In today’s vast and competitive market, the creation of complex special pricing agreements has made it essential for manufacturers and distributors to efficiently maintain pricing flexibility. According to US-based research, manufacturers and distributors are increasingly collaborating through special pricing agreements, or SPAs, which are commonly known as “contract support” in the UK building materials sector.
Special pricing agreements are collaborative arrangements where manufacturers and distributors assist each other for mutual benefit. While initially created to leverage scale, these agreements have now evolved into a more widespread tool used to increase sales and market share by allowing trading partners to offer a more competitive price than their rivals.
As special pricing agreements gain in popularity, the industry needs to adapt and adopt a more collaborative approach to implement and administer these deals efficiently. However, there is often a disconnect between manufacturers and distributors, leading to a duplication of tedious administrative work and strained relationships. This can cause special pricing agreements to be viewed as a necessary evil rather than the invaluable method of increasing market share and moving greater volumes of product that they really are.
What is a Special Pricing Agreement?
In simple terms, a special pricing agreement is an agreement offered jointly between a manufacturer and a distributor to supply products to a defined market segment at a specially reduced price.
The prices offered might even be loss making for the distributor without the support that they claim from the manufacturer. The manufacturer themselves is likely to be making less profit, but still achieves a sustainable net net profit along with the benefit of increased sales. The defined market segment previously referred to might be a specific contractor or installer, a specific geography, or even a specific installation location or site. The product range that is being discounted is often restricted too.
Typically, special pricing agreements are negotiated between a sales person in the distributor’s branch or pricing department and the manufacturer’s field sales team. Some special pricing agreements are initiated by the manufacturer, some by the distributor, and some by the benefitting contractor or installer.
The possible varieties of special pricing agreements differ depending on the specific manufacturer and distributor involved and the industry that each may be operating in. Although many of these varieties exist, the UK building materials sector typically grapples with three main varieties:
- A certain percentage discounted off of a given price (this is typically list price or invoice price);
- A fixed monetary amount per unit;
- Support to a guaranteed profit margin.
The diagram above shows some common agreements between manufacturers and distributors. Without rebates or special pricing agreements, distributors often sell products above their purchase price to make a profit. With special pricing agreements, however, they can sell products below their purchase price with the support of the manufacturer. Their profit then becomes the difference between their selling price and the level of support negotiated on top of their discounts. The manufacturer will still achieve a sustainable profit, ending up with a net-net price.
Why do Special Pricing Agreements Exist?
The primary goal of special pricing agreements is to allow a manufacturer to increase their market share by supporting the pricing of their products for a specific end customer. This can be achieved through various strategies such as supporting a distributor who has a strong relationship with the customer, guaranteeing an attractive price for the end customer during the design stage of their project, and supporting a distributor who is working to win new business. Special pricing agreements enable manufacturers to invest in growing their market share and remain competitive in the industry.
What are the Challenges of Special Pricing Agreements?
Reconciling special pricing agreements and rebates can be a daunting task for manufacturers and distributors alike. Often, these agreements are negotiated frequently throughout the year, leading to a high volume of claims that need to be processed and verified. In addition, the retroactive nature of SPA funding means that distributors must provide evidence of sales and pricing quotations to support their claims, a process that has become increasingly complicated due to GDPR considerations.
One major challenge that arises when managing SPAs and rebates is product mapping. Manufacturers typically use their own product codes when negotiating special pricing agreements, which can make it difficult for distributors to match their own product codes with those of the manufacturer. To overcome this challenge, distributors may use “special” codes, leading to further complications when claims are submitted and must be mapped back to the manufacturer’s codes for processing.
Furthermore, maintaining accurate and up-to-date documentation for SPAs can be an arduous task due to the many ways in which these agreements can be negotiated and re-negotiated. This can lead to missed claims and lost earnings, as many distributors may not have the information required to submit successful support claims.
Another layer of complexity arises from the fact that a given customer may be eligible for support under multiple separate special pricing agreements. Different manufacturers and distributors may have their own rules for handling these situations, which can lead to disputes and confusion.
The interaction between SPAs and rebates can also be mishandled, leading to further disputes and lost earnings. For example, when sales that are eligible for rebate payments are claimed under a special pricing agreement, they must be removed from the rebate accrual. However, if the SPA claim is rejected, these sales become eligible for rebate once again but are often not factored back into a rebate claim due to inadequate processes.
All of these challenges can erode the margin benefit that SPAs and rebates are designed to deliver. Therefore, manufacturers and distributors must have robust processes and systems in place to manage these agreements effectively and ensure that all claims are processed accurately and on time.
What are the Benefits of Special Pricing Agreements?
Without proper management and efficient processes, the benefits of special pricing agreements can be outweighed by the costs of administering them. The complexity of these agreements, coupled with the challenge of maintaining accurate and up-to-date records, can create significant obstacles to successful implementation.
To overcome these challenges, manufacturers and distributors must work together to streamline their processes, automate their systems, and leverage technology to improve transparency and efficiency. By doing so, they can reduce errors and discrepancies, eliminate the duplication of effort, and ensure that claims are submitted and processed in a timely and accurate manner.
Improved processes not only benefit the parties directly involved in the special pricing agreement, but they also benefit the end customer. By offering competitive prices and predictable pricing, manufacturers and distributors can better serve their customers and build long-term relationships based on trust and reliability.
In summary, while special pricing agreements can provide significant commercial benefits to both manufacturers and distributors, their successful implementation requires efficient processes, accurate record-keeping, and effective communication between all parties involved. By working together to optimize their operations, suppliers and merchants can leverage these agreements to outcompete their competitors, increase their sales and influence, and ultimately, deliver better value to their customers.
The Future of Special Pricing Agreements
In today’s highly competitive marketplace, companies must constantly seek out ways to gain an edge over their competitors. Special pricing agreements are a key tool in this arsenal, allowing manufacturers and distributors to offer targeted discounts and promotions to their customers. However, the challenges associated with special pricing agreements can be significant, including issues related to product mapping, documentation management, and interactions with rebate programs.
Despite these challenges, the benefits of special pricing agreements cannot be overlooked. Companies that are able to effectively navigate these challenges and implement efficient processes for managing special pricing agreements can gain a significant competitive advantage. By offering targeted discounts and promotions to their customers, they can increase sales, improve customer loyalty, and maintain control over their product lines.
To achieve these benefits, companies must be willing to invest in the necessary resources to improve their processes and foster strong collaborative relationships with their trading partners. This may involve implementing automated systems for managing special pricing agreements, establishing clear documentation and communication protocols, and working closely with their partners to ensure that everyone is on the same page.
In the end, the key to success with special pricing agreements is to view them not as a burden, but as an opportunity. By embracing the challenges and working simultaneously with your trading partners via a SPA management platform, companies can leverage special pricing agreements to gain a competitive advantage in the marketplace and drive long-term success.