Channel Promotional allowance programs are becoming the focus for many manufacturers again. Why? Budgets are tight and manufacturers are seeking ways to enable committed programs to have a greater impact on sales. This sounds like a perfect job for your channel allowances program, doesn’t it?
The good news is that it’s getting manufactures to see the true opportunity in their promotional allowance programs relative to being merely a cost of doing business. As such, everyone is asking: Should I move from a co-op program to and MDF format? The answer is, like most things in marketing, “it depends”.
For the record, “co-op” is often defined as ‘an accrual based program that allocates promotional allowances to channel partners based on past sales performance’-usually allocated as 2% or 3% of sales from a prior period. Conversely, MDF funds are more discretionary by allocated channel partners funds based on expected future performance. An attributes of the co-op funding model is that partners can easily predict what their budget will be, therefore streamlining planning for the period in question. The manufactures, on the other hand, view this is structure as too much of a perceived “entitlement” for the partners by allocating funds with no strings attached. The argument in favor of MDF is that funds will be allocated based on prior approval of joint sales and marketing initiatives, and therefore will yield a more effective return on investment. In it’s truest form, MDF usually means more administration for the channel partners and channel managers alike. Plus, the “discretionary” allocation of funds to partners in practice may or may not comply with the Robinson Patman requirements of fair and equitable distribution to all competing partners. That said, switching to MDF-style programs is in-vogue as more manufacturers seem to believe that such a program structure is more accountable, and thus a more effective approach overall.
In an effort to end that debate once and for all, the “effectiveness” of the program (which I’ll define as improved ROI), has less to do with the co-op or MDF designation and more to do with all the other components of a program. The only real inherent advantage of one over the other is that co-op programs are generally ideally suited for “mature” products and channels. Because the available allowances are more predictable by the partner and manufacturer alike, planning for how to spend those funds can be simpler, even IF prior approval is required for funding individual activities. Conversely, MDF is generally the ideal structure for dynamic channels in which either the partners make-up or product category is rapidly changing, such as moving from “early adapter” to “mature” category. In that rapidly changing environment, what happened last period is of little consequence to what has to happen now or next month, and therefore the traditional co-op model is impractical. In any case, there is no evidence that either funding model is more effective than the other-considering all other things as equal (and there’s the catch).
Hybrid models are gaining in popularity where co-op and MDF co-exist. Both can be offered to any one partner, or co-op is offered to one set of partners and MDF to another. In the case of the former, vendors may use co-op to fund basic programs, such as traditional marcom programs. Administration can be simplified, and as long as guidelines are followed, resulting expenditures can address mutual needs. Using such a hybrid model, the MDF fund would be used to fund activities that require greater scrutiny and accountability-as activities are harder to evaluate against a finite set of guidelines.
In the end, there is no one right answer to “best practices” relative to program structure which apply to all vendors. As long as I’ve been in this business (over 25-years-shock!), I still haven’t seen any two programs alike-even between vendors multiple within the same product category. Hey, this is marketing. The correct program design overall is as much “art” as “science” . It comes down to this: if you can a) measure the effectiveness of your program against program objectives and b) your program fills the needs of your partners go-to-market strategy, then you’re on the right track. If your program can’t do one or either of those, then you have bigger problems than whether it should be a co-op or MDF structure.