Picture this: You allocate marketing funds to a partner to run a booth at a trade show. The event goes well; your partner markets your product on your behalf and generates several high-quality leads. You gain brand recognition from the marketing materials displayed at the booth and your partner leaves feeling more secure in your partnership. But before you’re able to pop the champagne in celebration, you get an email from your legal team. It turns out that the funds you used weren’t properly labeled and now you could be in some hot water.
No one wants to find themselves in such a predicament, and promotional allowance program restrictions can make launching an MDF and/or Co-Op program feel extra risky. But while a laissez-faire attitude towards the regulatory laws can quickly turn into a legal issue, avoiding the endeavor altogether creates a business risk of its own. MDF and Co-Op programs help companies promote their products or services and increase sales by sharing marketing costs with their resellers or partners. In a market where consumers increasingly rely on recommendations, companies can use partner relationships to expand their reach, increase brand awareness, and bring in higher-value, partner-influenced leads. Therefore, opting out of such programs can result in your company losing out on an otherwise helpful edge over competitors.
There’s a middle ground between putting yourself at legal risk and refraining from promotional allowance programs altogether, and we’re here to help you find it. In this post we will cover:
MDF programs
A marketing development fund (MDF) lets channel marketers allocate money to their partners for sales and marketing purposes. These funds go towards the resources partners need to build brand awareness, generate sales leads, and drive business growth. This can include:
Unlike other types of funding, such as co-op funds (more on those later), MDF funds are typically allocated on a discretionary (non-contractual) basis used to seed new market opportunities, available prior to the revenue being generated, allowing partners to use the funding on a case-by-case basis to fulfill tactical lead generation, enablement or product/market awareness needs, or from the vendor’s perspective, to drive immediate desired partner behavior. This helps companies build strong, long-lasting partnerships and attract new partners while also empowering their partners with the resources they need in a timely manner.
Consider an MDF program if you’re looking for:
Co-Op programs refer to contractual, accrual-based marketing funds where companies and partners split the cost of marketing activities such as advertising, promotion, and other sales-driving initiatives. Co-Op funding is allocated for specific activities that must meet certain guidelines and requirements and accrues as a percentage of revenue is achieved. Vendors allocate co-op funds systematically for the execution of specific marketing initiatives, often pre-planned with the partner during the quarterly planning process. This type of incentive should have defined revenue percentages – between 1 and 5 percent depending on the channel strategy – and should be included in a contract within the partner program agreement.
Consider a Co-Op program if you’re looking for:
To design a successful market development funds (MDF) or Co-Op program that meets the requirements of your corporate legal team and finance department, it's crucial to have a thorough understanding of promotional allowance program regulations. Below, we are covering the two most important laws that impact these regulations.
The Robinson-Patman Act is a federal law enacted in 1936 to prevent anti-trust practices and ensure fair trade between competing retailers. The law limits price discrepancies granted to retailers by their suppliers, providing more protection to small independent retailers from their larger counterparts. Subsequent amendments specifically legislate promotional allowances, which were originally conceived as a work-around. While interpreting how the act applies to the allocation of these allowances to your channel partners is ultimately up to your own legal team, the regulation requires that a seller offer all competing resellers similar programs in a proportionate and equal manner.
Recently, the Federal Trade Commission (FTC) has been taking a stricter stance on enforcing the Robinson-Patman Act by closely scrutinizing pricing practices to ensure that they are being offered in a non-discriminatory and proportionately equal manner. Since companies that violate the act can face legal and financial penalties, there’s growing concern among businesses about ensuring compliance. But while holding off on MDF and Co-Op programs might seem like the legally responsible option, companies that refrain lose out on a powerful tool for attracting new partners and therefore tapping into larger end-customer audiences. Like many other legally monitored business practices, understanding the law and proceeding accordingly should ensure compliancy without falling behind competitors.
