Rebate
Reviewed by Dasha ShakovVP Marketing, Proton
Updated
What is rebate?
A rebate is money paid back to a buyer after a purchase, once the buyer reaches agreed volume or growth targets over a period. In distribution, manufacturers pay rebates to distributors and buying groups, and distributors sometimes pay rebates to large customers in turn.
How it works
A rebate is earned after the sale, unlike a discount on the invoice, and only if the conditions are met. Volume rebates are based on total purchases; growth rebates are triggered by beating last year and paid on total or incremental dollars. Many programs pay in tiers: a retroactive tier pays the higher rate on every dollar once a threshold is reached, an incremental tier only on the dollars above it. Some depend on sales to particular customers and must be claimed.
Supplier rebates are generally booked as a reduction in inventory cost, so finance’s margin can exceed the one a rep sees.
Rebate example
A supplier pays 3% on all of a year’s purchases once they reach $500,000, a retroactive tier. With purchases at $470,000 in November, the buyer pulls a $30,000 January order into December, reaches $500,000 and earns 3% on the full year, $15,000, less the cost of carrying that stock a month early.
Further reading
Related terms
- Ship and debitShip and debit is an arrangement in which a manufacturer lets a distributor sell to one customer or project below its normal cost, then repays the gap.
- Buying groupA buying group is an organization that negotiates prices, rebates and programs with manufacturers on behalf of many independent distributors.
- Cooperative (co-op)A cooperative (co-op) is a buying organization owned by its members, typically independent distributors or retailers, who pool purchasing for better terms.
- Gross marginGross margin is the share of sales a distributor keeps after paying for the goods it sold: gross margin % = (revenue − COGS) ÷ revenue.
- Margin leakageMargin leakage is profit a distributor loses through many small, often unnoticed gaps between the price or cost it should have had and what it got.
