Fred Schroeder's Off-Invoice Allowance and MCB Math: What Your Trade Dollars Really Do

Trade Spend
Written By Pedro Noyola

Fred Schroeder put one chart on screen during our summer trade spend webinars, and I’m still thinking about it now. It showed one case of product with $12.69 in trade spent on it, and only $4.16 of that money ever reached the retailer. The other $8.53 stayed with the distributor. I love a number that tells a story, and that one tells the whole story of trade spend for a growing CPG brand. 

An off-invoice allowance (a term you'll hear from every distributor rep) is one of the biggest reasons the split lands that way, and the mechanics behind it are the kind of thing you can change once you see them. Fred reminded us that trade is typically "90% or 95%" of a brand's marketing fund, which means every dollar you steer back toward the shelf is marketing money you already had. Y'all, let's go find that money.

Fred worked at Procter & Gamble and in Coca-Cola's Minute Maid division, then led two trade promotion software companies. Today he's a fractional trade manager for small brands, analyzing their trade spend retailer by retailer.
In this article, we’ll talk working trade vs. non-working trade and talk P&L math. I get pretty darn excited about a well-built P&L because I’ve seen the tangible difference it makes to a CPG brand’s bottom line over and over again.   

What Working Trade vs. Non-Working Trade Actually Means

Working trade is any trade dollar that reaches the retailer and, through the retailer, the shopper. Non-working trade is any trade dollar that stops at the distributor and becomes inside margin, the profit a distributor earns beyond the roughly 8% delivery upcharge it charges a retailer like Whole Foods.

Fred's May 6 chart modeled a typical plan built from the two most common line items, off-invoice promotions and manufacturer chargebacks, or MCBs. The retailer's $4.16 is the "a little over $4" Fred called out live, and one dollar in three reached the shelf. CPG companies spend 11% to 27% of revenue or more on trade promotion, according to the Promotion Optimization Institute, so a two-thirds shortfall at the shelf is a big number. Wholesale and retail trade already took 26.1 cents of every food dollar spent on domestically produced food in 2023, according to USDA's Economic Research Service, before any trade dollar of yours enters the picture.

Off-Invoice Allowances: Why They Rarely Reach the Shopper

Off-invoice allowances, or OIs, are temporary discounts a distributor takes on every case it buys during a promotional window, subtracted right on the invoice. Monash Business School's off-invoice allowance definition hinges on purchasing set quantities within a set time. Nothing in the deal requires a lower price on the shelf, and Fred said on August 19 that virtually all OIs are non-working trade with "very limited performance."

Two standard distributor practices explain where the money goes.

  • Forward buying means the distributor stocks up during the discount window with enough product to last until the next window.

  • Floor stock protection credits the distributor for cases already in its warehouse when your price drops, so full-price inventory earns the discount too.

Distributors like to see a 15% OI four times a year, and with four windows, Fred's rule of thumb is to assume nearly all your volume gets bought at the discount. On a $40 case, that's $6.00 off almost every case you ship, and Fred's experience is that "probably 10%" of it, at most, reaches the consumer. Sixty cents of shelf impact for $6.00 spent is the math I want you to remember. Our post on gross-to-net realities with UNFI and KeHE shows what forward buying does to your cash flow at those two distributors.

The MCB Math: How a 10% Chargeback Becomes $5.60

The MCB setup is simple on paper. You agree to fund a 10% discount for a retailer, the distributor passes the lower price through, and then the distributor bills that discount back to you. Your real cost depends on the price the 10% gets applied to, and Fred's May 6 example uses a $40 case and a 10% MCB at Whole Foods.

MCB billback = MCB rate × case price × (1 + wholesale upcharge)

  • Whole Foods receives the discount on its distributor cost, which includes the roughly 8% delivery upcharge. $40 × 1.08 = $43.20, and 10% of that is $4.32 passed through to the retailer.

  • The distributor bills you 10% of its wholesale price, the published price for its smallest stores, which sits 35% to 40% above your case price. Using Fred's round number of 40%, $40 × 1.40 = $56, and 10% of that is $5.60 billed back to you.

  • On your own case price, 10% of $40 is $4.00, the figure most Founders pencil in.

  • The $1.28 between what you're billed ($5.60) and what the retailer received ($4.32) stays with the distributor as inside margin.

