Are Rebates Costing You More Than You Think?

Rebates often appear to be a great way to save money. The idea of getting cash back after purchasing a certain amount of product from a supplier seems appealing. But could rebates be misleading you?

In this blog post, we’ll show you how we helped one business boost its gross profit margin from 30% to 42.5% – with one simple question about their reliance on rebates.

IN THIS ARTICLE

→ The Hidden Costs of Rebates: What You Need to Know
→ Rebates vs. Discounts: A New Perspective
→ The Rebate Trap: A Common Oversight
→ Simple Exercise, Significant Results
→ Are You Getting the Best Deal?
→ Conclusion
→ Final Takeaway

The Hidden Costs of Rebates: What You Need to Know

In a recent finance meeting, we analysed the margin on a product for a business we work with. We discovered the margin generated from selling their product was alarmingly low. For every dollar in revenue, about 70c was spent on the product.

Put simply, if this client was a kitchen supply business* selling dinner plates and forks (*industry changed for good measure), each plate or fork would cost $0.70c for every $1.00 dollar the business made in revenue. An extraordinarily high amount.

Rebates vs. Discounts: A New Perspective

When we asked about rebates and discounts, the business replied they received rebates from a certain supplier totalling 2-3% cashback at the end of the month. For example, if the business had to pay over $100,000 to its supplier, they would only need to pay $97,000, saving $3,000 in cash.

However, we suggested considering an alternative. 

“Could you find a supplier where your clients wouldn’t notice the difference – there was no perceived difference in quality – but instead of a rebate, you got something more powerful instead... a significant discount?”

A lightbulb went off. The business acknowledged that certain suppliers could provide the same quality at a better price, with discounts on volume far exceeding the 2-3% rebate.

The Rebate Trap: A Common Oversight

Our client had been entrenched in the rebate culture, believing they were saving money by not paying as much when settling invoices: “But I don't have to fork over as much cash when I pay their invoice, right?”

To which we answer... why not just decrease the invoice to begin with by 15 or 20%?

Simple Exercise, Significant Results

Next, we conducted a straightforward exercise to assess the business’s supply sources. About 50% of their product supply came from the rebate-providing supplier. By sourcing this 50% from another supplier at a better price through discounts, we calculated a potential increase in margin of around 12.5%.

And, if applied to the entire product base, the improvement could be as high as 25%, transforming a margin of 30% to 55%. A lot more appealing for that business!

Are You Getting the Best Deal?

This client wasn’t silly. He wasn’t uninformed or inexperienced in running his business. But he had been so focused on the rebates that he overlooked the possibility of better pricing through discounts.

Now is the time to ask yourself:

Are there suppliers you’re getting rebates from, but if you really challenge the total price paid vs another supplier of the same quality, are you truly getting the best deal? Or could you be blinded by the cash saving when you're paying the invoice?

Conclusion

In conclusion, it’s critically important to regularly evaluate your supplier agreements and explore alternatives that may offer better financial outcomes.

In the case study above, this strategy resulted in a 12.5% improvement in profit margins for 50% of a business’s product supply. If applied across the entire product base, the potential margin improvement could be as high as 25%.

Even experienced business operators can sometimes be swayed by the apparent benefits of rebates, and be missing out on better options. But by shifting the focus from rebates to discounts and taking a closer look at the true cost of supplies, you can make very real cost savings and margin improvements.

FINAL TAKEAWAYS:

• Reassessing your supplier relationships and pricing strategies can unlock hidden savings and improve the financial health and performance your business.
• To maximise your profit margins, consider evaluating your supplier agreements on a regular basis.
• Look for opportunities to replace rebates with more substantial discounts, making sure you get the best deal possible.

BY THE WAY...

Over the past decade, we’ve met hundreds of business owners, managers and accountants who know their business is capable of bigger and better things. The issue? They’re so bogged down in day-to-day operations that they don’t have time to dedicate to improving performance and profit.

That’s where we come in. In 2023, the small-to-medium ($5-50M revenue annually) businesses we work with across Australia, NZ and North America – mostly in manufacturing and wholesale – averaged:

• 6% increase in return on capital
• 21% increase in profit
• 400% increase in cash flow (true story; in all honesty, the round number annoys us).

Seriously, though. What would numbers like that do for your business?

If you’re interested to find out together, schedule a time that suits you (it takes less than 30 seconds) here.

If that’s still a bit daunting, no worries. You can also reach out by email via hello@cfodynamics.com.au and our friendly team will point you in the right direction. Or, sign up to our email list to get our director Brendan Mills’ personal email address, where he can answer any queries directly.