What is a marketing development fund?
A marketing development fund or MDF for short is financial assistance that a product manufacturer pays to a retailer for advertising purposes. A marketing development fund is often used as a collective name to combine different discounts and conditions.
Marketing Development Fund policies and practices are signed on a contractual basis. This agreement sets out the exact terms and conditions of how and when a manufacturer will provide a promotional allowance. The duration and terms of such contracts can vary greatly. There is no predefined legal framework for an advertising allowance agreement. The relevant contact person from the manufacturer’s side can usually be found in the marketing or sales department.
How is a marketing development fund calculated?
Depending on the agreement, the manufacturer pays a fixed share of the costs for certain forms of advertising. Often a maximum amount is agreed for a period, which depends on the sales performance of the last periods or the agreed sales targets for the current period. In many cases, the allowance is directly or indirectly based on the order volume of the distribution partner with the manufacturer.
Be careful with advertising allowances involving backdated payments. In such cases, the manufacturer is only obliged to assume the costs if an initiative has led to measurable results – for example, increased turnover or more new customers. If this is not the case, the retailer is out of pocket.
How is a marketing development fund accounted for?
Marketing development funds must be entered as business income regardless of the received form. VAT is to be accounted for. The gratuitous provision of non-cash benefits is to be recorded as other business income to the amount of the item’s value. However, this value can be depreciated over the service life period. Likewise, the grant of an advertising allowance in the form of a discount is to be recorded as other business income.
Who gets a market development fund?
Theoretically, any distributor who sells a manufacturer’s goods to other companies or end customers is eligible for market development funds. The size or type of the retail partner does not matter – it can be a chain store with several locations and a single retailer. Stationary retailers can receive an MDF in the same way as online retailers.
How are marketing development funds used?
Marketing development funds are aimed at retailers to finance their sales promotional measures, in which the products and services of the manufacturers concerned receive special attention. Retailers thus often use the MDF for retail marketing campaigns, such as price reductions or special offers. In practice, promotional allowances can take many different forms:
- The manufacturer bears a portion of the retailer’s product catalog costs. In return, its products hold a prominent display.
- The retailer purchases a specific volume of a product. In return, the manufacturer provides a discount. The manufacturer offers a discount, enabling the retailer to sell the product at an attractive price as part of a special promotion.
- The manufacturer gives the retailer an item free of charge related to its product and can help promote sales. In retail, for example, the product is positioned in a special display – i.e., given more prominence than on regular display shelves.
- The manufacturer prints flyers or places digital advertisements pointing out that a specific retailer sells its goods. In return, the retailer agrees, for example, to exclusively sell the manufacturer’s products.
What are the benefits of marketing development funds?
Fundamentally, retailers are (jointly) responsible for marketing and carrying out sales-promoting campaigns in the value chain. However, the conception of professional campaigns involves a lot of work and costs. Small and medium-sized companies in particular quickly reach their limits. Part of the costs incurred can be absorbed with the help of the manufacturers’ advertising allowance.
Therefore, the market development funds are a worthwhile opportunity for retailers to add a little extra to their marketing budget. They get to enjoy a certain amount of freedom in the design of the measures. Producers, in turn, benefit from increased sales and lower administrative costs. In addition, the advertising allowance is often much more cost-effective for manufacturers than if they had to do their marketing for the products.
Are there disadvantages to marketing development funds?
Because of its influence on price-fixing, market development funds also involve Competition Law, easily seen from the examples mentioned above. Not without reason have there already been related lawsuits and court rulings. For example, the Federal Cartel Office targeted the German drugstore chain, Rossmann, for “selling below cost” – but ultimately won before the Düsseldorf Higher Regional Court and the Federal Supreme Court. How market development funds are considered is also controversial at the state level. For example, the Monopolies Commission of the Federal Government (with explicit reference to the Rossmann case), unlike the Cartel Office, favors a free decision by the supplier in allocating the allowances.
Another point: although the supplier finances the market development funds, it primarily leaves the advertising activities to its retail partner. In other words, it accepts limited control over the concrete use of the funds. The retailer is mainly free to decide how to advertise the promotions and present them in its shop. For a long time, it was common practice for manufacturers to demand proof of the actual expenditure on advertising. However, the practice of granting allowances without direct evidence has become increasingly common. Instead, the sales achieved or the number of new customers serves as a yardstick – this is based on the assumption that an increase in earnings would not have been possible without (subsidized) advertising.
How can marketing development funds be used transparently and efficiently?
When working with distribution partners, manufacturers face the challenge of allocating the advertising budget between their activities and those of their partners according to the marketing contributions. Therefore, it must be ensured on an ongoing basis that the budgeted advertising resources are used efficiently. It is advisable to monitor key figures, such as advertising costs per new customer, and track the distribution channels’ development over time.
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