Rewarding Added Value (56.246Kb) - DOWNLOAD

It is not difficult to see what is wrong with simply rewarding volume sales. Ask the skilled specialist who has spent months closing a deal, only to have a box-shifter with low overheads and low skills snatch it at the last moment. Ask the half dozen partners who are all competing on price for the same big order from the same big customer.  Ask the consumer who ends up with a low price product, accompanied by poor service and support. 

Adam Fein, head of Pembroke Consulting spells it out: "All rewards drive behaviour and the traditional way of rewarding through volume discounts drives volume. Trade promotions can cause great instability leading to higher inventories and distorting the manufacturing cycle. If intermediaries can not make money by selling, then they do so by negotiating extra discounts from the supplier."

In contrast, a model where you reward value-add looks, at first sight, like a no-brainer.  Simply define value add in any way you like, and then reward those intermediaries who actually deliver.  Want to hit small and medium businesses?  Keen to reward intermediaries who really please the customer?  Or do you simply want to reward the very efficient? 

“Value add schemes are open to manipulation, even fraud.”

Whatever your goal, you should be able to put in place a system which either completely replaces volume rewards, or sits on top of a volume system.

In practice, rewarding value-add has proved to be extremely difficult.  At least volume rewards have the merit of being simple.  But how do you objectively measure value add?  How do you police a value-add system?  And how do you even set about explaining all these new rewards to your channel?   Many suppliers have tried and failed to introduce value add-based reward schemes.

This article looks at when value-add systems are appropriate, their benefits and drawbacks and case-studies several suppliers who have actually implemented such schemes.  We also look at how best to implement such systems.

In practice, most suppliers base rewards on sales volume  and then add some extra value add rewards on top.  Usually, these value add rewards are given in an ad hoc way – often on a deal-by-deal basis.  Perhaps you give free demonstration kit to any intermediary who adds value by giving you the details of end-customers.  Alternatively, you might agree to co-fund a marketing programme which looks as though it will hit your target customers.

Such schemes work reasonably well when you are selling through a few channel players, however, the moment your channel grows beyond a certain size, ad hoc solutions hit problems.

Ad hoc value add schemes are open to manipulation, even fraud. Large partners will threaten your account managers with a loss of sales unless they agree to pay out extra margin for various spurious activities. Suppliers’ account managers can quite easily be sucked into this process.  Often these extra margins are simply used to discount your product more heavily.