NEWS ANALYSIS: Soft dollars

NEWS ANALYSIS: Soft dollars

Less-scrupulous channel players that are using rebates and co-op marketing funds to subsidise their pricing structure have been accused of creating a false economy and giving vendors added reason to keep their purse strings drawn.

Rebates, co-op marketing, MDFs (marketing development funds), soft dollars -- they come in any number of flavours. Regardless of the name, funds provided by vendors to entice resellers to develop business and achieve targets are drying up.

"I guess the message is it's a double whammy in a contracted market," said Anne Mossman, director sales and marketing at Tech Pacific.

She argued that the channel is being squeezed on two fronts. Firstly, by tough market conditions which are seeing co-op dollars being withheld, and secondly, by some distributors and resellers selling products at lower prices in the hope they will reach targets and receive marketing dollars to compensate for the loss of margin.

"Soft dollars can significantly fund the bottom line profit of a business," Mossman said. "Rebates are there for channel companies to stretch for targets. So you see some of the less-professional or less-mature companies incorporate them into their pricing, which creates unnatural conditions."

Mossman said the result of this is having a direct impact on some companies' viability, "and that's why a lot of them are going under".

Mike Muscat, manager of BBF Distribution in Victoria, said that while he couldn't name the companies involved in inappropriately using rebates, the proof is in marketplace pricing, which doesn't add up to what he and his peers pay for.

"One vendor actually used that as an excuse for why one of our competitors was selling their product so cheap," he said. "When we asked why, [the vendor] said they had no trouble with a distributor using marketing funds to subsidise their prices, mainly because the distributor in question was actually using the marketing funds of a different vendor to lower the price of their product.

"It is always a problem for us to maintain our margins to compete with those that subsidise sales with co-op marketing funds. It puts an incredible amount of pressure on us," Muscat added.

While the situation isn't new in the channel, it has finally drawn the attention of vendors, which are demanding a more visible return on their investment and exercising constraints on how the money is spent.

Anthony Szabo, general manager of BMS Technology, South Australia, said the best marketing schemes were where vendors provided a direct rebate scheme based on what the distributor purchases. He believes it should be up to the distributor to run their own marketing campaigns to ensure they provide the right incentives for their resellers.

"The rules are pretty clear-cut with the vendors we deal with -- some of them also check its use. Lately they have been a lot more strict, and are more likely to review the marketing activities," Szabo said.

While Compaq partner program manager Ian Bowley said there had been no change to the way Compaq does business with its channel -- inferring it had not wound back on its marketing spend -- he did say Compaq works closely with its partners "in planning where that spend goes".

"We certainly work closely with our partners to ensure that both the partner and the vendor get maximum return on that investment," he said. "There's always scrutiny on how the dollars are being spent, and of course the channel would always like to see more."

It's a response that rang true with all of the vendors that ARN spoke to for this article. Simply put, vendors are tired of seeing marketing dollars spent on coffee mugs, throw-away pens or, worse still, to fund salaries or subsidise pricing.

BBF's Muscat said that rather than receiving direct funds from its vendor partners, BBF approaches vendors with ideas for marketing campaigns, and the vendor then decides whether to take on the initiative.

"Anytime we can justify the expense, we don't have any trouble with our vendor partners," he said. "Our relationships have always been pretty straight up and down."

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