The impact on marketing funds
The Robinson-Patman Act has a significant impact on marketing discretionary fund (MDF) programs:
Like with MDF programs, the Robinson-Patman Act requires Co-Op programs to be offered in a non-discriminatory manner to all qualifying resellers:
The accounting scandals at Enron and WorldCom involved the intentional misreporting of earnings to shareholders and fraudulent activities to conceal the true financial conditions of companies involved. The result? The creation of regulatory requirements known as the Sarbanes-Oxley Act (SOX). Prior to SOX, many companies reported trade allowances as marketing expenses, but under the guidelines established by SOX, these expenses were viewed as perks or sales rewards to be classified as contra-revenue. As a result, the classification of expenses charged to promotional allowance programs changed significantly.
Under the SOX Act, companies must classify expenses correctly as either operational expenses or contra funds, and they must ensure that their accounting practices comply with SOX regulations. Failure to do so can result in legal and financial penalties.
Contra-revenue refers to:
Comparatively, operational expenses (OpEx) require that:
Some examples of contra-revenue versus OpEx:
Tip #1: Outsource to a third-party
Using third-party software to manage Market Development Funds (MDF) and Co-Op programs can be an effective way to ensure compliance with program allowance regulations. Platforms like 360insights provide an unparalleled combination of audit, analytics, and expertise to protect businesses against fraud and ensure that claims are processed correctly. With 360insights, every claim is audited, every payment is reconciled, and every transaction is analyzed, all without compromising the user experience. By partnering with 360insights, companies can have peace of mind knowing that their MDF and Co-Op programs are being managed in a compliant and effective manner.
Tip #2: Consider important keywords in your program language
(For compliancy with Robinson-Patman Act) The law states that “all competing partners [with equal access to the customer] must be offered similar programs on a proportionately equal basis.” Therefore, it is important to consider the language that you use to communicate to partners. Although it is not uncommon for manufacturers to offer different programs of varying value to channel partners, manufacturers should use the following keywords:
Tip #3: Use test questions to accurately categorize OpEx and contra-revenue
(For compliancy with SOX Act)
The classification of marketing expenses usually depends on the specific accounting framework or guidelines followed by a company. These criteria help evaluate whether an expense meets the requirements for recognition as a marketing expense. While I can provide you with a general framework, please note that specific rules and guidelines may vary depending on the accounting standards adopted by the vendor or jurisdiction. Here are four common tests used to evaluate marketing expenses:
1. Intent: Was the expenditure incurred with the intention of promoting or selling products or services? The primary purpose of the expense should be to generate revenue or enhance the company's marketing efforts.
2. Benefit: Did the expense provide a direct or indirect benefit to the company's marketing activities? The expenditure should contribute to or support marketing initiatives, such as advertising, promotions, market research, or brand building.
3. Reasonableness: Is the amount spent on the expense reasonable and justifiable based on the company's marketing objectives and industry standards? The expense should be proportionate to the expected benefits and consistent with industry practices.
4. Direct attribution: Can the expense be directly linked to specific marketing activities or campaigns? The expenditure should have a clear connection to marketing efforts and should be able to be allocated or assigned to specific marketing initiatives.
It's important to note that these tests are not exhaustive and may vary depending on the specific circumstances and accounting standards applied. Consulting with an accountant or referring to the applicable accounting guidelines for your jurisdiction would provide the most accurate and up-to-date information regarding the classification of marketing expenses.
Tip #4: Run your program by your legal and finance departments before launching
Even after implementing best practices for Market Development Funds (MDF) and Co-Op programs, it's crucial to run your programs by your legal and financial departments to avoid any potential penalties for non-compliance with program allowance regulations. While tips #1-3 can help you heavily minimize the work that these departments need to do, it's still important to have them review the program before implementation. By involving legal and financial departments early on, you can get buy-in and support for your MDF and Co-Op programs while identifying potential legal and financial issues and save time and resources down the line. By working together with these departments, businesses can be confident that they are meeting requirements and avoiding potential legal or financial penalties.