Edit
 Upfront or Backend?
CMDA Delhi’s move to send a letter to MAIT asking the manufacturers’ association to work with its members to end the practice of backend rebates and incentives is certainly a bold initiative.
While I am not in favor of completely removing backend rebates, I would like to see vendors adopting a policy that provides higher upfront margins compared to backend incentives.
A backend rebate is like a performance bonus given to employees. But how can an employee earn a bonus that’s higher than his/her salary? In most organizations, the bonus is 20-30 percent of the individual’s salary.
Implementing a policy where resellers are bound by vendors to sell at a certain price to ensure satisfactory upfront margins will create a healthy marketplace. Resellers will then be achieving targets on the merits of their sales strategies, and not on the basis of lower prices.
In fact, a reseller who is maintaining his upfront margin (and not price-discounting) should be given a higher preference and also better incentives as compared to one who sells at cost or below cost.
This will address the price and inventory imbalances in the market, and also keep in check the credit defaults and frauds that we often witness.
Some may say that such a policy is against the norms of market economics where prices are determined by supply and demand. Many volume players may argue that if they can sell more they should be eligible for higher performance incentives. To them I would like to point out that no free market economy can ignore the welfare of a large group of people.
If a business policy or practice adopted by select players is causing harm to a larger section of the business community, it’s an issue which needs to be addressed.
CMDA’s letter raises the same concern. The channel association has pointed out that the backend rebate policy of vendors is resulting in losses and causing mental stress to its members. CMDA has even threatened legal action if their request for upfront business practices is not considered favorably.
I am not a legal expert to know if, on the grounds of mental stress, an association can take vendors to court. However, the tone of the letter makes it clear that vendors need to have policies which keep the welfare of the larger business community in mind—and not just the few large ones, which is the case now. |