Some aspects of channel marketing programs are intuitive, while others require more thought or even intensive study. One of the less-intuitive channel marketing concepts is contra revenue, which actually means “against revenue.”
The name “contra revenue” comes from the fact that channel marketing programs such as rebates, sales promotion incentive funds (SPIFs), co-ops and non-discretionary market development funds (MDF) are logged by the brand owner as a debit. These types of channel programs are directly tied to the units sold and revenue captured by channel customers. The brand owner subtracts the costs of the programs from revenue received when calculating net revenue in general accounting.
For example, a distributor purchases $1 million in products and/or services. As a participant in the brand owner’s incentive program, the distributor and its sales reps are entitled to receive rebates, SPIFs and MDF. Rebates to the distributor represent 4% of sales, SPIFs for the sales reps are 1.5% and MDF amounts to 2.5%. In total, the brand owner spends 8% ($80,000) on incentives given to the distributor. This $80,000 is typically subtracted from revenue to calculate the net revenue of $920,000.
Disadvantages—but Much Value
In addition to lowering net revenue as shown in the example, contra-revenue programs add complexity and administrative costs.
If these programs reduce your top-line revenue as a brand owner while increasing complexity and costs, why use them? If decision makers really thought these expenditures were unnecessary to maintain sales, marketers would eliminate them—but why not just lower the up-front price and avoid contra-revenue programs and their resulting administrative efforts? To answer that question, let’s use an analogy.
Most companies pay their sales representatives a salary plus a bonus or commissions. Why don’t they just pay a higher salary and be done with it? The answer is based on the future, because smart brand owners want to motivate and push their sales representatives to do more. Brand owners want to influence behavior by paying sales reps more beyond their standard paychecks to do X, Y and Z. Similarly, companies use these “back-end” contra-revenue programs to shape channel behavior and motivate partners to do A, B and C—all of which companies believe will result in the sale of more products and services. That’s why we see these programs increasing in popularity and usage.
Four Little-Known but Impactful Reasons
Besides influencing partner behavior to drive increased sales, there are four more reasons—less widely known but very significant—why companies invest in contra-revenue programs:
Reason 1: Brand Competition
To compete against other brands, companies often have to offer better prices than the competition. Programs such as “ship and debit” and promotional rebates enable a brand owner to capture additional sales and take market share away from direct competitors by lowering a price either for a specific customer (ship and debit) or across the board temporarily (promotion). This is better than dropping the price on a more permanent basis.
Reason 2: Managing Channel Conflict
Brand owners need to manage conflict between their channel partners to ensure long-term engagement from the channel. Deal and design registration programs are examples of contra-revenue programs designed to manage channel conflict.
For example, when a partner takes time to identify an opportunity or design and/or specify the brand company’s product into an opportunity, that partner needs to be protected from the free-rider effect. Since other partners have the same product but did not have to invest their time and energy to find and specify the deal, they can quote a lowball price and undercut the partner that performed all the work. These other partners typically identify the opportunity as a “house” account and eliminate the expense of paying a commission to a sales rep. They pass all or part of the savings on in a lower price and win the bid. If the partner who does the work is not protected from this free-rider effect, eventually the investing partner stops doing that work and the brand company doesn’t see or doesn’t get specified into future opportunities. The brand owner can lose sales and market share as a result.
Reason 3: Capturing Channel Mindshare
Partners carry other brands, including complimentary products and products that compete with the brand owner’s offerings. This allows partners to call on customers that the brand owner is not able to economically reach or serve. While this can help a brand owner increase sales, it also means the company needs to compete for the partner’s attention and time with respect to both the competitive and even the complimentary products. Contra-revenue programs help companies address this issue. Programs such as volume and growth rebates are designed to capture the attention and outsized effort from the partner owners or corporation, while SPIFs are designed to capture the attention of the partner’s sales reps. MDF funds are used to focus partners on marketing activities for the brand leveraging local market knowledge.
Reason 4: Motivating the Channel to Invest
Co-ops and MDF typically reimburse the channel for demand-generating activities. These programs usually represent only a percentage of the costs and may vary by activity to focus partners on specific activities the brand owner believes are more effective. For example, attending a trade show may be reimbursed at 50% of the cost, whereas creating and distributing digital marketing materials and/or case studies may be reimbursed at 80% of the cost. This means the channel not only receives reimbursement for these activities, but the brand owner gets to leverage partners’ marketing spend and combine it with some channel spend.
Understanding the reasons for a contra-revenue channel marketing program enables channel managers to be more strategic. They can combine the right programs and adjust the investment amounts in each program to better align channel payouts to the brand owner’s growth strategies. Instead of being against (contra) revenue, the ultimate outcome is long-term results and strong, consistent sales performance from a loyal channel.