When Fred walked through this live, I summed it up in two words, "double markups," and they've stuck. Your 10% gets applied to a price 40% higher than yours, so a 10% MCB promotion really costs 14% of your case price. Budget MCBs at the billed rate and deductions stop feeling like surprises.

Splitting Trade on Your Own Case Rate

Fred spends virtually all his time inside a client's gross-to-net P&L, working "retailer by retailer, distributor by distributor," and you can copy his method in an afternoon.

  • Pull total trade dollars per case for one retailer from your gross-to-net P&L, the case-by-case walk from delivered price to net revenue.

  • Count scan dollars as working trade, because a scan pays only on units sold at the register, along with the slice of each MCB the retailer actually received, the $4.32 in Fred's example.

  • Count every off-invoice allowance, the MCB upcharge above the retailer's share ($1.28 in the example), and any floor stock protection as non-working trade, which is distributor margin.

  • Divide working dollars by total trade dollars to get your working trade percentage.

On Fred's full chart, $4.16 ÷ $12.69 = 33% working trade, which leaves 67%, or $8.53 a case, non-working. That 33% is a snapshot, and a single MCB billed at $5.60 against a $4.32 plan is enough to move it.

Checking every deduction against the promotion it came from, line by line, is the work our trade spend management service does for clients.

The Case for Scans: Turning Non-Working Dollars Into a Better Price Point

Scan promotions flip the billing in your favor. The retailer reports the exact number of units it sold at the promotional price, and the distributor bills you for those units at the agreed scan rate, plus a deduction fee of "a couple of percent." The 40% upcharge drops out, and you pay only on units shoppers actually bought.

Fred's August 19 example shows what that frees up. Under an MCB, the upcharge eats part of your budget, so you might only afford to give a retailer "$1.20 if it's an MCB." Move the same budget to a scan, the upcharge disappears, and that money becomes "$2" per unit, enough to hit a two-for-$7 price point. Retailers typically don't push back once they see those numbers, Fred said on August 19, and the ones that hesitate are weighing the extra work of reporting unit sales to the distributor.

Even so, getting there takes patience and ganas, or drive. Fred said some retailers agree to scans for larger brands, some when asked often enough, some for brands they like, and some once a new buyer arrives. His realistic pace is one more retailer a quarter, sometimes one every two quarters. Once a buyer says yes, Fred's advice is to write the scan straight into the contract. Read the Alec's Ice Cream case study for the weekly cash discipline behind a 3X year-over-year growth streak.

Where Your Marketing Budget Actually Goes

Splitting trade into working and non-working dollars, retailer by retailer, shows where your marketing budget goes. Margin, cash flow forecast, pricing, and the story you tell investors all move with that split, which is why I treat trade as part of one system. Fred's own yardstick for progress, from our May webinar, is that "you continue to put more dollars in working trade than non-working trade" and get fewer negative surprises out of your deductions, and finding those extra working dollars with you is my favorite part of this job. 

Build your gross-to-net P&L with Cultivar and put a real number on your working trade percentage.

Frequently Asked Questions

What's the Difference Between Working Trade and Non-Working Trade in CPG Distribution?

Working trade is the share of a trade dollar that changes what the shopper pays or sees on the shelf. Non-working trade is the share that stays with the distributor, through forward buying, floor stock protection, the MCB upcharge above the retailer's cut, or a scan's deduction fee.

How Do I Figure Out What a Distributor Is Really Charging Me on an MCB Chargeback?

Multiply the MCB rate by your case price, then by one plus the distributor's wholesale upcharge. At a 40% upcharge, a 10% MCB on a $40 case comes to $5.60 billed back.

Are Off-Invoice Allowances Worth It for a Small CPG Brand, or Do They Mostly Benefit the Distributor?

Fred's experience is that at most about 10% of OI money reaches consumers, so OIs mostly fund distributor inventory and margin, and he suggests minimizing them.

How Do I Get a Retailer to Switch from an MCB to a Scan-Based Promotion?

Show the buyer how much more money per unit a scan frees up, and connect it to a multiple price point like two for $7.

Related Resources

Pedro Noyola
Next

FOB vs. Delivered Pricing: Why the Choice Gets Harder as You Scale