1. The distributor issues a chargeback to the supplier when the price the product is sold to the consumer at is less than what the supplier sells the product to the distributor for. Hence, since the distributor bought the product at a higher price, but sold at a lower price, the distributor incurs a loss. To make up for this loss the distributor submits a chargeback to the supplier and the supplier pays the difference to the distributor.
2. The distributor negotiates a percentage of revenue or a per-pound or per-case refund from the manufacturer or supplier. This is the straight-volume based chargeback for purchase from the supplier or manufacturer.
3. The distributor gets funds from the manufacturer to market and promote the products.
Chargebacks can be paid via checks, fund draw-downs, or credits, over a specified period.
A challenge with chargebacks for the distributors is keeping track of the cost for recovery, especially with the lack of specified data standards. The advantage however is that 40% of distributors’ profit is based on chargebacks, as compared to 3% in net income.