Opinion: Update on the future of Rebates and SPAs for HVACR Distributors and Manufacturers?

rebates Enable

Rebates, Backsides, and Special Pricing Agreements (SPAs) continue to grow in importance every year for the Channel.

At the Enable Catalyze Conference earlier this month – I was asked to present a channel focused session. I was excited about presenting, because this is the only industry event that I know of where you spend two days with B2B Distribution leaders just focusing on – Rebates and Special Pricing Agreements.

FYI – Enable is partnered with many buying groups like Affiliated Distributors and Net Plus Alliance (public information) and many North American Distributors. The Catalyze event theme was about the need for a “reset” to reflect, strategize and transform when it comes to using rebates, and improving the ways rebates are used. For me personally,  it was perfect opportunity to talk to as many channel leaders as I could, as Enable had over 300 attendees at this years Catalyze conference.

I had 3 big questions in mind to ask and get feedback on from manufacturers and distributors.

1. Are Rebate programs between the Manufacturer and Supplier still one of the top drivers in total profitability for the channel?

I went in knowing that Manufacturer rebate and incentive programs deliver between 10% and 100% of total net profit dollars to distributors in many B2B Distribution channels.  The answer to the question of are rebates still vitally important was….Yes!

There was some variance on the answers though as distributors and buying groups resoundingly replied with an emphatic “YES”. The Manufacturers in the room were more a lower case “yes”.

Some of the manufacturers were not always sure they get the return they wish from their rebate programs. I personally believe rebates drive more than just loyalty and partnership for manufacturers. If manufacturers view their returns as more a “gift” or “tax” on the business, then they may not be capitalizing effectively on their programs. It was very interesting to hear directly from many manufacturers on “rebates’,  and in some cases those programs were viewed more as “a cost of doing business”.

I can say from my direct experience working for many of North Americas largest distributors in a Category Management role, that the more open and honest manufacturer answers I got at the event are not always shared at the negotiating table with distributors.

After two days though it was still clear that Rebate programs today are still vitally important to Channel Profitability especially for the distributor. It is very clear that the “backside” incentives from Manufacturers are crucial to every B2B channel partner at the event.

2. Do Rebates really deliver the returns manufacturers expect? What I heard was more a mixed bag of positive results.

I think often many manufacturers overlook the positive effect of rebates on market level pricing. This is possibly the largest benefit of Rebates for manufacturers and distributors. Rebates help keep market level pricing higher with end user customers. Most manufacturers would tell you that when they give a 2% first cost reduction to a distributor, that they often find it becomes a pass thru 2% discount in sell price in the market to win orders.

With rebates, whatever level you are at with your distributors less of that “rebate discount” is passed through to the end customer and this keeps end customer market level pricing higher. That is a win for both the manufacturer and the distributor  in the channel. Many of the manufacturers I spoke with were more focused on the rebate payout dollars, and were potentially overlooking the market level pricing benefits.

It is clear that a good rebate program will drive more focus on your line from your distributors that help grow sales above market.

3. Are SPA programs Growing or Declining?
This one was interesting question to get a lot of direct feedback on. I got a wide range of answers from many in the channel, and I got about an equal number of answers-  1. About the same number of SPAs, 2. We are increasing SPAs or trying to increase them, or 3. We are trying to reduce the overall number of SPAs to manage.

Special Pricing Agreements are what I call a “Blerse”. Sometimes SPAs can be a “Blessing” and other times they can be a “Curse”. What is difficult to manage is whether a SPA is blessing or curse can vary by market, and by individual customer.

When you have a great SPA system in place the “Blessings” are evident-

  • It locks in a competitive price at the SKU by customer or customer type.
  • It creates a barrier to entry for the competition as they may not be able to sell the same SKU at the level you are selling the SKU for a specific customer.
  • It makes pricing easier by reducing end customer negotiation. The end customer is not as likely to ask for an additional discount on a price that you have already negotiated.
  • It is more “guaranteed business”. If you have a SPA tied to a customer for a specific line that is negotiated that business is highly likely to stay with you.

When SPAs are viewed as being in the “Curse” Category-

  • If your end customer has a SPA with a key supplier at the other distributor or a competitive supplier and you don’t have a similar SPA level it is hard to move that business. A customer SPA that is not tied to your business, can be a large barrier to entry with an end customer.
  • SPAs are very hard to manage in terms of time, effort, and resources for both manufacturers and distributors. There is benefit to the complexity of SPAs, but the claim and administrative process is often immense to manage that process.
  • If you are not as proficient managing your SPAs as the competition (Number of SPAs, customers on SPAs, competitive SPA price levels, etc.) your team may feel they are at a competitive disadvantage.

One thing was clear at the event from every conversation I had was that SPAs for better or for worse they are here to stay. In my opinion those manufacturers and distributors who maximize their SPA programs are going to win more often at the expense of those competitors who do not maximize their SPAs

What are your opinions on the future of “Rebate and SPA Programs” for B2B Distribution?

As always we appreciate your feedback, please feel free to reach me at john.gunderson@dorngroup.com

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