Rebates and Prebates

Rebates and Prebates

The sixth in a series of eight posts titled:

“The View From the Other Side”

If you are a really large buyer of lab supplies (over ten million per year) and you have done a good job negotiating, then you may be offered the proverbial brass ring - a prebate.

A “prebate” is also known as a “signing bonus.” What it is never called is a bribe. Meriam Webster defines a bribe as: “to influence the judgment or conduct of (someone) with or as if with offers of money or favor.” A prebate comes at the end of a prolonged contract negotiation. The offer is made first by the non-incumbent vendor who is of a mind that you haven’t gone to all this trouble with no intention of switching vendors.

I’ve never been in an actual meeting where this type of offer has been made, so I can only guess that the process is to lay a signed check in front of the buyer and then ask if $X,XXX,XXX were placed on the amount line would the contract could be awarded to our firm? For multi-year, multi-million dollar contracts (e.g., Big Pharma) the reported amounts of these rebate checks can be as much as five million dollars! This is money paid up front before the first purchase order has been issued! Of course, once this offer is made, the incumbent vendor is then informed that they now have the opportunity to meet or beat the offer on the table. Repeat.

If you can’t get a prebate, what about a rebate?

A rebate is getting money back as an incentive for doing something that the contract holder wants to encourage you to do.

These include:

Growth incentives - Money or credit on your account for hitting growth targets that are set by the distributor.

Incentives for switching - Money or credit on your account for changing from one vendor to another who yields more margin for the distributor. Typically done to encourage use of private label products vs. branded products.

Incentives for contract compliance - This is a common incentive put forward where there are multiple sites in different geographic locations. The reward is provided if all sites (or a high percentage) convert to the new supplier. The reward is withheld if ANY of the sites have not made the switch.

Loyalty rebates or bonuses - Awarded for staying in the contract or extending the contract. Typically payouts start at year 2 and are paid annually thereafter. These are the easiest to negotiate.

Are there any downsides to rebates?

Amnesia is the biggest problem I’ve seen. Distributors have a habit of forgetting that incentives are part of the contract until they are reminded. Another problem with rebates is the metrics. The distributor generates the metrics used to determine if a payout is due, and they have an incentive (and tendency) to “bend” the numbers if the payout level is close.

Perhaps the biggest problem with rebates is who gets the money? In a corporate environment it’s not an issue. But in a situation like a University where procurement is spending money on behalf of a lot of different grant holders, this can end up being a big legal issue. If not handled in a transparent and correct manner, rebate distribution can even jeopardize government grants (e.g., NIH).

For-profit institutions should definitely include a rebate request in the original bid specification. My recommendation for public entities and non-profits is to tread very carefully when dealing with rebates and make sure the process is handled in the open and with full transparency. Make sure you are in compliance with the terms spelled out in grants principal investigators may be awarded!

For the real poker players out there, go for the prebate! If you are a highly ethical individual, this advice may cause you to squirm a little, but the rule is, if you don’t ask, you won’t get.

What we have discussed in this series:

  1. Contract Terminology 101 - what are the components and what do they mean to you?
  2. Contact vs. Agreement - What’s the difference? Do you have the right to shop elsewhere? What about a “generic” or group contract?
  3. The Hot List and Price Caps - The pros and cons.
  4. Guaranteed Cost Savings - Hard vs. soft cost savings. Metrics. Penalty clauses.
  5. Cost Plus Pricing - Depends a lot on how you define “cost.”
  6. Rebates and Prebates - Sound too good to be true? Most likely it is.
  7. Profitization - How it’s done and how you can protect against it.
  8. LPS On Your Side - The LPS approach. How it addresses these issues and is a better fit for many lab