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.
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.
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 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.