by Martin McNally
Director of Product Management, CCI

This is the time of year when waterfalls are at their peak. In many parts of the country, water is flowing fast and wide and it's a beautiful sight. As the water continues to move, there is a source and destination at each segment of its journey. The same model can be used for funding co-op/MDF programs in support of channel sales and marketing activity. This is becoming an evermore popular alternative to more traditional accrual-based funding models.

In this model, money transfers from a master funding account, to a regional account, the eventually to a partner's account upon Prior Approval (PA) or Claim transaction approval. These transfer are automated and are performed using a series of transfers and adjustments for impacted accounts-each with an audit trail assuring no unauthorized over expenditure of funds in the process. Depending upon your company structure, program business rules and partner landscape, interim holding accounts may be involved too. If so, funding is further divided, at each step, between holding accounts until it reaches a funding account. The waterfall approach allows funding to "flow" from the top down through your defined account hierarchy and ultimately to the partner.

Throughout the process, the partner does not know the funding account or its balance. The partner has its own account where available and projected balances are calculated based on accruals, adjustments, prior approval and claim transactions and payments.

Waterfall funding allows the funds to flow upstream too. If a PA is closed, voided, or expired, any remaining funds that have not been claimed are returned to the funding account.

This approach is best suited for more discretionary models, where a master fund is established but the actual distribution of funds to partners is managed on a localized (decentralized) basis. This tracking is important because it accounts for all distribution of funds (spend and unspent) and ties back to a master budget with accountability and controls each step of the way. Many companies are evolving to this model, either apart from or in addition to accrual-based models, as the latter is felt to be more entitlement-oriented by the partner. This "waterfall" method of distribution focuses the fund where the opportunities are needed most. However, care must be taken to assure the distribution is consistent with Robinson Patmann guidelines-here in the US anyway. But that would be a legal matter and a topic for another blog entry. Rest assured, though, that your legal team knows all about that, should you want to consider this funding model for your own progfram

The good news is that it's getting manufactures to see the true opportunity in their promotional allowance programs relative to being merely a cost of doing business. As such, everyone is asking: Should I move from a co-op program to and MDF format? The answer is, like most things in marketing, "it depends".

For the record, "co-op" is often defined as ‘an accrual based program that allocates promotional allowances to channel partners based on past sales performance'-usually allocated as 2% or 3% of sales from a prior period. Conversely, MDF funds are more discretionary by allocated channel partners funds based on expected future performance. An attributes of the co-op funding model is that partners can easily predict what their budget will be, therefore streamlining planning for the period in question. The manufactures, on the other hand, view this is structure as too much of a perceived "entitlement" for the partners by allocating funds with no strings attached. The argument in favor of MDF is that funds will be allocated based on prior approval of joint sales and marketing initiatives, and therefore will yield a more effective return on investment. In it's truest form, MDF usually means more administration for the channel partners and channel managers alike. Plus, the "discretionary" allocation of funds to partners in practice may or may not comply with the Robinson Patman requirements of fair and equitable distribution to all competing partners. That said, switching to MDF-style programs is in-vogue as more manufacturers seem to believe that such a program structure is more accountable, and thus a more effective approach overall.

In an effort to end that debate once and for all, the "effectiveness" of the program (which I'll define as improved ROI), has less to do with the co-op or MDF designation and more to do with all the other components of a program. The only real inherent advantage of one over the other is that co-op programs are generally ideally suited for "mature" products and channels. Because the available allowances are more predictable by the partner and manufacturer alike, planning for how to spend those funds can be simpler, even IF prior approval is required for funding individual activities. Conversely, MDF is generally the ideal structure for dynamic channels in which either the partners make-up or product category is rapidly changing, such as moving from "early adapter" to "mature" category. In that rapidly changing environment, what happened last period is of little consequence to what has to happen now or next month, and therefore the traditional co-op model is impractical. In any case, there is no evidence that either funding model is more effective than the other-considering all other things as equal (and there's the catch).

Hybrid models are gaining in popularity where co-op and MDF co-exist. Both can be offered to any one partner, or co-op is offered to one set of partners and MDF to another. In the case of the former, vendors may use co-op to fund basic programs, such as traditional marcom programs. Administration can be simplified, and as long as guidelines are followed, resulting expenditures can address mutual needs. Using such a hybrid model, the MDF fund would be used to fund activities that require greater scrutiny and accountability-as activities are harder to evaluate against a finite set of guidelines.

