Revenue from indirect channels such as distributors can contribute between 20% to over 75% of total revenue. A recent McKinsey & Company article highlights that distributors can account up to 24% of a semiconductor company’s revenues. In the High Tech market, indirect revenue is growing at a faster rate than direct revenue, and I often hear company’s exceeding 70%. So, why are channel rebates important to these two industries?
The answers are different for each industry.
Semiconductor companies that traditionally sold through direct sales are embarking on new indirect channel strategies to win customers in the long tail. Examples of long tail customers include those too small for conventional channels or those in geographic regions or verticals where distributors have the advantage of local knowledge and relationships. Since a distributor often represents more than one manufacturer, it is critical to have proper incentives to motivate the distributor to sell the manufacturer’s products while maintaining mind share and visibility. With cutting-edge products subject to inventory and technical obsolescence, combined with ever-changing supply chains, semiconductor rebates must be able to handle complex requirements.
Here’s what I’ve observed about channel rebates in the semiconductor industry. The most common channel rebate is an incentive paid to the distributor and used to promote specific products. Another reason is to increase attach rates, such as offering a rebate for selling specific bundles and kits. Sometimes a price masking rebate is paid to an end-customer, thereby concealing the final end-customer price from the distributor. The overarching need to create targeted incentives using rebates requires robust software functionality and automation. With the complexities and novelty of rebates, only a highly configurable solution can fulfill the ever-changing requirements.
In High Tech, it’s slightly different. Indirect channels have always existed as a major go-to-market strategy. It’s my experience that rebates are used to motivate partners to increase revenue. These rebates can cover standard periods such as annual or quarterly incentives, as well as one-time rebates such as a fixed-time period promotion of specific products in certain regions.
To drive successful rebates in semiconductor and high tech companies, Model N recommends the following:
- Designing systematic ways of creating, approving and activating rebates programs.
- Targeting incentives that foster revenue growth for specific product lines and categories based on distributor or partner.
- Operationalizing efficiency through streamlined processes – from rebate creation to payment.
- Introducing robust accruals to align with the rebate earning calculation process.
- Implementing a system based on planning combined with a robust, scalable solution.
To learn more about how Model N can meet the challenges of channel rebates for semiconductor and high tech companies, go here.
