Show me the money

Resellers love 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

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By  Stuart Wilson Published  November 29, 2004

|~|Dandawate,-Sunil-----KOBIAN.gif|~|Sunil Dandawate, managing director at Kobian|~|There is a pot of gold at the end of the rebate rainbow for resellers that meet the vendor grade. However, it is certainly not a case of rebates for nothing and spifs for free when it comes to vendors splashing the cash on the channel. They want the resellers to really work for it and show unwavering loyalty. Rebate and incentive schemes have now become a pervasive part of channel programmes across the board, but many vendors are shying away from offering pure financial rewards. The theory being that resellers will just discount in anticipation of receiving a fixed back-end rebate turning it into a futile exercise. Many now prefer to offer individual reseller sales staff trips and prizes instead. Rebate and incentive schemes have never been more important in the market as a differentiator between vendors. “All the vendors’ products have more or less the same specification and the same price,” explains Sunil Dandawate, managing director at Kobian. “Incentive schemes and rebates have become an essential tool to increase sales. These schemes bring the vendor, distributor and second tier reseller closer together, helping to maximize sales.” Vendors employ these schemes to achieve a number of different goals. Claire Jones, SMB and distribution manager at 3Com Middle East outlined four main reasons: to reward loyal partners, to help resellers grow, to remain competitive against other vendors and to help boost market acceptance. While the goals are simple, the schemes themselves can be complex. Vendors often use a two-pronged approach to channel rebates and incentives. First tier distribution partners typically receive contractual rebates based on the volume of product they sell as well as rewards for the predictability of their purchasing patterns. On top of this, a second set of reward programmes reaches out to the second tier channel community. Johannes Helmreich, manager volume channel at IBM Middle East, explains Big Blue’s approach: “First tier distributors and corporate sales partners get a full year target and also have quarterly targets. Much more important are the incentives we give to second tier resellers. Over the last few years IBM has successfully developed programmes at this level that involve everything from sales to education and are embedded into IBM PartnerWorld.” When it comes to rewarding the channel at any level through rebates and incentives, vendors need to make sure that the benefits they pump in are being used as they intended. Making sure that financial incentives — often used to help bolster partner profitability — are not used instead to drive discounting in anticipation of the kickback is a constant conundrum. HP uses incentive schemes to drive ‘sales in’ to its Channel Development Partners (CDPs) as well as boosting ‘sales out’. Rania Hannoush, partner planning and reward manager at HP Middle East, says: “We give incentive schemes to sales people at a CDP level when we have permission from the company. We try not to put monetary value on these schemes because we don’t want it to end up in the product price. This means that the incentives tend to be trips and prizes.” In parallel, HP offers a financial incentive to CDPs based on the linearity of their purchasing. “These payments support the margin of the CDP and should not be reflected in the price of the product,” adds Hannoush. “CDPs need to order a certain percentage of their quarterly product at certain times. If they meet the parameters we set they are eligible for a percentage-based rebate. This is part of HP’s profit for results (PFR) programme.” ||**|||~|Overbeek-2.gif|~|Edzard Overbeek, VP for commercial channels and distribution at Cisco EMEA|~|As soon as the channel starts discounting in anticipation of a financial rebate or incentive, the whole scheme become pointless. It is something that the vendors are acutely aware of, especially in the Middle East IT channel, which still includes a large number of resellers with a pure trading mentality. “It is very difficult to control rebates over here,” says Yusuf Syed, Middle East regional manager at US Robotics. “If you give a US$3 rebate on a SKU, the reseller puts it in the end user price and the rebate becomes pointless. So, we prefer to give incentives like travel vouchers instead with the value based on their sales performance.” One factor hampering the implementation of rebate and incentive schemes in the Middle East is the presence of sub-distributors and re-exporters selling on to other resellers as opposed to end users. There have been cases where these players have been able to beat the authorised distributors on price by virtue of the fact that they build the back-end rebate — intended for the genuine resellers selling to end-users — into their price. Rebate and incentive programmes can also be used to encourage the channel to move into new areas. Cisco’s Value Incentive Programme (VIP) provides a range of extra benefits to channel partners that push into emerging technology areas such as IP telephony and security. The scheme includes a back-end rebate element and Cisco monitors the market carefully. Edzard Overbeek, VP for commercial