Channel 'sweeteners'

The best IT products in the world don’t stand a chance of reaching end-users unless vendors offer the perfect cocktail of rebates and incentives to the channel. With decent up-front margins on commodity IT products a fast-fading channel memory, ‘sweeteners’ are a vital tool in ensuring partner profitability and vendor loyalty.

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By  Stuart Wilson Published  November 10, 2004

The best IT products in the world don’t stand a chance of reaching end-users unless vendors offer the perfect cocktail of rebates and incentives to the channel. With decent up-front margins on commodity IT products a fast-fading channel memory, ‘sweeteners’ are a vital tool in ensuring partner profitability and vendor loyalty.

There can be no doubt that the channel appreciates rebates and incentives — so long as the schemes are not overly complex. While these schemes can provide a valuable link to the second tier reseller community for vendors, they can also turn into an administrative nightmare if not properly managed.

This dynamic can put vendors in a tricky position. How exactly do you create rebate and incentive schemes that are simple and easy-to-use but not open to abuse by canny resellers looking for a quick buck?

One of the most common schemes used is the back-end rebate whereby second tier resellers qualify for a portion of the sale price as a refund once they sell the kit to end-users. It sounds like a pretty simple plan, but there remain a few issues that have to be carefully considered and closely monitored by vendors.

These schemes are often used as a means to ensure adequate partner profitability. Giving out a few percentage points as a back-end rebate helps to prop up reseller margins and also encourages them to focus on the vendor with the most attractive scheme. Unfortunately, problems can arise when resellers start discounting in anticipation of receiving the back-end rebate.

In other words, if a reseller knows he will qualify for a 5% back-end rebate on top of the standard 2% margin he can make, there is always the temptation to knock 5% off the sale price. This reseller believes he can survive on the 2% margin alone and wants to be the cheapest in the market to boost volumes. The theory being that selling 1,000 units at 2% margin is better than 100 units at a 7% (5%+2%) margin.

As soon as one reseller does this, others follow suit, quickly turning the rebate scheme into a futile exercise. With the extra rebate discounted into the end-user purchase price, everyone is quickly dragged back down to a 2% margin and also has the dubious privilege of filling in a load of paperwork to claim back the 5% from vendors. Pretty pointless when all is said and done.

Then there’s the problem of second tier resellers claiming to have sold the product onto an end user when in actual fact it is either sitting on their warehouse shelves or has made its way to a dealer down the street. These canny resellers will still try and claim the back-end rebate as their own and it is nigh on impossible for vendors to identify whether a claim is bogus or genuine.

Back-end rebate schemes work when everyone sticks to the rules. Resellers need to show restraint and empathize with the plight of the wider channel community. If one reseller undermines a rebate scheme, everyone suffers. If everyone sticks to the rules, channel margins remain healthy.

Vendors have woken up to rebate abuse in the Middle East and it will not be tolerated as the market matures. More vendors are pushing for greater disclosure from second tier resellers about their business transactions to really identify where and when sell out is occurring. They have already done this with first tier distribution partners by pushing for detailed sell out data on a weekly or even daily basis.

Distributors used to receive financial incentives from vendors based on the amount of products they bought from vendors each quarter. This factor still remains the primary measurement for calculating distributor incentives, but it is frequently being tied into additional measures such as inventory turns, sell out data and channel breadth.

As these schemes become more sophisticated and the measurement criteria more specific, it becomes harder for distributors and resellers to abuse the programmes. It is still possible, just a lot more complicated. The required statistics can be manipulated by the channel but regular stock audits by vendors, cross checking against invoices and requesting customer details all hampers the channel’s ability to pull a fast one.

Rebates and incentives are part and parcel of the channel infrastructure. For vendors, the primary aims of these schemes are to build channel loyalty, promote specific product areas and exert an extra level of control on channel sales out and inventory levels.

Many distributors and resellers in the Middle East continue to see the role of rebates and incentives in a slightly different light. They see them as an opportunity to do some ‘monkey business’, falsify a few documents, shift some product sideways, provide false information to vendors and carve out an advantage over the competition.

The contrasting viewpoints of vendors and the channel towards rebate and incentive schemes are clearly at odds with one another. As channel visibility grows in the market, vendors and rebate abusers are on a collision course.

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