August 2009 Feature

Marketing Development Fund and Co-op Programs

The Pluses and the Pitfalls

In these days of ever-tightening budgets, companies — and their channel partners — are searching for ways to make the most effective use of marketing funds. Whether a company decides to go with a marketing development fund (MDF) or a co-op program — or a combination of the two — depends in large part on its channel marketing goals and objectives.

MDFs can play a key role in helping companies influence channel partners to invest in their products/solutions while they also build end-user sales. With these programs, companies set aside discretionary funds (based on forecasted sales) that they give resellers on a case-by-case basis and according to defined specifications.

Generally speaking, MDF programs have contra-revenue activities that focus on new market or partner development. Typically, these activities are designed to generate sales by reaching new customers or markets, launching new products, and/or developing new partners. The activities may also focus on specific products or campaigns key to the current GTM strategy, up-selling or cross-selling to existing customers, and/or new product or solution introductions. We’ve also seen an increasing trend of using MDF programs to help new partners develop skill sets or to recruit new partners and help them launch their businesses with the vendor.

On the other hand, co-op programs are arrangements in which companies share with partners the cost of marketing their products. Typically, these programs accrue funds on a per-partner basis as a percentage of the partners’ sales volume. Allocation is therefore based on prior performance, and partners often consider the proceeds as “entitlements.”

Generally, these funds go to big-volume distributors and LARs that produce “bread and butter” sales and are frequently used for advertising/marketing activities that qualify as expenses. These include, but are not limited to, outdoor advertising, radio/TV broadcast, print or online catalogs or newsletters, direct mail/e-mail and telemarketing.

The Sarbanes-Oxley Effect

The Sarbanes-Oxley Act has had a definite impact on MDF and co-op programs. Since its passage, manufacturers’ responsibility to account for spending correctly (contra-revenue vs. expense) and maintain verifiable internal controls has increased. In addition, the act clearly defines which activities are considered expenses and the specific guidelines that must be followed.

To qualify as a marketing expense, four “tests” must be met:

  1. The payment covers a service by the partner that offers a clear benefit to the company managing the program.
  2. The benefit is clearly separable from the sale of the product.
  3. The benefit could be purchased from a source other than the partner.
  4. There is proof of performance to reasonably estimate true costs.

The penalties for not meeting Sarbanes-Oxley requirements can be severe. For example, the executive management of a company can be punished directly and be held personally responsible for any violations. Consequently, many companies don’t want to deal with the stricter audit requirements; they say, “We’re doing contra-revenue only,” settling for this designation.

However, since contra-revenue activities are not considered expenses, their costs must be deducted from the top line of sales revenue. This can impact revenue growth year after year, a situation some companies may want to avoid, especially those that are publicly held.

For this reason, we recommend that when expenditures can be administered or qualify as “expense” vs. “contra-revenue,” they should be accounted for in this way to improve the company’s bottom line.

Robinson-Patman Considerations

The Robinson-Patman Act was originally enacted to ensure fair trade between competing retailers by limiting suppliers’ wholesale price discrepancies. Subsequent amendments classify promotional allowances such as MDF and co-op programs as incentives like other discounts or sales performance incentive programs (SPIPs).

In essence, this act states that “all competing partners [with equal access to the consumer] must be offered similar programs on a proportionately equal basis.” The subtleties are in the underlined terms. The words “competing partners” do not apply to government resellers, which are not “enterprise” resellers; they go for a different market and, therefore, can qualify for different programs. Also, “similar” doesn’t mean “identical” in terms of in terms of “conditions.” And “proportionately equal” means there is some basis of scale that is uniform.

These are all grey areas, but when designing a program, companies must address these issues to the best of their abilities and keep a level playing field in mind. Otherwise, they face the prospect of hefty fines if a partner has a grievance — and proof of unfair treatment.

Conclusion

MDF and co-op programs can be effective vehicles for increasing sales, targeting new markets and strengthening the sales channel. The key is to find the right mix of programs given your channel sales and marketing goals, and then to ensure that you are adhering to all regulatory requirements.