channels and distribution at Cisco EMEA, says: “We really make sure that the back-end rebate is assigned correctly and does not leak to the street. We are taking much tighter control in ensuring that customers are actually customers. We’re making sure that when a reseller does an implementation and claims against it, the implementation has actually occurred.” Distributors have had to provide detailed sales out data to vendor partners for some time now. Increasingly, that level of disclosure will be required from the second tier resellers as well if they wish to participate in vendor reward programmes. More vendors will ask for end-user verification as the Middle East channel matures. This not only increases their market visibility but also acts as a hindrance to grey product flow. Keeping rebate and incentive programmes simple is a primary concern for vendors. That means simple both in terms of internal management resources required and also in terms of processing claims for the resellers taking part. A vendor can have the best rebate programme in the world and still find no resellers taking part if qualifying for the rewards and payments is an administrative nightmare. Overbeek adds: “When I took over channels we had between 140 and 150 promotions per month and 20% of them did 80% of the volume. We reduced the number of promotions and now have about 30 of them. The two main programmes — VIP and the Opportunity Incentive Programme — are really starting to kick in now and help partner profitability.” ||**|||~|Hughes,-Philip-----APC-----.gif|~|Philip Hughes, general manager at APC Middle East and Pakistan|~|Rebates and incentives can also be used as tools to drive sales of specific SKUs. If certain products are building up in the channel, a well-timed promotion can give the added impetus that restarts ‘sell out’. Within HP, product managers liaise closely with the Solution Partners Organisation (SPO) team to look at channel inventory and come up with the appropriate promotions. “We measure the success of a promotion by the volume of sales it achieves,” says Hannoush. “The extent of the rise in sales depends on the products, the features and the rebates that are attached. A scheme can result in a 30% to 40% increase. These promotions really do work well.” Syed at US Robotics agrees: “If you want to drive a particular product you put an incentive on it. We have products like broadband and wireless that have more incentives than analogue and it does help.” Kobian reports similar success according to Dandawate: “Kobian promoted Mercury motherboards and gave distributors a free Mercury laptop when they bought a set amount of motherboards. This tripled motherboard sales and also increased the interest in Mercury notebooks.” Vendors should strive for total clarity in the implementation of their rebate and incentive programmes. That means defining the rules on pricing and claims processing, setting strict guidelines for eligibility and running the scheme for a fixed duration. “You have to make sure that everyone in the channel is aligned around a promotion,” says Hannoush. “If I want to launch a scanner promotion all the CDPs have to be lined up for it or else I will have an issue in the market. If I launch a scheme in the UAE with Redington or Tech Data, you can be pretty sure that some partners in Saudi Arabia will try and claim for rebates. That is why you have to be very clear on the territory parameters when running a promotion.” Channel promotions evolve constantly as vendors look to keep their model fresh and appealing. They also keep a close eye on rival vendors and engage in a perpetual game of one-upmanship. Having the best technology only takes a vendor so far. It needs to be accompanied by a compelling partner proposition if it is really to succeed. “We do look at what competitors are doing but we always try to build something that is unique and position it correctly for the reseller base,” adds Overbeek. “Competitors look at our programme and what we are doing in emerging areas like IP telephony. They are playing catch-up and we will always come up with new innovative schemes that drive sales and assist partner profitability.” Promoting a channel community to develop can also help vendors in their quest to boost reseller loyalty. 3Com runs regular events to keep the interest of its channel ticking over. Trips abroad for top performing partners are also used by vendors to reward the channel. Despite the high-tech ERP and CRM systems and customer databases that exist through out the channel, the IT sales process — especially to the end users — remains a people business. The vendor that wins the heart of the sales person selling to end-users is in a strong position. Vendors should never forget this. Philip Hughes, general manager at APC Middle East and Pakistan, concludes: “It is all about incentivising the people that sell out products. It is very easy to set up a promotion where all you’re doing is giving a particular company extra margin. That for us doesn’t work. It has to be targeted at the guys specifying the product, doing the job. It has to hit them.” ||**||Thoughts from the Street|~|Nandi,-Tarun-----BLUEBELL-C.gif|~|Tarun Nandi, general manager at Blue Bell Computers|~|So what exactly do the resellers make of the rebate and incentive programmes that currently exist? Money talks and they want the vendors to ensure that the channel