What are Chargeback, Trade Spending, and Deduction Fees?
One of the potential profit drains for consumer packaged goods (CPG) companies are the trade spending and deduction fees that tend to come with selling their products. They usually stem from working with wholesale distributors, like leading US distributors KeHE and UNFI, and can be tricky to manage if simply left undealt with. Let’s first take a look at what exactly some of these terms mean and then we can discuss how to tackle all of these fees like a pro.
For CPG companies, trade spending is a relatively common practice, and it’s basically the amount you spend to increase demand for your products. This can include coupons, co-advertising, and slotting (preferential display locations). What’s critical to know here is that if you agree to these promotions, they will be deducted from your invoices in the shape of deduction and chargeback fees.
But what are deduction and chargeback fees? When a company incurs a cost, for example, through said promotions, then the distributor will ‘deduct’ this cost from their invoice. These deductions can be quite the profit machine for distributors. These kinds of fees should be properly spelled out in the initial contract you sign with your distributor, so that there is a clear expectation for both parties.
Chargeback fees are a little different in that they are deduction fees that a distributor will add to your invoice when a retailer buys a product from them at a discount. And chargeback fees usually come with an added fee or upcharge from the distributor. So, definitely a cost to watch out for.
What is Chargeback Management, and Why Is It Important?
It’s important that you’re aware and are on top of your chargebacks and invoices as they can really add up. It’s an area of business for CPG companies that requires recognition, planning, and effective management. There are a number of challenges that you may come across in managing your chargeback fees, and these can include:
- Tracking ongoing trade activity.
- Understanding the ROI on trade spending and how it compares to projected sales.
- Not holding adequate reserves to deal with the fees.
- Keeping up with large distributors, like KeHE and UNFI, which have strong accounting teams.
Chargeback management is all about taking a proactive approach to your invoices and accounts, and actively reviewing and disputing the validity of any charges taken by a distributor or retailer. A quick call to your distributor every now and then simply will not do. You will need to implement a robust and regular review process to mitigate any wrongly charged or invalid fees to put you on the path toward significant savings!
How to Avoid Being Surprised by Chargeback Fees?
To avoid any nasty surprises on your invoices, there are a few key ingredients you’ll need for successful chargeback management:
Timing – Stay up to date on your deduction fees as they usually come with a time limit on disputing them.
Documentation – Make sure you have all your documents safely stored and that they are signed and checked properly to ensure that everything is legal and up to scratch.
Persistence – Distributors don’t count on you following through on any disputed fees, so prove them wrong and make sure you’re regularly following up on all your open disputes.
Organization – Chargeback and deduction fees can really add up and you may end up with a lot of paperwork to work through to figure out what is what. So, good organization when it comes to your accounting processes is really important here!
Consistency – Being consistent in your deduction and chargeback disputes will allow the distributor to get to know you and your business, especially with the typical areas that need to be accounted for.
Tired of Losing Money Every Month? Consider Chargeback Management
If chargeback management still sounds a little too daunting to you then there’s no need to worry because Simple Startup can manage this tricky task for you. We can provide chargeback management to our clients as part of our fractional CFO services, and have a buttoned up process of going up to bat for our clients. We want to ensure that you keep as much money in your business as possible! If you’re looking for support with your company’s chargeback management then grab some time on our calendar to start the conversation.