being in line with actual sales activity.

 

Equally, a Distributor has a number of concerns with this type of process, as they are the ones who are often selling onto the Resellers at a price lower, or near-equal, to their buy-in price from the vendor. This means they risk making no margin at all from the transaction.

 

The Typical Type of Risk and Issues Distributors face include:

• Cashflow Impact. Cash is king in any business, but no more so than for distribution. With margins typically being relatively low, every cent counts. If a vendor is slow to validate or approve claims, and pay the monies owed, then it can mean cash flow risk for the Distributor.
• Credit Settlements. The frequency of credit settlements may also be an issue, due to slow manual verification/approval of claims. This can cause unpredictable spikes/troughs in a distributor’s cashflow.
• Lack of Transparency. A lack of transparency and visibility into approved discounts for Resellers/End-Customers can case inaccurate reporting and claims. If not addressed, these will delay the process of getting credits due in a timely fashion.

 

Summary

The Back-End credits process is often ‘hidden’ from the view of the Channel Operations Management team. This might be because it gets handled separately by Finance and/or Supply Chain Operations.  However, it deserves to be more “front and centre” in the attention of the Channel Management team, especially when sales via Distribution is being scaled up. The impact of a poorly controlled manual back end credits process, that is not scalable or transparent, can become a risk to the bottom line performance of the Vendor, and to the Distributors the company has chosen to partner with.

 

Further Reading:

1. Download our complimentary eBook: Top 10 Distributor Back-End Credit System (BECS) Considerations 
2. Distributor Back End Credits & Rebates (BECS)
3. CFO’s: Are your Channel Sales Audit Ready?

 

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