What is a sales rebate and how is it used? Examples

The origin of the term rappel on sales comes from the world of climbing, since rappelling is the technique of rapid descent by sliding down a double rope attached to an anchor. When a climber rappels, he is rapidly descending a wall with the help of the ropes and ropes that hold him.

From the above definition comes the metaphor applied to the business world. The rappel on sales is a practice widely used in the business world that consists of a "descent" or discount on the invoice that is granted to a customer when he generates a certain volume of sales for the company. As with escalation, the higher the invoice, the greater the discount.

This practice is common in transactions that occur on an ongoing basis, where a significant volume of merchandise is traded. To encourage this type of purchase, companies use rebates to obtain greater profitability. Therefore, it tends to occur mainly in wholesale companies that move high volumes of products.

This rebate assures the supplier of the movement of its merchandise. Generally, the companies that grant them have large inventories of products, which generates additional costs if they have to store them for a long time. In this way, the rebate becomes a very efficient and cost-effective strategy that provides an outlet for a warehouse's stock. It can be carried out in various ways, e.g. by means of a forward agreement after several consecutive orders, coupons, etc.

What is a sales rebate?

A sales rebate is therefore a commercial discount to a customer based on the volume of a transaction that is applied when a sale reaches a certain amount. In this way, the customer will be more satisfied with his purchase and will want to repeat it in the future.

As noted above, this rebate can be applied in different ways, such as:
  • As part of an agreement for the future.
  • After successive orders and reaching a certain level of turnover.
  • As a refund of a part of what has been charged after reaching a certain level of turnover.
  • In the form of discount coupons.
  • As an advance payment made by the supplier to the customer in exchange for the customer's commitment to purchase above a certain amount.
  • As a way of adjusting turnover at the end of the fiscal year.
Reasons for using a sales rebate

There are many reasons and times when it is beneficial to use a sales rebate. Here are some of the most significant ones:

To build demand loyalty through attractive discounts that offer a great benefit to the customer. In this way, the customer will have enough motivation to buy, choosing us over the competition.

Reduce costs. The rebate is used to encourage high orders and thus facilitate the disposal of certain stocks in our warehouse that may be out of fashion, out of date or deteriorating. For this reason, many food factories apply this strategy.

Improve reputation and brand image. Rebate is a way to improve brand image, since there are customers to whom it can be applied to keep them satisfied and improve a supplier's reputation. Being the supplier of certain customers gives visibility and image of solvency and stable company.

Batch manufacturing. By manufacturing in batches, receiving very large orders in a certain period of time facilitates the processes, saving costs derived from having to move from producing one batch to another.

Closer customer-supplier collaboration. This rebate helps to increase the volume of orders, allowing the supplier and customer to work more closely together over time.

Price discrimination. The rebate can be used to launch different offers targeted at specific customers, who will place larger orders.

Financial objectives. By using the rebate we can charge a slightly higher price until a certain sales volume has been reached, which would be a kind of advance payment from the customer.

To obtain a rebate on purchases. As we produce more we will need to demand more raw materials and supplies. In this way, we can get our suppliers to grant us a purchase rebate as well.

Rebate as insurance. The price for large customers is set by the rebate, so that if we do not reach the expected sales volume with a customer, we will be compensated with a higher price per unit.

Calculating and accounting for a sales rebate

Before determining a sales rebate, it is essential to calculate it to determine if it is the option our company needs. To do this, we must think about the discount percentages to be applied for each sale, as well as find out whether it is better to market by units or by lots. On the other hand, if it is a unit discount, it will be necessary to determine whether to charge by weight or by quantity of products. This will depend on the characteristics of the stock.

As with any financial transaction, this rebate must be accounted for. Once it is carried out, we will place it in the entry of account 709 with the name "sales rebate". Subsequently, we will have to post it in the account 477 of the Public Treasury with output VAT, with the purpose of declaring the least amount of VAT possible. At the close of the fiscal year, account 709 will be credited and charged to profit and loss. However, if we add the rebate on the invoice we will only record the sale for a lower amount. The latter is the simplest, since if it is reflected in the invoice it is not necessary to take it to the company's accounts.

To facilitate this task, in the market there are several accounting programs that will allow us to carry out the accounting of the rebates in a simple and fast way, automating the whole process.

Examples of sales rebates

As we have just seen and commented, the sales rebate is very commonly applied in the business world. An example of this would be the case of a small start-up company that wants to increase the level of sales at a certain time. To this end, it decides, for example, to apply a 10% discount for customers who purchase 300 items and more. Each of these items is priced at 5 euros, but by purchasing that amount they will be able to buy them at 4 euros, which could increase their turnover quickly. This shows that a small start-up company can also execute this strategy for its own benefit.

It is usual to have a marked discount percentage depending on certain net turnover amounts or units sold. An example could be the following:

If we apply the rebate based on net turnover:
  • From 2.000 € purchase - 5% discount
  • From 2.000 € to 5.000 € purchase - 10% discount
  • From 5.000 ¤ purchase - 15% discount
If we apply the rebate on product sales units and net discount:
  • Up to 20 units (T-shirts) - 0.25 ¤ discount per unit
  • From 20 to 50 units (T-shirts) - 0,50 € discount per unit
  • From 50 units (t-shirts) - 0,75 € discount per unit