Marketing/Rebate Programs

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The crop protection industry has long made a practice of employing marketing programs to sell products through the channel. These programs, which include discounts and rebates from manufacturers to the distribution channel, are not without a measure of effectiveness. However, as they’ve evolved, marketing programs have become highly inefficient.

Since they were first introduced around 1980, marketing programs have increased in size each year. Marketing programs now constitutes an average 25% of the manufacturer selling price, and the range goes north of 50% for some products. Channel margins obtained from the marketplace and also from retention of discounts/rebates from manufacturers on average total only 11% to 12%. This means, on average, there is a 13% to 14% negative up-front margin.

Despite the obvious inefficiency in the system, no manufacturer has found a better way to achieve their objectives through the channel, or even to recalibrate the system to increase efficiency and efficacy. Retail networks enjoy the luxury of high payments and feel that continuation of the status quo is in their best interest, so they have not put energy into promoting change.

As we consider “the big ideas” of the year or years ahead, we ask: Can these marketing programs continue to increase without either precipitating change or preventing a normal and necessary market evolution?

The goal is that the whole system — the grower, the retail networks/distribution channel, and manufacturers — contribute to the ever greater productivity needed from agriculture in the future. Accepting inefficiency, and worse, propping up inefficient players (even if unintentional), doesn’t contribute.

Why These Programs?

Marketing programs help differentiate a manufacturer’s offering. The most effective marketing programs define objective criteria of clear value to the manufacturer and the market, are doable by the channel partner, and the criteria are adhered to/correlated to payments. They differentiate the manufacturer in a way that is valuable to the channel companies, and difficult or impossible for competitors of the manufacturer to match directly. Changed periodically, programs become neither predictable nor taken for granted. In turn, they have value and cost in balance and are an opportunity for all parties to benefit.

Today, however, with a few exceptions, marketing programs from manufacturers primarily enable channel companies protection from their own weakness with upfront margin procurement in return for some commitment on priority.

Use, Dollar Values Increase

Since their introduction with pyrethroids three decades ago, crop protection marketing programs have increased (as a percentage of gross sales) more than tenfold. However, profitability retained by the distribution channel/retail networks has grown only slightly.

The portion of the industry represented by unique products — those which had no generic or in-kind competition — declined. And as it did, the importance of the distribution channel/retail networks and the need to differentiate in non-product ways increased.

By 2007, the average had grown to represent over 25% of the selling price.

As the rebates have grown, they’ve come to represent an astoundingly large dollar figure — more than $1.5 billion dollars paid annually. Marketing programs are second only to cost of goods in size of expenditure by manufacturers. That percentage has continued to increase 4% to 5% per year in recent years. Still, they are only partially effective.

We’ve Always Done It That Way

A “because we’ve always done it that way” mentality often, over time, precludes efficiency.

As the industry has matured, we’ve seen an increasing portion of products with expired patents (generic options) and/or in-kind options. That shifted the power from research-based manufacturers to the owner of the retail interface, the retailer/retail network. Retailers have the primary influence on the grower and can shift brand choice on equivalent/nearly equivalent products. Further, we’ve seen the consolidation of generics companies to be larger, stronger, and more service-oriented, which further shifted power from the basics to the distribution channel.

Ultimately, we have witnessed sweeping industry system changes that were driven by marketing programs and now sustain them, e.g., a shift by basic manufacturers to net sales from gross sales where marketing programs were an expense. Now they are off the P&L by making them an off-revenue accrual. In essence, rebates have become part of pricing.

What Can Be Done?

The current state of crop protection marketing programs seems to defy common sense and would certainly benefit from a recalibration. But how?

We know that no single manufacturer has any chance for successfully replacing marketing programs with a net pricing model. Collaborative activity isn’t an option. If any two or three manufacturers made changes with any similarity, they would likely receive Security and Exchange Commission/Justice Department scrutiny.

The distribution channel and retail networks certainly want marketing programs to continue, so we don’t expect change from there. In summary, no single company, manufacturer, or distributor/retailer has energy at this time to change the game, alter the model, or lead the change.

However, recalibration, while not urgent, could be very effective. To start, manufacturers should set measurable, value-adding, objective criteria. They should work out win/win objectives with the channel using the criteria and metrics — and then adhere to the objective criteria religiously to determine the level of marketing program payment. Since this new breed of marketing approach would not include a guaranteed payment, they would be less likely to be passed through. Recalibration should/would also keep value in use for growers paramount — so growers would not be penalized.

Retailers and retail networks are eager to effectively compete for their grower customers’ business. They can help by expressing a desire and support for win/win arrangements that strengthen their business, add value for their grower-customers, and deliver value for the dollar to their partner manufacturer. Retailers and retail networks should also cease creating and maintaining systems to estimate net, net pricing, and putting these in the hands of their sales team! They win when they continue to sell service and value.

Everyone in the industry should accept that some companies (especially in the channel) won’t survive. Ideally, that would be the weakest entities. Tweaking marketing programs helps assure that evolution favors the smart, the strong, and well-managed — and yields greater productivity of the entire system.

Other solutions might come from new technologies that capture point-of-sale information, provide more objective metrics, and tie more closely with performance. Some such systems, as employed in the consumer sector, may provide still another means to better capture value and positively evolve our industry toward greater productivity.

New mindsets will be required. But rather than doing it for the sake of “we’ve always done it that way,” it’s definitely time to consider every means possible to operate more efficiently and to grow productivity.

Borel is a partner with The Context Network, West Des Moines, IA.

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