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Why Many New Industries are Adopting Rebates

Supply chains face major disruptions, companies are attempting to get costs under control amid a tight labor market and economic uncertainty, and consumer demands are more exacting than ever before. Normalcy still hasn’t returned following the chaos the past few years – the COVID-19 pandemic, war in Europe, and a sustained period of high inflation. And while inflation has come down, it remains stubborn even as the effort to arrest it is threatening to cause a global banking crisis.

These are all reasons companies must partner more closely with their trading partners. And key to partnering closely is providing healthy behavioral incentives that ensure all partners are successful. In my work, I’ve seen several incentive types through the years, but the healthiest I’ve seen over the long term, are rebates. And what I’m seeing now validates this – in an expanding array of industries, companies are adopting rebates to strengthen their supply chains and establish more cost-effective relationships with trading partners.

Rebates are versatile financial tools that enable partners to set goals and incentivize achievement. When designed properly, they optimize financial outcomes like improving margins and profits for partners, and bolster relationships between trading partners. By fulfilling on the incentives when goals are met (such as an increase in the sales of a specific product), rebates give companies the tools they need to customize their business strategies, incentivize the maintenance of healthy long-term partnerships, and adapt rapidly to shifting market conditions.

Rebates allow trading partners to build more strategic relationships, drive revenue while protecting margins, and maintain market share even in tumultuous economic conditions. This is why we will continue to see an emphasis on rebate management across a widening range of companies and industries.

How rebates improve trading partnerships

Times of economic stress can be particularly hard on the relationships between suppliers and their customers. When shipping costs exploded in recent years (they have since come back down), suppliers passed these costs along to their trading partners. Backlogs at ports, shipping delays, and other crises were significant sources of friction in these partnerships. Inflation and global economic instability exacerbated all these issues.

Rebates can reduce the tension between suppliers, distributors, and other trading partners by generating strategic alignment across the supply chain. Because rebates ensure that trading partners develop compatible business objectives and KPIs, they create powerful incentives to collaborate over the short- and long-term. Rebates modify behavior by presenting clear business opportunities to both parties in a trading relationship. For example, rebates can help suppliers and distributors adjust the sales mix to promote new products or those with higher margins and lower volume. Simultaneous production and sales incentives can increase revenue and limit risk.

The implementation of a robust rebate management platform can improve visibility across the supply chain – a capacity which 77 percent of supply chain leaders say they’re investing in. Rebates work best when information flows freely between trading partners, as their negotiations, targets, and adjustments have to be based on accurate data. This is yet another way rebates provide healthy incentives to the companies that use them.

Rebates are revenue engines

I hear about companies offering discounts in pricing instead of rebates because they don’t have confidence in the simplicity or trackability of their rebate programs. And it’s been true traditionally that keeping rebate programs simple but effective on a customer-to-customer basis is difficult. But as a client once told me, “Discounts are soon forgotten, but rebates are earned.”

Rebates are critical to improved trading relationships where both partners feel like they’ve won. And they’re critical to reacting quickly to win deals while maintaining healthy incentives.

Unlike pricing discounts or promotions – which are limited in depth and scope – rebates are advanced tools. While discounts reduce the price of goods at the point of purchase, rebates allow trading partners to develop systems of incentives based on long-term growth priorities, shifting behavior and market conditions, and inventory priorities.

Rebates also enable partners to develop and implement sophisticated trading mechanisms such as incentive bands that apply monthly, quarterly, or annually; pricing tiers in which volume fluctuations determine how much rebate is provided; and conditional agreements that account for economic changes and other unpredictable variables. This level of customization gives trading partners the ability to fully leverage their relationships by making those relationships more adaptable, mitigating risk for both parties (by preparing for a wider range of contingencies, for instance), and incentivizing future cooperation.

Rebates are particularly important during periods of economic volatility, as they hedge against unpredictability by providing a financial backstop when sales numbers and other KPIs fall short.  Rebates also allow companies to differentiate themselves from their competition while maintaining healthy relationships with their trading partners. This is why companies in many new industries are investigating how to create and sustain their own rebate programs – they want the ability to navigate adverse market conditions and remain competitive in a turbulent economy. They also want to ensure their incentives maintain a healthy relationship between their partners while differentiating them from others.

Why now is the right time to consider rebates

A significant proportion of companies in the supply chain sector have long understood the value of rebates – for many distributors, rebates comprise 100 percent of their net profit. But the awareness of rebates is rapidly spreading to other industries as cost pressures and the state of the economy force companies to consider new ways to generate revenue and minimize risk. Meanwhile, supply chain companies and other long-time rebate users are making even larger investments in their rebate platforms.

According to a McKinsey survey, the COVID-19 pandemic caused 93 percent of supply chain executives to focus on making their supply chains “far more flexible, agile, and resilient.” McKinsey also found that B2B companies with their own marketplaces are capturing more market share than competitors – a shift that demonstrates how distributors are using incentives (like market access) to build stronger relationships with suppliers. These are a few of the central reasons supply chain companies continue to increase their investments in rebate management. While the pandemic was a catalyst for change in the supply chain sector (demonstrated by the renewed interest in regionalization, for example), the economic chaos of the past year is having a similar effect. A 2023 PwC survey found that 86 percent of supply chain executives think their companies should “invest more in technology to identify, track and measure supply chain risk.”

Effective rebate management platforms facilitate communication and collaboration between trading partners and provide the digital resources necessary to increase visibility across the supply chain. The same applies to trading partners in other industries – by creating compelling incentives to develop joint business plans, share data, and forge stronger long-term relationships, rebates bring companies together around common goals and KPIs.

Rebates uncover new sources of revenue while helping companies identify and mitigate risks. At a time when high inflation and a looming recession are contributing to a profound sense of economic unease around the world, it’s no surprise that companies are increasingly using rebates to improve their financial position.

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