MDF’s Vs Co-Op – Financial Implications

Most of my colleagues in Marketing may have heard the marketing-dollarsterms MDF’s and Co-Op’s. Very standard marketing lingo. This rings especially true for those of us who dabble in partner/alliance marketing.

Very simply put, MDF’s are Marketing Development Funds and Co-Ops are Co-Operational Funds. Often, these terms are used interchangeably, depending on context.

MDF’s typically are fund allocations (typically a percentage of sales projections) that are to be used for market development activities by partners. BTW, partners can be defined in the channel as distributors, resellers and/or vendor ecosystem (such as ODMs, ISV’s etc). Partners use these funds for infrastructure investments, margin allocations,  sales contests, special pricing, promotions, trainings and the like. MDF’s are typically paid out in the beginning of the time period.

Co-Ops on the other hand is typically an accrual based fund where the partner puts in resources alongside with the vendor to run a program and partners are compensated after the fact. Marketing programs such as tactical campaigns such as email blasts, DM’s, call-outs etc, collateral development, social media campaigns, give-aways and contests etc. It’s a way to ensure that the partners also put some skin in the game to ensure mutual success (or failure for that matter).

The main reason for this post is to highlight the financial implications for each of these activities. While most marketers, seem to think that marketing activities are typically an expense (mostly in SG&A), few seem to be aware that top-line revenue can impacted by these actions as well. Impact to top-line revenue by means of marketing actions is known as contra-revenue. We all know that top-line revenue is very visible to the stock market and can have a direct impact on the company’s stock-price.  Not a good thing for sure.  Which tells you that folks in the C-suite will be paying attention to contra based marketing activities.

Now, that does not diminish the importance of marketing expenses in SG&A, as that can impact profitability, but expenses can be dressed up by creative accounting to dull the thud. Profits impact FCF’s, which in turn effect the valuations, which in turn influence stock price. In other words, both contra based and non-contra based marketing activities effect financial performance, I would argue that the influence of contra-based actions has more drastic implications.

Given the importance of the way accounting treats MDF’s and Co-Ops in addition to the manner in which these actions can potentially influence company stock,  I believe that marketers will be stand to benefit from some accounting knowledge. For that you need to look no further than the dreaded SOX (Sarbanes-Oxley) accounting rules.

Very simply put, ALL marketing activities are deemed contra unless the following rules are satisfied.

  • Direct and measurable benefit to ‘funding’ company or vendor – The payment covers a service by the partner that offers a clear benefit to the company managing the program.
  • Is benefit clearly separable from the sales relationship? – In other words activities should be able to stand on their two feet without linkages to other ongoing relationships or activities.
  • Is there a reasonable FMV (fair-market-value) of services provided? Meaning, can this service be purchased from another company? If it is separable, it should have a FMV associated with it. That would also mean that there needs to be POP (Proof of Performance).

As I mentioned before, management would typically try and avoid impact to top-line revenue via contra. Hence, in most firms, there is a concerted effort to push marketing in the ‘expense’ bucket. Additionally, this is  also a SOX compliance issue.  Marketers would be wise to know of these nuances to ensure that their actions are not visible for the wrong reasons. Marketers endure a lot of grief for ROI anyways and the last thing they would like is to be in a C-level meeting for the wrong reasons.

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2 Responses to MDF’s Vs Co-Op – Financial Implications

  1. Pingback: Robinson-Patman Act and it’s implications for Marketers. | Pixel Ballads

  2. Pingback: The Value Add of Distributors | Pixel Ballads

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