In the end, there is no one right answer to "best practices" relative to program structure which apply to all vendors. As long as I've been in this business (over 25-years-shock!), I still haven't seen any two programs alike-even between vendors multiple within the same product category. Hey, this is marketing. The correct program design overall is as much "art" as "science" . It comes down to this: if you can a) measure the effectiveness of your program against program objectives and b) your program fills the needs of your partners go-to-market strategy, then you're on the right track. If your program can't do one or either of those, then you have bigger problems than whether it should be a co-op or MDF structure.

by Craig DeWolf, CCI

The #1 question I am asked by clients and prospective clients alike has been "How can I measure the effectiveness of my Co-op (or MDF) program?" Interestingly, there are more answers to this question than there is space in this blog. However, in the interest of brevity, the short answer is below:

It depends.

While that response is appropriate for most marketing related questions, my guess is that it didn't completely satisfy your insatiable curiosity as to the answer.

So, here's the longer response (you asked for it).

Each objective should have measurable goals. This becomes the basis for your program. As simple as it sounds, when I get asked the "Measurement" question, my response is another question: "what are your objectives for the program?" Interestingly, the response frequently is: "I don't know." While elementary, the appropriate follow-up comment is: "Then how do you know what ‘effectiveness' is if you don't know what your objective is?" If you treat your program simply as a cost of doing business, then that's what you'll get-a program that sucks money from your marketing budget without providing any realized marketing benefi t.

Step One: Identify Objectives
So, as you probably guessed, the fi rst step in the process of measuring the effectiveness of your funding program is to defi ne your objectives. While this can include something as broad as "increase sales", it can also include intangible objectives such as "Increase partner/retailer loyalty." Either example has ways to measure the effectiveness against goals, albeit very different. The fi rst example would rely on a more quantitative approach of measuring sell-though, while the second example may include (at least in part) a more qualitative approach- such as a survey. Objectives may be either long-term (ongoing) or short-term to address certain market conditions.

Typical objectives for your co-op or MDF program may include one or more of the following:

» Increase sales overall
» Increase sales of specifi c products
» Increase partner share of voice
» Reinforce brand messaging
» Focus spending behind specifi c products, media, or events
» Increase utilization rates (overall, or from select channel partners, or from a select geography)

While these might be some of the more common objectives, there are many, many more. Each example is measurable, and you can choose more than one objective. Just be sure you have the strategies in place to attain each objective assigned to your program.

Step Two: Identify Goals
The second step is to identify goals for each objective and a basis for measuring progress. As you can see from simply reviewing the above list, each objective will require different metrics. While each objective will have a critical KPI (Key Performance Indicator), each strategy deployed to attain any one of the objectives will require associated metrics as well. So don't expect to have this fleshed out on the back of a cocktail napkin after a brief 5 minute discussion at your local watering hole. Completing this step takes some consideration. Take my word for it.

Step Three: Set a Baseline
The third step is to determine the current baseline for each goal which will be used as your starting point. It's often said, "If you don't know where you are now, how will you know how to get where you're going?" Truer words have never been spoken. By defi nition, all goals are measurable. So begin by identifying your starting point. ‘Nuff said.

Step Four: Set Up Reporting
The fourth step is to set up your reporting to identify trends over time. This will not only help you track progress, but it will help you understand the rate of change over time as your strategies evolve. It is worth repeating that you should track progress for individual strategies as well as tracking progress against each objective. It will be these tactics and strategies that you will be adjusting over time to accelerate the attainment of each objective. So, the whole effort is moot unless you track the individual strategies in your quest to deliver a more effective program.

While this sounds simple enough, apparently it isn't and if you're not doing this now, you're not alone. The good news is that it's not too late to start. I'll explore in future blogs ways to assign and measure specific objectives.

Craig DeWolf is Vice President of Sales and Marketing for CCI.

Craig's extensive experience spans over 20-years, across a variety of industries and distribution models. This background has given Craig an excellent perspective of the issues facing marketers and their distribution partners, and the solutions that will make them mutually successful.