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Market Development Funds Articles

• MDF - Wave of the Future?



• MDF Breathes New Life Into an Old Idea



• Negotiated Funding

MDF: Wave of the Future?
by Shannon McIntire, NAPAA Newsletter Staff
Source: 1998 Fall NAPAA Newsletter, Issue 26

TradeOne Marketing conducted a study on promotional allowances for NAPAA. The results were presented by Miles David of TradeOne and Nancy Ellenbogen of Levi Strauss & Co., at the 1998 NAPAA Spring Conference. Below, Miles David discusses the survey findings concerning trends in Market Development Funds through the millennium.

NAPAA: In TradeOne's study, you defined MDF as a "fund provided above accrual to meet account requirements." Did you find the term to be difficult to quantify because of the wide variety of programs in use?

Miles David: MDF is definitely not one thing. It can be funding over and above co-op accruals a retailer demands. Remember the routine with Jack Benny, the tightwad comedian? A mugger holds him up and demands, "Your money or your life." Benny stands there for a long pause and answers, "I'm thinking, I'm thinking!" Some MDF requires no thought because it's survival. In other cases, MDF may be initiated by the manufacturer proactively, which can lead to a much better outcome.

NAPAA: You said in your presentation at the NAPAA Conference that some MDF has standard accrual like co-op but non-standard activities. Can you elaborate?

David: Historically, co-op was ads. But in many businesses, effective marketing today is much broader than ads. You may run a product seminar, or integrate advertising with an event. Or fund telemarketing with cash or gift incentives to telemarketers. Or integrate visual merchandising with ads and an event. Often if a program allows a customized combination of non-traditional and traditional promotional vehicles, that program is called MDF rather than co-op.

But the funding level offered accounts may still be standardized even if the way the reseller spends the money is completely customized. So Market Development Funding isn't a very precise term. It would be good for our profession if we got away from the terms co-op and MDF and called them both co-marketing or some other term that means working together to do what it takes to market a product.

NAPAA: How has the growing dominance of chains affected MDF? People feel they must offer MDF to stay on the shelf. Why?

David: It can be "your money or your life," as we mentioned. Many products have to be in major chains because of the number of boxes they move. If you have the number three share in a five brand field, you may feel there is no choice but to pay what it takes. But what if you develop a strong promotion, for example, and customize it for key accounts. You level the playing field with your initiatives, or information. You help the retailer do a better job for the store and your product. Now it's co-marketing, not passive acceptance.

NAPAA: Why is MDF considered the wave of the future? Do the findings of your survey support this idea or is it more perception than reality?

David: It is reality in many businesses. The chains keep growing and gaining power in negotiations. A way to offset that power is to approach trade marketing, the process of marketing through retailers, as a discipline like national advertising.

A company which has a small or midsize brand in national advertising doesn't just simply accept that it has no choice but to sell on price and play a defensive game in marketing. To become more successful, that brand looks for creative solutions. The same thinking process applies in trade marketing. You have to come to the dominant retailers with a concept that works for both of you.

NAPAA: Who are the most resistant to MDF among manufacturers?

David: Those who have share dominance or technology dominance. Some have traditional attitudes toward the legal issues. And of course there are significant businesses that will probably continue to sell through specialty retailers where there is a very significant consumer need for expertise from the salesperson.

NAPAA: What was the most interesting finding in the survey?

David: It isn't really what you could call a finding, but as we captured verbatim comments from respondents, we heard the beginnings of what may be counter trends. Some said they were rolling back from MDF because of the progress they had made as brand, business is good, and they aren't going to give up as much profit to fund the retailer.

Others said business could take a different direction. Is the consumer of the future going to be increasingly time-starved and want to buy without a trip to the mall - maybe a return to a very upscale, service-oriented version of specialty retail that's so convenient people will accept higher pricing. No one predicted the category killers. Is it possible we'll look back and be surprised no one predicted a new form of small retail?

Or will the Internet be a balancing factor? When a significant proportion of upscale consumers have cable modems that operate at high speeds or live in a community that is wired for ultra high-speed T1 [a very fast Internet network link] phone lines, conventional retailers may find themselves affected. Luxury apartment buildings today are starting to be built with T1 lines, so it isn't just a dream.

NAPAA: Would you like to comment on any other aspect of the study relative to MDF?

David: Reading between the lines and putting this study and many others we have done together in our thinking, we feel it is time to stop using the language of yesterday. It is not co-op and it is not MDF that we should be talking about, it's co-marketing. It's customized thinking and strategy applied to the way manufactures move products through channels to the consumer.

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Co-op by Any Other Name: MDF Breathes New Life Into an Old Idea
by Shannon McIntire, NAPAA Newsletter Assistanct Editor
Source: Winter 1997 NAPAA Newsletter, Issue 23

Has co-op outlived its purpose? Some promotional allowance managers' high praise for Market Development Funds, or MDF, might make one think so. But is it really the case?

