You might be unfamiliar with the term retrospective when thinking about rebates. However, retrospective rules follow the standard understanding of the word. These rules look back on past events; they are typically calculated after a specific period has passed. This approach is in contrast to the pro rata rules that look forward.
In a retrospective rebate, if the threshold is met, the highest rebate is applied to the total amount of purchases or sales in that period. This type of rebate is commonly referred to as a back-to-dollar-one rebate because the rebate is not just applied to the sales or purchases in the highest bracket; it is applied to all the sales or purchases in that period, right back to the first dollar earned or spent. Retrospective rebates can also be applied to negative transactions.
The goal of retrospective rebates is to incentivize long-term commercial relationships.
For example, suppose you have a customer whose sales value in 2022 was $621,238. You want to incentivize growth, using a retrospective approach. You set up the rule as follows:
In 2023, the customer’s sales value was $740,044. Based on the sales transactions, here’s how the rebate is calculated:
As you can see in the table above, the customer’s sales grew by over 5%, making them eligible for the 20% rebate. That 20% is applied to the total value of sales transactions ($740,044.18). As a result, the customer gets a rebate of $127,850.96. This has a much greater positive impact on the customer than giving them a separate rebate for each bracket.
Example 2
A rule is set up as follows:
This graph shows how the rebates is applied to the transactions over time.
