Chargebacks are essentially business and trade processes, where wholesalers request for amounts that represent the difference between the price of a manufacturer price to the wholesaler and the contract price to the resale customer (Smith and Walter, 2006, 7). The actual chargeback occurs only after the wholesaler sells the manufacturer’s products at contract prices that are lesser that the cost of acquisition of the wholesaler (Smith and Walter, 2006, 7).
Whilst chargebacks are especially common in pharmaceuticals, they are also evident in all businesses that involve distribution channels and mass sales. Whilst wholesale distributors are dependent on rebates, also called chargebacks from their principals, e. g. the manufacturers for safeguarding of their margins, it is common knowledge that many wholesalers are unable to claim their rightful chargebacks because of the laborious accounting involved and because of the errors inherent in such voluminous and error prone accounting work (Smith and Walter, 2006, 27).
Chargebacks are critical to the wholesale business process because of their impact on final profit margins (Smith and Walter, 2006, 27). With wholesalers frequently competing on price, back end rebates are often critical to profits because of the practice of offering products to customers at prices that are less than the purchase price paid by the distributors (Smith and Walter, 2006, 27). In such cases distributors file chargeback claims with the manufacturers and are reimbursed with the price difference (Smith and Walter, 2006, 27).
Again in many situations manufacturers, on their own, offer prices to end customers that are lower than distributor prices with the understanding that the differential will be reimbursed to the distributor (Smith and Walter, 2006, 30). Such differentials, which are integral to distributor earnings, are also often left unclaimed because of the voluminous accounting work involved and lead to distributors practically giving away large sums of money (Smith and Walter, 2006, 30).
Whilst chargeback accounting is a routine accounting process, (involving computation of chargeback and validation with agreement) it becomes nightmarish when volumes increase exponentially because of numerous distributor-manufacturer agreements as well as thousands of customers and enormous sales transactions (Smith and Walter, 2006, 30). The issue tends to become further complicated because of the complexity in the nature of rebates offered, which can be straight, as well as stepped, depending upon volumes (Smith and Walter, 2006, 28).
Apart from these, there exist arrangements known as purchasing and selling chargebacks, and a combination of both, with distributors being entitled to chargebacks for lifting as well as selling certain quantities (Smith and Walter, 2006, 30). Pricing arrangements between manufacturers and distributors frequently involve a range of incentives like warranty recoveries and other structured systems that cover numerous customers and retain their validity for years (Smith and Walter, 2006, 30).