The distinction between co-op and MDF depends on whom you ask. Typically, co-op is considered to be a company's published program with a stated accrual percentage. Alternately, MDF is usually a budget dispensed at management's discretion to develop new market channels or products. Most industries use co-op and MDF in tandem to complement each other. But recently some have converted to an MDF program only.

Market Development Funds are designed to develop a market or a particular channel. Companies may use MDF to launch new products or to introduce established products to new markets. Initially a reactive necessity, MDF has become more and more popular for its flexibility and responsiveness; in some areas it threatens to completely eclipse co-op.

Traditionally, co-op is associated with a defined structure that requires detailed administration and long-term planning. With co-op, the reseller may have choices for using funds that do not require manufacturer approval. Most tend to be the traditional advertising media-print, radio, TV, etc. "Most retailers and resellers opt for a regular pattern of advertising and don't get too creative," said one Co-op/MDF manager. In a co-op program, it is possible for a retailer to have little or no direct contact with the manufacturer. Many co-op programs can be perceived as being too restrictive in what advertising is allowed.

On the other hand, MDF usually requires prior approval; which means the manufacturer and retailer work together on planned promotion. Furthermore, MDF programs frequently allow media not covered in co-op programs or will sponsor projects not usually thought of as advertising, such as business presentations and training classes. In many ways, MDF brings a whole new approach to marketing funds. Companies use MDF to partner with the reseller; it is particularly popular in industries that require impact at store-level, such as consumer packaged goods.

MDF has become more common in the last seven years with most companies implementing it in some form. Managers feel that MDF allows retailers more input into the use of their funds which provides a more dynamic dialogue for creative suggestions and ideas, as the managers work with the retailers to decide what types of promotions work best. These can often be in-store features such as end-caps, coupon dispensers, demonstrations or sales flyers. However, it should be noted that MDF is still a gray area and each company administers its programs differently. Some programs are highly successful and proactive. Others are continuing to develop and define themselves.

Those who consider co-op passe focus on MDF's flexibility and value its capacity to craft specific programs to match individual retailers, which enhances the advertising goals of both parties. In industries that have gone fully to MDF, the consensus is that it has revitalized their programs. "Retailers had come to view co-op money as an entitlement," said another MDF manager, and used the money for commonplace ads. MDF counteracted this atrophy within co-op programs and most funds are used in more creative and innovative ways.

However, not everyone is so quick to dismiss co-op. Some manufacturers value the control and structure of a co-op program. They fear retailers would take advantage of an MDF program and they appreciate the specific guidelines of co-op. Plus, not all co-op programs are creatively restrictive. In fact, many companies encourage the unusual, non-traditional types of promotion within co-op programs that others cite as MDF's strength. Certain industries don't lend themselves to MDF instead of co-op, particularly those that never used much traditional advertising in the first place . For these, t-shirts, trade shows, sponsored events, or catalogues are the norm.

Additionally, retailers themselves often insist on a co-op program from manufacturers. Companies that try to eliminate co-op can run into problems. Retailers like the assurance of knowing up front how much money they can expect to receive for their promotions. MDF, with its case-by-case administration, can be unnerving for them. Most companies find a combination of co-op and MDF works best.

Perhaps the best service of MDF is the fresh, new attitude it brings to manufacturers' promotions programs. It isn't that co-op couldn't allow for these new ideas but that it hadn't. Even MDF proponents admit that much of the difference between co-op and MDF is just semantics. "Retailers look at our program" says one MDF manager, "and call it co-op." But most MDF managers feel a new empowerment in their relationship with retailers and are working together to achieve mutually beneficial product marketing goals. MDF has given promotional funds managers another vehicle for accomplishing the true meaning of "cooperative advertising."

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Negotiated Funding
by George Held
Source: Winter 1999 NAPAA Newsletter, Issue 31

Many companies have adopted the policy of offering MDF (Market Development Funds) or SMF (Soft Market Funds) and have abandoned their traditional co-op programs. Are you in that group? Or is your company considering moving to an MDF program as an alternative to co-op?

Since you’re reading this newsletter, we assume you have some responsibility for your company’s promotional advertising program, and if your company is reviewing the option of switching from co-op to MDF, you probably have a major stake in the decision. If you were asked for your input on the subject, would you (or your management) know what arguments to make for or against either type of allowance? Perhaps this analysis will help.

First, let’s start with a simple definition of both co-op and MDF:

Co-op advertising is best described as local retailer promotional expenses paid for in part by a manufacturer or service provider. These promotional dollars are normally earned by retailers based on a percent of sales volumes. The more product the retailer buys from the manufacturer, the higher their co-op budget or accrual.

Market Development Funds (MDF) are best described as promotional funds provided by manufacturers or service providers which are used by retailers to promote product sales within a retailer’s facilities. Funding for MDF is normally negotiated between the retailer and the manufacturer’s sales rep, and may or may not be directly linked to purchase volumes of the retailer.

Talk to the former co-op manager within some companies, and they’ll tell you, “We don’t do co-op anymore. We’ve gone strictly to MDF.” But then, when you analyze them, their program resembles co-op in virtually every way but one — no budget allocations are made to each account. Funds are made available based on the perceived value to the manufacture. Sales reps are given a budget which is normally based on their sales territory’s previous sales or projected sales. The rep is responsible for seeing that the funds are used effectively in the marketplace in ways that will sell the most amount of product.

