Purchasing and Negotiation Training

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

This hot issue shows no signs of being resolved.  Whether rebates benefit the bottom line or are just a gimmick can be a matter of optics.  

My view is that Rebates should be PRE-BATES.  Rebates are a great sales device but a violation of Cost up, not Price down principles of purchasing. This rebate craze grew out of the economic malaise of the 70’s with auto dealers offering “manufacturer’s rebates”. All they did was take an extra $2,000 of your money, spin it around in the interest mill in Detroit, and 6-8 weeks later sent you back your own money, but in a multi-colored shiny envelope.

When you get an income tax refund, are you happy? If you are, then you’ll love rebates. The government s sending back your own money that they over withheld.   Sellers justify rebates as a reward for loyalty and attaining certain volume levels. NONSENSE. At higher volumes, their costs are less so they are effectively given you money that you failed to negotiate.

Consider instead a partnering program where you establish a projected volume and set the price based on that volume. If you think the volume is unpredictable, then maybe a discount is not justified because the supplier can not achieve economies of scale. If you can predict a volume, factor it down by some percentage and settle on the discounted price up front. This way, you won’t be getting your own money back later. If you exceed the volume, re-negotiate these subsequent rebates.

Below are many gathered other viewpoints from online discussions from various sources about the topic.  Let’s examine them by groups.

Favor

• Well managed rebate programs can be one pathway to a lower price.  The rebate must be realistically achievable and subject to audit verification.   
• In a Business-to-Consumer (B2C) universe, supplier rebates are designed to boost sales.  Most sellers know that the number of rebates that are actually applied for and that meet the conditions of the rebate are small so it’s a low cost way to try to drive purchases and capture business from competitors.
• For procurement groups heavily focused on cost reduction, suppliers use rebates to entice buyers. The rebates often qualify as cost savings.
• Rebates represent too much of a bottom line contribution over and above operating profit for owners and executive management to ignore.
• 

  In-house corporate training

  Manufacturers can negotiate and incorporate the rebate in the price. For resellers where who must deal with Robinson-Patman Act price discrimination protection, it’s a good way to hide extra discounts. So you can pay $1 like everyone else in the same price volume but you can get 10 cents back on rebate for something like  that no else gets. 

Disfavor

• If there is enough money for a rebate, then that is money that was left on the negotiating table. Also, monitoring, verifying and disbursing rebates can be an additional resource drain to both the supplier and the customer.
• When rebates don’t relate to a specific project, they can be used to transfer money from one department to another, perhaps erroneously.
• Rebate programs can be a road block to potential value added services that might be achieved with a strong potential for customer savings. Although suppliers favor rebates as a means to securing higher volume sales, there is no guarantee that the goals will be achieved. Issues can arise regarding quality, delivery, and service that can outweigh any rebate.
• Suppliers should be willing to engage and “collaborate” with customers. Getting rebates for quality and on time delivery is a foolish business practice.  
• Rebates can encourage poor end of year behavior with money being spent just to achieve the rebate.  What is worse, the next budget year must resolve the “found money” problem.  Either the Finance team must accrue the value of the rebate or the money gets applied to the following year, or the rebate calendar out of time with the budget.
• The purpose and a value of a rebate as the cost reduction can be applied directly to the price. The actual processing of a rebate incurs additional cost and therefore the savings is diminished.
• Eliminate rebates so that management can view standard company reports or invoices and see the prices paid. Rebates are also vulnerable to abuse.  The only time to consider a rebate is when a processor quotes a total cost that includes a product that is purchased. A competing vendor may offer a rebate to compete with other suppliers. If this is done one must be certain that accounting knows about the agreement.
• Rebates can become “too a tight link” with the Customer, and it can be interpreted, as a sort of legalized bribe. It is much better to negotiate a price discount. 
• Have the hard savings applied to a reduction in cost rather than agreeing to volume rebates over a period of time. This way not only is the savings guaranteed, but is realized immediately. Rebates are generally counter-intuitive to both short term and long term cost savings goals. They are also hard to project and apply to the bottom line. They tend to muddy the waters on the cost savings spreadsheets and I have also seen them muddy the waters in the supplier relationship.
• Rebates are used by suppliers to influence customer sourcing decisions. For each purchase it can force an evaluation of any price difference against the impact that purchase would have on the rebate. If a Buyer wants the price break for a quantity and makes no firm commitments to purchase more, the supplier can either refuse or inform the buyer that the rebate will kick in once the quantity level has been met. The seller has nothing to lose.  If the buyer fails to purchase the required quantity, no rebate will be paid. 
• Many buyers view rebates as price reductions that they should have been receiving from the beginning and an additional cost as the supplier has the use of the buyer’s money until they pay the rebate.
• If suppliers will not agree to reduce the price and insist on a rebate approach, understand that the rebate is an attempt to lock you in for the future. Ultimately, chasing rebates could result in paying more than what the competition is charging to get the volume for the rebate. That may have been what the supplier’s strategy was in the first place by offering it.
• Very few buyers like rebates. They are a hassle and add costs of collection, accounting, and management. A rebate’s purpose is to hide pricing from the market. 

Uncertain 

• Rebates are just a tool, not an end-all solution. It may have value under some circumstances, and not in others. While having the savings locked in at the beginning is preferable, if a volume rebate is a last resort, it shouldn’t be dismissed out of hand.
• Some suppliers do not want to invest the time and expense to manage rebate programs. Others see them as a mechanism that drives sales volume and loyalty.  
• Most rebates are tied to sales volume.  In negotiating rebates, do it the same way you would negotiate any volume pricing. Look at where there are real cost differences and opportunities.
• If suppliers realize cost breaks from buyer volumes, the rebate should be higher than if your volume will have zero impact on their costs.
• The case against perpetuating rebates is easy to make in manufacturing. But in supply management, dependent on the resale of commercial and industrial goods, rebates are not going away anytime in the foreseeable future.
• If the rebates set are unachievable, they merely to encourage more spend. Unless the rebate is achievable, it will not work.

 Opinion

In this admittedly unscientific sampling, the overwhelming opinion is to disfavor rebates.  What do you think?