Q&A: Volume Rebates
What are you seeing companies offer on volume rebates these days?
I don't know what everyone else is doing on volume rebates, but I know at least 7 ways to improve your volume rebate structures:
1. Base volume rebates on cash receipts- not invoicing, new business, or other metrics.
You want to reward new business, you want to reward revenue generation, but new business and revenue don't translate into tangible bottom line performance unless your customer pays you for your product or services.
2. Exclude late payments.
You also want customers to pay you on time. Excluding late payments is a reasonable quid pro quo for granting the rebate. The magic words are "within terms". It's amazing how this concept can incentivize a customer to suddenly improve their payment performance.
Extra tip: be generous about granting exceptions- you're trying to motivate timely payments, not wiggle out of an obligation. If the customer pays an invoice one day late, include it.
3. Exclude existing contracts.
Your existing contracts with that customer may have other discounts or incentives baked in. Including those contracts in the new volume rebate would further deteriorate their profitability below acceptable standards. If this situation becomes a sticking point, look for creative ways for the payment volume on existing contracts to help the customer earn a better rebate on new contracts, without actually rebating against the existing contracts.
4. Exclude zero/low margin items or service areas.
Never let your rebate put you in a loss-making position on any product or service.
5. Use "progressive" tiers to calculate the rebate.
By "progressive", I mean the first $xxx is rebated at 0%, the next $xxx is rebated at 2%, the next $xxx is rebated at 4%, etc. This approach contrasts with an "absolute" tiering where the total amount is rebated at a single percentage based on the rebate table.
Believe it or not, this approach benefits both parties. The progressive approach is far easier to accrue and plan for throughout the year, since the absolute approach can radically change (even be manipulated) at year end. The percentages are typically higher under progressive approaches, encouraging more consistent repeat business.
6. Provide the rebate as a credit note, not cash.
Most sellers are better at receiving payments than making them, and most buyers are better at making payments than receiving them. Credit notes avoid the awkward administrative hassle of figuring how to send cash to your client, and are more conducive to helping customers allocate the rebate to the various contracts involved.
7. Expire the credit note if not used within 6-12 months.
The first time I came across this concept, I questioned its ethics. However, I have clients who have unapplied credit notes sitting on their balance sheets for years. If a credit note isn't applied in the first 12 months, you need to have the ability to resolve it one way or another. Default to expiring the credit note outright, but with a fallback option to convert the credit note to a refund payment at that time instead.
Book a meeting or contact me to discuss how you can improve the financial performance of your organization.