Back end rebates: Look before you leap

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Back end rebates are an integral part of the business strategy (sales plan) of any national or international principal company. According to Neelesh Saxena, proprietor, Hi-Tech System Ltd, Jaipur, back end rebate is a committed incentive scheme for channel partners by principal companies. It is applicable to those channel partners who achieve their time bound targets. These rebates are aimed at ensuring channel partners’ loyalty, tying them up with targets and maintaining price stability by extending benefits only after the targets are achieved. Broadly, back end incentives are driven by the performance, quality, consistency and loyalty of the channel partners.

In the electronics industry, back end rebate is the most important survival factor for channel partners, who do their business on credit and sacrifice their profitability at the altar of volumes.

By Sandhya Malhotra

Wednesday, February 17, 2010: Compensate low margins

Commenting on the necessity of back end rebates, Delhi based, SK Jain, managing director, Sumitron Exports, says, “It maintains the profitability of channel partners by improving their margins. Around 20-30 per cent of our business comes from back end rebates. These rebates are adjusted when the final payment is made to the principal company.”

Back end rebates also cover miscellaneous expenses like cost of paper work, time, handling charges, transportation cost, availability of product and discounts to sub-dealers. But it does not cover the interest on working capital, damage due to wrong handling, obsolete products and useless support spares (frequent change in models).

No back end rebates for importers

Typically, back end rebates are provided to channel partners who sell boxed items or finished electronics hardware of principal companies. Importers, channel partners and distributors selling components don’t get this rebate. Mumbai based Gulabchand Hariya, director, Cirkit Electro Components, says, “Back end rebate is not given to industrial electronics component distributors like us. This is due to the fluctuating prices of imported goods.”

Agreeing to Hariya, Padam Aggarwal, director, Aggarwal Electronics, a Delhi based importer of networking products, computer connectors and components, adds, “Our principal companies provide 20-30 per cent price discounts on monthly or quarterly basis, which improves our margins.”

TV Deshikan, director, Omniscient Electronics, highlights another issue. “In our business, price margins are shrinking while product volume is going up. But apart from technical and commercial training programmes, principal companies do not extend any other back end rebate to us.”

Types of back end rebates

The percentage of back end rebates depends on the principal company’s policies. Holistically, there are five types of back end rebates extended to channel partners—unit based or bundle rebate, target based rebate, promotional activities rebate, special tour package rebate and combo pack rebate.

Unit based rebates are quite popular, under which, on a single order of a particular volume the channel partner gets a certain number of products free. This rebate gives an instant rebate and is not a target based incentive. Target based rebates are given on a credit note period of 30 to 45 days, thereby providing enough time to channel partners to sell the product or divert the money for other purposes. Beneficial for new entrepreneurs, promotional activities rebate is another kind of rebate, under which, channel partners get advertising materials. “In special tour package rebate, principal companies bear all the expanses of channel partners except flight fare when we attend various company sponsored training or promotional programmes,” says Saxena. It is quite popular in box selling product segments like telephones, PCO machines, UPS and inverters. Lastly, combo pack rebate is a combination of all the above mentioned rebates.

Besides these, there are some companies who give start up rebates to new channel partners. It provides special discounts on promotion, training, initial distribution expenses, spare parts and transportation, for the first two billings.

Issues related to back end rebates

All back end rebates are taxable. According to Saxena, principal companies deduct TDS (tax deduction at source) on all back end rebates while finalising reimbursements. Besides, many channel partners complain that manufacturers often force their products on them by luring them with rebates. Aggarwal agrees that due to cut throat competition in the market, ‘push sale’ has become a common problem for channel partners. But he also adds that partners must take risks based on market analysis and not blame the manufacturers if they fail to meet the targets.

The other important issue related to back end rebates is late payment or partial payment by principal companies.

For delayed payments, principals usually give reasons like “Manager who was handling the region has been transferred or left. Therefore it will take time to recalculate the payment”; “There is a cash crunch in the company”; “Credit note has not yet been signed by higher authorities”; “Regional reports are not being filed”; “Quarterly meeting is going on” or “Boss is on tour”.

Normally, rebate reimbursement gets delayed by 30 to 45 days and some companies deduct charges like promotional expenses, service charges, breakage of products, TDS, courier, return charges, etc. “About 70 per cent of the principals delay back end rebate payments, therefore, a channel partner should handle it cautiously,” suggests Mukesh Chourasia, owner, Dream Zenith.

Documentation required

Before filing the reimbursement of back end rebates, channel partners should check that every communication with the principal has been done in writing and the claim does not involve any verbal commitment by the principal. A partner should demand all the details of the rebate on company’s letterhead or on e-mail. Channel partners should collect the incentive claim form from the company and enclose all letters, mails, photocopies of bills, bank account statements and approval taken from the regional head along with it. However, if the problem still persists channel partners should try to discuss the matter with higher authorities in the company.

Solutions to get quick settlement

The onus of smooth reimbursement of back end rebates largely falls on the principal company and channel partners should handle it professionally. All the above mentioned issues can be resolved if all the transactions are done online, which facilitates the partners to see targets, achievements, amount of rebate, process time and schedule in one place. Moreover, channel partners should try to know about hidden charges. They should ask the principal company to have a separate department to resolve grievances of channel partners. “In most cases, the regional head is solely responsible for the payment delay. We want some other authority to settle the rebates,” says Chourasia. Principal companies should understand that rebates are very essential for their business, and problems related to these ought to be sorted out through discussions, concludes Jain.

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine

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