is getting its fair share of the benefits. “Rebate schemes may be designed for the reseller’s benefit, but on Computer Street the dealers don’t understand how to make effective use of what is on offer,” explains Tarun Nandi, general manager at Blue Bell Computers, a major trader working out of Dubai’s Computer Street. “They cut the rebate and then they pass this saving onto the end user. Ultimately the end users gain and not the reseller.” Price wars on the Street have severely dented margins and despite Intel having stopped its back-end rebate scheme, traders are still selling components at lower rates than distributors. “When you talk to a distributor, he gives you a fixed price, but when you ask a reseller he will give a price that is the same or lower than on offer direct from the same disti,” comments Rakesh Bohra, managing director at Dubai-based reseller Trinity Infotech. “The reseller in question is deducting the rebates that he is going to get after three, four, or five months and passing it onto the customers to remain competitive. The bottom line is everybody wants to be competitive all the time.” The misuse of rebates and also the time lag between applying and receiving the money from a vendor has led many at the second tier to question and ultimately stop taking rebates. “All the vendors I deal with have incentive programmes,” adds Bohra. “I am not dealing with anybody who has a rebate programme. Rebates don’t help anybody. Applying creates too much paperwork, it takes a long time to receive the rebate and this delay is becoming longer. The market should look at incentive as being better than rebates as rebates don’t help anybody. The only people who gain from rebates are vendors, while with incentives everybody wins — vendors, distributors and resellers.” The sellers on the Street don’t object to rebates, but they do protest about how such schemes are run. “Vendors offer rebates to almost all the resellers out there but distributors take a different approach and only give rebates to preferred resellers, which is much more effective,” says Nandi. “Distributors want to pass savings only onto loyal customers and not to every Tom, Dick or Harry in the market. When vendors announce an incentive, even a reseller who doesn’t buy knows the rebate. Other resellers abuse vendor rebates by seeking to apply the rebate retroactively from the distributor. They go back to the distributor and say, ‘there is a rebate programme so why didn’t you discount.’ But when distributors are running the programmes for a select group of resellers — and not known to anybody outside of this group — the programmes become very beneficial for us guys on the Street.” The challenge for vendors is to run any rebate or incentive scheme in a professional manner. “Incentives and the like are useful but they have to be properly used and monitored by the manufacturer to see if it is being properly utilized by us resellers,” notes Nandi. “There are a lot of incentives in the market but again they are totally misused by resellers. Whatever incentives they receive they pass onto the end-user and spoil the market. When this happens none of the traders make any money and instead the only beneficiary is the end-user.” Smart resellers look for programmes that reward them for all their hard work and take into account the volumes that they have shifted. “With typical rebates, if I buy one or a hundred products it makes no difference,” adds Nandi. “The money I receive is the same and there is no recognition of what I have done for the vendor. Incentives are based on quantity and targets — they reward based on your achievement. So suppose you buy a quantity of five to ten, your incentive will be 1%, for ten to 20 it is 2% and so on. This arrangement will see resellers shifting much more stock as they benefit directly from doing higher numbers and they know they’ll make more money. So that is the difference between incentives and rebates. Rebates should also be based on the targets scheme rather than dealers who do different amounts of business and get the same rewards.” By using incentives vendors can also thank the employees on the shop floor, rather than just putting the money straight in the boss’ wallet. “If AMD is going to give three tickets for a grand prix in Bahrain, then obviously three guys from my shop are going to go,” says Bohra. “This might not make a direct financial contribution to the bottom line of the company but then my boys become much more aggressive in selling. And I’m not just selling processors but completed machines. AMD is able to achieve its volume targets, I make money on all the accessories or all the peripherals and components which go into the system, and my boys get to go on a trip. It is the knock-on effect and it helps me make more money.” The bottom line should not just be about money but instead about changing how the channel does business. Vendors here could learn from how schemes are implemented in other regions and what this has done to change the IT distribution landscape. “India is a beautiful example where we have incentives running constantly across the country from all the vendors,” concludes Bohra. “Through the prizes — trips and giveaways — resellers there have learnt how to do business more effectively. You actually change the outlook of the small dealers in a short time.” ||**||

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