Deductions 101: Navigating Distributor Relationships in CPG

Working with a distributor is essential for many CPG brands looking to scale into grocery and retail stores. But the relationship is complex, and deductions are often a primary pain point. Here’s what you need to know about deductions and how to manage them effectively.

What is a Deduction?

A deduction is when a distributor “deducts” a cost directly from your invoice. Some deductions are legitimate, while others act as a profit center for distributors. Most are linked to commitments your brand has made to the distributor or retailer. Disputing deductions can be challenging, requiring patience, organization, and persistence.

Key Components of Distributor Agreements

Deductions should be clearly outlined in your distributor agreement. This document includes financial terms, promotional obligations, and mutual performance expectations. Always review your distributor agreement carefully—ideally with an expert—before signing. Even if you don’t have leverage to negotiate terms, understanding these costs helps with strategic pricing and retail planning.

Common Promotions Leading to Deductions

Typical promotions that may lead to deductions include:

Off-Invoice Promotions

Published Ads

Distributor Trade Shows

If you agree to these, expect to see them deducted from your invoice. Many brands face unexpected charges, so planning your promotional budget carefully is essential.

Common Deduction Terms & Lingo

OI (Off-Invoice): A discount deducted directly from your invoice, typically around 15% of the case price and applied during specified months.

MCB (Manufacturer Chargeback): When a retailer buys your product at a discount from a distributor, the distributor deducts the discount amount (plus any upcharge) from your invoice.

Scan: A discount taken at the point of sale, providing transparency as it’s tied directly to end-consumer transactions with supporting documentation.

PLC (Product Loss Claim): When a retailer charges back for spoiled or unsellable products, and the distributor passes the cost to your brand.

EDLP (Everyday Low Price): An ongoing discount agreed upon with the distributor.

TPR (Temporary Price Reduction): A temporary price cut for a specific period, which the distributor then extends to retailers.

3rd Party Billing: When a distributor collects money owed to the retailer on behalf of your brand.

Overpulls: When a retailer buys more discounted product than the distributor has in stock, resulting in extra charges to your brand for the over-ordered cases.

Pricing Credit: If you incorrectly invoice a discount price, the distributor deducts the difference between the invoiced and correct price.

Free Fill: When you give away free product cases to promote launches or placements, which the distributor charges back at wholesale price.

Shortages: Deductions for not shipping enough product to meet the distributor’s purchase order.

Managing Deductions Strategically

To avoid getting blindsided by deductions:

Understand Your Agreement: Know what you’re signing up for in terms of promotional obligations and associated costs.

Plan Promotions Carefully: Make sure promotional spend aligns with your budget, and track that deductions match what was agreed.

Monitor & Document: Keep records of all promotions, agreements, and invoices. This will help if you need to dispute a deduction or clarify charges.

Distributor relationships can be challenging, but understanding and managing deductions can help you navigate them with confidence. Remember: thorough preparation and clear documentation are your best tools for minimizing surprises.