Tiered rebate scales: whole rate or marginal rate?

With a whole rate, the rate of the tier reached applies to all of the turnover; with a marginal rate, each slice of turnover earns the rate of its own tier. For the same scale, a whole rate produces a higher year-end rebate and creates threshold effects; a marginal rate is more progressive and more predictable. The choice is made scale by scale, depending on what the agreement is meant to reward.

Two ways to apply the same scale

Take the following base scale, used in all our examples:

Whole rate (also called a retroactive, retrospective or “first euro” rate): find the tier the turnover reaches, then apply its rate to all of the turnover. Marginal rate (or incremental, per-slice rate): cut the turnover at the scale’s bounds and apply each slice’s own rate, as with income tax brackets.

Worked example at €1,250,000 of turnover

With a whole rate, turnover of €1,250,000 reaches the 2% tier: the rebate is €1,250,000 × 2% = €25,000. With a marginal rate, the first €500,000 earn nothing, the next €500,000 earn 1% or €5,000, and the €250,000 above €1,000,000 earn 2% or €5,000: the rebate is €10,000, an effective rate of 0.8%.

The table below compares both modes at several turnover levels:

The gap between the two modes is anything but marginal: with the same scale, the whole rate costs the supplier from nearly twice to four times as much as the marginal rate in this example. Comparing two agreements without knowing their mode is meaningless.

The threshold effect of a whole rate

A whole rate has a property worth understanding before signing: the rebate jumps when turnover crosses a bound. A few extra euros of turnover can move the entire volume to the higher rate.

This has three practical consequences:

• Strong incentives near the bounds. That is the intent: to push the distributor to concentrate its purchases and cross a tier. But the incentive is nil just after a bound and at its peak just before one.
• Sensitivity to declaration errors. A figure declared within 2% of a bound deserves a careful check: a small error either way changes the amount a lot. Checks on turnover declarations should take this into account.
• Unstable accruals. While the year’s turnover sits close to a bound, the rebate estimate can double or halve from one quarter to the next.

Pros and cons of each mode

How to choose for each supplier

A few guidelines, bearing in mind that the mode is chosen scale by scale:

• A whole rate suits a clear, binary objective: reaching a specific volume, consolidating purchases that used to be spread across suppliers, rewarding a wider listing. It works well with few, widely spaced tiers.
• A marginal rate suits stable relationships, high volumes and scales with many tiers: every euro counts, no tier creates year-end tension, and finance accrues without surprises.
• Same budget, different rates. Switching modes without raising or lowering the rates changes the amount dramatically. Always simulate the old and the new scale on the year’s actual turnover before proposing.
• Growth bonuses have their own rule. In marginal mode they are computed on slices of the increase, not on the year’s turnover, which gives much smaller amounts. See how growth rebates work.

Recalibrating a scale when changing mode

Suppose you want to move the example scale to a marginal rate without changing the rebate of a supplier at €1,250,000 of turnover, who earns €25,000 today. The upper slices need higher rates, for instance: 0% up to €500,000, 2% from €500,000 to €1,000,000, 6% above. The calculation does give 0 + €10,000 + €15,000 = €25,000. But the new scale only matches the old one at that point:

The recalibrated scale pays less below the reference turnover and more above it: it rewards every euro of growth instead of rewarding the crossing of a bound. It is often a good compromise for a supplier with stable volume, provided you present it with this table. Always simulate several turnover levels, not just this year’s.

Questions to ask before choosing

1. Which behaviour do we want to reward: crossing a specific volume, or every extra euro?
2. Where does the supplier sit relative to the bounds, and where is it likely to be next year?
3. How many tiers does the scale have? The more there are, the more natural a marginal rate becomes.
4. How will finance accrue this rebate during the year?
5. Will the supplier and the purchaser read the calculation the same way from the agreement?

How Palier handles both modes

In Palier the rate mode is a setting of the agreement, chosen separately for the base scale, the family scales and the growth bonus. Tiers are entered with half-open bounds (lower bound included, upper bound excluded), each scale’s amount is rounded once, to the euro or the cent depending on the account setting, and the simulator shows the amount, the effective rate and the distance to the next tier side by side for any turnover. Explore all the features or test your own scale in the free rebate calculator.

Key takeaways