In some of these programs, the companies’ guidelines are just as restrictive as any traditional co-op program. They mandate how the funds can be used, where, and when. They also require just as much documentation of the claims, including invoices and proof of performance. The only difference between a co-op program and MDF in these cases is that the retailer has no idea how deep the company’s pockets may be. It encourages the retailer to continue to press for funding and to squeeze for more until the sales rep says no or (if it’s his or her largest customer) cries, “Uncle!”

Keeping an MDF program in compliance with the Robinson-Patman Act, the law that addresses the implementation of advertising and promotional allowances, is much more difficult than keeping a co-op program legal. In MDF programs, retailers are not always advised of the funds’ availability. Most MDF programs are probably legal as long as ALL retailers are notified that funds are available. That way, all retailers have an equal opportunity to apply for funding. Smaller retailers (theoretically, at least) have just as much chance of convincing their sales rep that they need the funds as much as the larger retailers. If some retailers ARE advised and others are NOT informed of the funds’ availability, the program is in violation of the Robinson-Patman Act. But in reality, most MDF funds are allocated under the Meeting Competition” provision of the Robinson-Patman Act. This means manufacturers don’t have to notify all competing customers of MDF funds being available if they can substantiate they are providing funds to a retailer to meet competitive offers from other manufacturers to the same retailer.

An MDF program also violates the Robinson-Patman act when the company gives funds to one retailer with fewer strings attached than to another retailer (for example, no documentation needed for one retailer; full documentation required from another).

Not all MDF programs are restrictive. Some of the more liberal MDF programs allow usage of the funds to include in-store displays, shelf-space, shelf-talkers, in-store announcements, web-sites or web-site ads, dedicated sales people, demo equipment, open house or seminar expenses, SPIF’s (Sales Promotion Incentive Funding), in-store signage or other innovative promotional methods. Generally, as long as the retailer can justify that the activity will sell more product, and the retailer can sell the manufacturer’s rep on their program, it’s a “go.”

Some companies think MDF will simplify their lives and eliminate documentation. If you don’t care about documentation and prefer to eliminate the hassle of auditing claims, that is a pragmatic decision that really has no bearing on whether to stay with your co-op program or to go with MDF. I would not recommend eliminating the documentation unless you implicitly trust your field sales people to verify the fund usage. Even then, if your field people have many accounts to call on, it’s unlikely they will be able to verify a promotion occurred in every store of a chain or that promotion of any kind occurred at a smaller retail location that is on the company’s B or C list.

Will an MDF program eliminate deductions? Do leopards change their spots? The answer to both questions is “not really.” If the retailer has adopted a company strategy of charge-backs, then why should they care about negotiating a performance contract? The answer is, they probably won’t. However, don’t hesitate to TRY to incorporate some controls on deductions such as contractual agreements and to work through direct contact with the retailers’ accounts receivable departments. A retailer’s DMM and his or her buyers are usually responsible for achieving a set margin for each product line. Their answer may be “We’re advertising a lot more than what we’re charging back to you.”

Some companies require an ad planning calendar per year. If the retailer deviates from the plan, the manufacturer initiates a discussion with the retailer. Rarely, if ever, however, do these discussions change the way the retailer does business with the manufacturer. Some companies operate under the assumption that if the promotional activity is on the plan and it’s been approved, then the retailer doesn’t have to submit their proof of performance. That’s an interesting idea — works for MDF as much as it works for co-op.

So far, in this discussion we’ve established a point that there is not much difference between MDF and co-op. But there really is a big difference. It’s in the usage of the funds. Because co-op programs are allocated to all retailers based on a percent of sales, some of the smallest accounts NEVER use the funds. Breakage (non-usage by retailers) is as much as 30 to 40% in many industries. However, with MDF programs, unless the sales reps are extremely chary with their funds, usage of the allocated monies can quickly reach 100%.

Another danger in having negotiated programs is that the success of the program is only as good as the sales rep who deals with the retailers. If the rep is a “Larry Spineless” type of character, funds can be exhausted early in the year rather than spread out and planned for maximum impact during key selling seasons. The rep can over-commit funding to a retailer that later doesn’t fulfill its promised obligations in purchases or in promotions. If payment is made prior to performance, the funds have been wasted. If payment is withheld until performance, then the MDF program begins to resemble a traditional co-op program again.

The strongest argument made in behalf of MDF is that this type of program give sales people more flexibility. Reps can adjust budgets. Reps can be held accountable for the funds. In some cases, companies require that the reps show they have planned 80% of the dollars up front in the year. The remaining funds are kept in reserve for “opportunities” that may be presented as the year progresses.

Other MDF programs take a more aggressive, proactive approach to how the funds are used. Manufacturers take a plan to the retailers and negotiate performance and results. MDF funds, when used this way, are not always a reactionary response to the retailer’s requests.

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Updated as of 09/01/2006