Understanding String rebates
String rebates are one of the more common queries we get asked about. The concept is actually fairly straightforward, but implementation and calculation can be extremely difficult, especially when agreements contain multiple rebate periods and multiple strings.
On the one hand, it’s obvious why suppliers like string rebates — they’re a bit like avoiding double taxation; you shouldn’t be taxed on money you’ve already been taxed on, so when you calculate your taxes you deduct any local taxes or other taxes you’ve paid during the year and then you’re taxable income is based on the net — but the problem for groups who agree to string rebates is calculating them effectively, and understanding the affect they can have on your targeted rebates.
What is a string rebate?
A string rebate avoids a supplier paying rebate twice on the same set of turnover, or more accurately, paying rebate on rebate. If you have monthly or quarterly rebates, those rebates paid during the year get deducted from the annual spend when the annual rebate is calculated — so rebate isn’t paid against rebate already paid during the year.
To demonstrate, let’s create a fictitious — albeit silly — example. Let’s say you get a 10% monthly rebate, and a 10% annual rebate. Let’s start by looking at a non-strung annual rebate: if you spend £1,000 per month, you’ll get £100 (10%) per month and then £1,200 (10%) at the end. In total, you’ll have spent £12,000, and earned £2,400 in rebate.
If the annual rebate is strung against the monthly rebates, your £12,000 of spend over the year actually becomes £10,800 when the annual rebate is calculated (the £1,200 in total monthly rebate earnings over the period are deducted from your annual spend). Therefore, your annual rebate actually becomes £1,080, and your entire rebate earnings in total for the entire year end up as £2,280.
Where things get complicated
The above example is actually quite straight forward — partly because we used a silly 10% monthly and 10% annual rebate example — but also because the annual rebate is guaranteed, and there’s just one monthly rebate.
To demonstrate where things can get complicated, let’s set-out a more realistic agreement:
- Monthly rebates
5% on hand tools
8% on power tools - Quarterly rebate
5% on power tools - Annual rebate (all products)
1.5m — 2m @ 2%
2m — 10m @ 3%
10m+ @ 4%
Let’s say we spend £100k per month on hand tools, and £80k per month on power tools, and the quarterly rebate and annual rebate are strung.
So — let’s work this out!
Monthly, we’re going to get £5,000 (100k @ 5%) in rebate on hand tools, and £6,400 (£80k @ 8%) in rebate on power tools.
When we get to Q1 — which is on power tools only — we’d have spent £240,000 on power tools but also received £22,800 in monthly rebate. When that is deducted from our £240,000 we’re left with £217,200 in power tools spend during the first quarter. The rebate on that would be £10,860 (£217.2k @ 5%).
Now let’s get to our annual rebate. In spend terms, we’d have spent £1.2m on hand tools, and £960k on power tools. That’s £2,160,000 in total spend, and the annual rebate is based on spend across all products — thereby putting us in the 3%( £2m+) band.
…. or does it?
You see, we’d have already received £60,000 in rebate from our monthly hand tool rebate, £76,000 from our monthly power tool rebate, and £43,440 from our quarterly power tool rebate. Add all those rebate earnings up, and that’s a total of £179,440 in rebate earned over the year. Deduct that from our £2,160,000 in annual spend, and suddenly our spend is now £1,980,560 and we’ve dropped back down into the 2% band!
Everything, post-target, or pre-target?
There are three types of strings when it comes to targeted rebates — the first is when the string affects everything, like in our example above; The already earned rebate from our monthly and quarterly rebate is deducted from the annual spend, we fall back down into the 2% band, and we end up with the following annual rebate:
- £1,980,560 in annual spend @ 2%
£39,611.20 in rebate
However, this type is string is very supplier friendly (the smallest rebate possible is payable). We’d argue that although the rebates might very well be strung, the targets are negotiated in good faith as total spend — not including deductions, and when you try to project your spend in negotiation meetings, you’d need to be a human calculator to try and factor in strings. So the more member friendly alternative (whilst retaining the string) is the second option — post-target. In this scenario, the level of rebate you achieve isn’t affected by the string — you’ll get your 3%. However, you’ll only get your 3% on the strung spend of £1,980,560 (not the £2,160,000 of total spend). In this scenario, you’ll end up with the following annual rebate:
- £1,980,560 in annual spend @ 3%
£59,416.80 in rebate
The last option is a half-way house — pre-target. The level of rebate achievable will be affected by the string — you’ll only get 2%, but you’ll get the 2% on all your spend — all £2,160,000 of it. In this scenario, you’ll end up with the following annual rebate:
- £2,160,000 @ 2%
£43,200 in rebate
You’ll be surprised how many times an agreement has been negotiated, but how the string is applied to the targets has not been specified clearly, either by the supplier or the negotiator, yet everyone has signed off on the agreement. If you can negotiate a post-target string, and get that in writing within the agreement — in the above example you’d have earned an extra £19k of rebate.
However, if you can’t get the supplier to agree to a post-target string, perhaps they can be convinced to accept a pre-target string — which is better than the standard string terms of both, and can perhaps be seen as a compromise.
As you can see, string rebates can be complicated — both when you’re negotiating your agreements and when it comes time to calculate what you’re due. Of course, you can make it even more complicated by negotiating a deal where rebates are not retrospective to zero, but that’s a topic for another day!
Having a system in place that can handle all of these variables and accurately calculate your rebate for you can save you massive amounts of time and headaches. Speak to us today to see how we might be able to help…
