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Terms of Trade: How Can They Add Value to Your Amazon Business?
For every e-commerce business, it is of utmost importance to have a strong sourcing model and supply channel. The quality and brands of products retailed are going to ultimately build your reputation, thus resulting in long-term sustenance if managed properly.
With hundreds of suppliers, it is an uphill task to ensure a low cost of goods sold, commonly referred to as COGS. If the COGS is high, then the business may not be profitable. Merely having a set of suppliers in place will not help. Periodic, effective, and structured negotiations with the suppliers are very important to ensure ongoing profitability and healthy performance metrics.
Suppliers have various ways that they impart discounts to sellers and it is always recommended to discuss the possibility of further discounts with each supplier. Sometimes there are no direct discounts provided upfront, but they can be given as kickbacks and credit notes. Below is a list of ways that discounts on product price can be passed on to you from the supplier. Better known as Terms of Trade (ToTs), these discounts can help you compensate for any defective product issues and ensure that you are receiving value from your suppliers as your business scales.
1. Rate Card Discount
The most simple and direct form of discount is the rate card discount, widely practiced amongst Amazon sellers. The supplier typically keeps a standard price list or rate card and he offers a flat discount on all SKUs across the board. The discount given can vary from seller to seller and is based on negotiation, relationship, and volume of business.
A rate card or price list discount is usually negotiated at the beginning of the year and stays fixed for the remainder of the year. For example, if you are enjoying a 23% rate card discount, you can negotiate and get an additional 2-4%. The additional discount may get less with each passing year, as almost all suppliers have a cap to the rate card discount that they can extend.
2. Marketing Co-Op
All brands have a marketing budget which is distributed across many channels. There is always an allocation reserved for sellers to promote the brand and the products. Reach out to your supplier and discuss the available marketing spend. As a seller, you can advertise the products and the brands to increase sales and visibility. Part or all of this spend can be sponsored by the supplier. This particular instance is more relevant if you are directly dealing with the manufacturer or brand owners and is less available with distributors.
Once you have discussed your marketing plan and estimated spend with the supplier, they will come back to you with the marketing support they can provide. There are two ways that they may provide marketing support:
- As a percentage of the entire purchase, such as 2% of the entire purchase. This can be deductible from the invoice itself or can be received as a credit note at the end of a quarter or year.
- As a fixed value, such as $500 per month. This comes in as a credit note at the end of the month or quarter and can be adjusted against the next purchase.
Marketing co-op should always be discussed at the beginning of the year, as most of the marketing spend is allocated within the first half of the year.
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3. Volume Incentive Rebate (VIR) or Growth Incentive Rebate (GIR)
As the names suggest, these types of discounts or rebates are linked to higher volume and growth.
Every supplier wants his or her retailers to sell more and grow faster every year. Therefore, some suppliers have VIR or GIR in place as an incentive.
VIR – Volume Incentive Rebate
|Up to $100,000||1%|
|$100,000 – $200,000||2%|
|$200,000 – $350,000||3%|
|$350,000 – $500,000||4%|
With a volume incentive rebate, the higher the volume, the better the scenario for both the supplier and you as the seller. The discount increases with the volume of the business. An example of a VIR plan can be seen above. The rebate is valid for the total amount of business done during the year with the supplier. For example, if you end up doing $372,000 in the year, then you will be eligible for 4% and will get a credit note for $14,880.
GIR – Growth Incentive Rebate
Growth incentive rebates are usually applicable after at least one year of business with a supplier. The supplier expects the seller to grow more than the business done in the previous year. For example, if a seller has done $200,000 in business in 2017, then a GIR plan for 2018 can be as below. The additional rebate kicks in once you have grown past the previous year’s business.
|Up to $200,000||0%|
|$200,000 – $350,000||2.0%|
|$350,000 – $500,000||2.5%|
4. Defective Allowance
Every product manufacturing business will have some percentage of products that are defective, sometimes as low as 0.2% or as high as 4%. Either way, as the seller of the products, you are faced with the burden of finding a solution. Suppliers will take back the defective products, but by the time it reaches their warehouse, you will have likely incurred a significant amount of shipping and handling charges through all of the back and forth. Some suppliers will give a small percentage off to compensate for these charges.
You should discuss the number of expenses incurred against defective products with the supplier and negotiate on a fixed percentage for the entire year. In some cases, the supplier is ready to give a higher percentage off the initial product purchase and will, therefore, make you take the financial hit for the defectives. To avoid this, make sure you have your data available so you aren’t on the losing end of the deal when Q4 arrives.
5. Shipping Allowance
A shipping allowance is applicable in the event that the supplier provides free shipping on all shipments. You might be thinking, how can we get more from the supplier when they are already providing free shipping? In actuality, nothing is free. The supplier is paying for the shipping and is getting it covered through the product cost. Discuss with your supplier about how much additional discount is available if the shipping was not free.
Some suppliers will take away the free shipping and come back with a shipping discount that can be taken off the invoice. If you can manage to ship the same products for less, then that will open the door to additional savings for your business. For example, let’s say the supplier can give 5% off for removing the free shipping clause. If you can manage to ship the product from the supplier’s warehouse to your preferred location in 3.5% of the product cost, then there is an additional savings of 1.5%. When the business is $500,000 annually, the additional savings can be $7,500.
The aforementioned Terms of Trade cover nearly the entire spectrum of discounts that are commonly discussed in the e-commerce industry. Additional discounts may exist based on the category of products that you sell. Many suppliers offer more than one type of ToT and are typically happy to negotiate. Upon discussing the scope of these additional discounts with your suppliers, you can end up getting anywhere from 5-10% in additional discounts off your purchases.
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