Using special pricing agreements to increase your profit margins

Using special pricing agreements to increase your profit margins

SPAs (Special Pricing Agreements) are a common vendor program in many industry sectors. The program gives a special product discount for verified sales to an ultra-competitive event where in-stock discounts can’t secure the order. Special pricing agreements trace their roots back to the 1970’s but have shown significant growth in the past decade. As B2B e-commerce now counts for an estimated 15% of all orders and grows at 8% per year, special pricing agreements  have grown significantly as price and availability are easily and quickly researched. Special pricing agreements are now used by 77% of all distribution firms in North America; second only to volume rebates which are used by 90% of distributors.

US based research has found that software dedicated to tracking, remittance, and attribution of vendor monies is a significant factor in the sales success with special pricing agreements.

75% of distributors agree that special pricing agreements are slated to grow as more vendors will offer them and, today, there is significant opportunity for distributors who improve their usage of these funds.

Defining special pricing agreement Improvement

Measures of special pricing agreements success are difficult to find. For years, manufacturers and distributors have used vendor monies but too often have not attached sufficient measures to their ROI. We believe that this will end soon. Why? The US survey shows that managing your special pricing agreements better is linked to higher margins. We found a significant difference between top, average, and below average performers in special pricing agreement usage, with said difference being enough to confer competitive advantage.

Top performers earned 6.7% of their cost of goods sold in SPA discounts versus 2.1% for average performers and 6% for below average performers.

The differentials in special pricing agreements, most often, go into the competitive arena where price is a major consideration where the adage “There ain’t any loyalty that 2% off can’t buy. . .” is quite common.Exhibit I shows the differentials in SPA performance in graphic form. From the exhibit, there is a 1.5% difference in below average and average performers and a 4.6% differential in average and top performers in SPAs as a percent of cost of goods sold.

SPA performance differentials

In the bracketed differential, there is a 6.1% difference in cost of goods sold between top and below average special pricing agreement performance. To put this in perspective, if $10M USD in competitive material was up for bid, the top performer would have a $460,000 USD cost advantage over the average performer and a $610,000 material cost advantage over the below average performer. The upshot is that maximizing special pricing agreement usage, in competitive bid situations, is important and likely to grow as e-commerce gives the buyer numerous real time sources for price and availability.

Generating and maximizing special pricing agreements

Our research finds substantial differences in distributors’ generation and maximizing special pricing agreements. Generating special pricing agreements reflects the ability of the distribution firm to work with vendors on securing needed special pricing agreements for competitive events; it is an inter-channel action between vendor and distributor. Maximizing special pricing agreements is an intra-distributor event between different functions. Generating and maximizing special pricing agreements depends on visibility, the power of information, and analysis/control. The more visible special pricing agreements are within a distribution firm, the more they are likely to be used.

Distributor executives estimated that approximately 30% of special pricing agreements go unnoticed by both sellers and purchasers. The problem is one of visibility in that there is no central location to understand which special pricing agreements are available. This impacts the ability of purchasing to negotiate SPAs with vendors and sellers to use them in the market. Additionally, if special pricing agreements have a readily available history of usage, purchasers can access the history and use it to leverage the vendor negotiation. However, in many instances, this information is not centrally archived in a relational database which inhibits its usage. Hence the power of information is an important feature to special pricing agreement generation.

Finally, control over special pricing agreements is important.

As special pricing agreements are negotiated, management can analyze the information for trends on marketplace success. This includes type of competitive situation, size of the order, segment of customers, competitors, and a host of other market variables that, if analyzed, can help management control their usage for greater sales success. Improving generation and maximization of special pricing agreements is dependent on one primary variable, the use of specialized software for their tracking, remittance, and management. We asked distributors about the differences in philosophy, managerial attention, and funds tracking/remittance practices for special pricing agreements. We found no difference in special pricing agreement performance for distributors who said they “measured and managed funds carefully” versus those who “. . .have no overall strategy for their use.” However, we found a significant difference in special pricing agreement performance, as a percent of cost of goods sold, for firms based on their tracking/remittance systems. We found that distributors who used primarily spreadsheets, or a combination of spreadsheets, ERP system, and vendor portals, averaged special pricing agreements of 4% of cost of goods sold.

Distributors who used specialized tracking software averaged special pricing agreements at 7% COGs or nearly double other tracking/remittance systems

Tracking/remittance software is relatively new to North American Distribution. Our research finds that only 20% of distributors have the software and there is significant variation in program features and benefits. However, the use of the software gives a significant performance advantage in SPAs. Our review of tracking/remittance software is not part of our research, however, specialized bolt-on software in distribution is growing and has distinct advantages including:

1) Centralize processes for quality, through-put, and improved financial performance

2) Create a repository of transactions for analysis and managerial action

3) Increase visibility across the supply chain for better negotiation and internal usage of available funds.

Our work in special pricing agreements is ongoing, however, this research points to the overwhelming fact that usage of specialized software in special pricing allowances gives the firm a sizeable competitive advantage.

Elizabeth Lavelle

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