The Impact of Pricing and Contracts on SPAs
At times, customers want to purchase items from the distributor's inventory but to do so, they require special pricing that reflects their purchasing power. The only way for the customer to make the purchase is by adjusting the cost of inventory for the distributor—on the spot. For instance, the distributor may be selling a unit at $50, but for this particular customer? They’ll create a special price of $40: a special pricing agreement (SPA).
A SPA enables modification of pricing to meet the needs of various customers through one distribution channel and inventory, with only financial adjustments being made to determine the appropriate cost. Unlike sending lower-priced inventory in the hopes that only the intended customer will purchase it, this approach ensures that the price discount goes where it is intended within the marketplace, and the transaction occurs only where it is intended to occur.
But SPAs are notoriously difficult to manage. Does their complexity outweigh their benefit? We’ll let you judge.
Difficulties with the SPA Process
One of the most common complaints surrounding SPAs is the difficulty of managing them. Managing these complex agreements is a time-consuming, manual effort due to:
- Out of Date Pricing
When executing on SPAs, some manufacturers don't keep their pricing up to date. For example, the SPA price may be higher than the current internal stock price because there was an internal stock reduction six months ago that was never reflected on the SPA platform. Alternatively, some manufacturers may have set SPA prices so low that they end up selling their products below the manufacturing cost without realizing it.
- ERP System and Data
Another issue with the SPA process is that the origin data comes from distribution partners, which are external to the company. The ERP software that companies buy is intended to manage all aspects of their operations. However, the SPA data is usually kept separate from the rest of the data, making it difficult to proactively manage pricing contracts. There is a lack of visibility, triggers and smart systems to identify pricing errors or make necessary changes. The SPA data is often imported into the platform without proper auditing or accounting. IT teams typically build the SPA systems internally and then move on to the next project, leaving the system running in the background without proper maintenance.
- Administration of SPAs
SPAs are typically managed by salespeople who may prioritize selling over administration. However, administering a SPA requires a lot of documentation and there are multiple components to consider, including product information, product hierarchy, pricing information and transactional information.
If any of these components are not set up correctly, it can lead to frustration. Therefore, it's crucial to administer SPAs clearly, maintain visibility in the contracts and to make it easy to import and update information on the distributor's side.
Managing Increased Costs When Your SPA Hasn’t Expired
Even if there is a fixed contract in place for the next 12 or 18 months, a SPA is still eligible for a price increase whenever one occurs. To accomplish this, you need a platform that can distinguish between contracts that will absorb the price increase and those that won't, allowing you to input the new pricing and modify the contract accordingly to reflect the lower price.
For example, if there are a thousand contracts, you may determine that 900 of them will be subject to a price increase. The calculation for these contracts is straightforward: simply apply a multiplier to reflect the price increase, while leaving the contract structure unchanged. However, the remaining 100 contracts are more complex. For these contracts, you would need to modify the multipliers to reflect a lower multiplier of the new cost. The goal is to maintain the same net price for the customer, while ensuring that the price increase is not passed on to them.
While it may initially seem complicated, the process is actually quite simple once you have clearly documented and identified the business rules for each contract. This process then becomes a standard part of the negotiation process. When negotiating a pricing agreement, you must determine whether it will be fixed for several years or whether it will be subject to dynamic pricing adjustments whenever changes occur in the marketplace.
How SPAs Can Bring Manufacturers and Customers Closer Together
As a manufacturer, you may lack knowledge about your end customers because distributors, who own the customer relationship and receive payment, make up the majority of your sales. This can make it challenging to understand the purchasing behaviors of your end customers. However, with a SPA in place, you can gain visibility into your end customers' activities and establish a direct relationship with them.
A SPA also provides price protection, enabling you to secure contracts and maintain relationships with distributors and end customers without worrying about competing prices. By carefully selecting and utilizing price as a lever, you can increase revenue and grow your business while also safeguarding yourself from marketplace disruptions. Through a SPA, you can document customers' buying habits and consumption patterns, giving you real insight into your marketplace.
Streamline Your SPAs Pricing and Contracts
The key to developing an efficient and sustainable SPA process is choosing the right tools. While many manufacturers and distributors turn to the trusty spreadsheet to manage their SPAs, this choice has led far too many businesses down a dark path of inefficiency, disorganization and costly errors.
Enable’s SPAs platform can save a significant amount of time and effort when it comes to calculating, tracking, reconciling and reporting on your contracts. It includes an extensive suite of automated tracking, analysis and reporting features designed specifically to streamline the process of managing SPAs.
For a more in-depth look at our SPAs solution, check out our product page: https://enable.com/solutions/special-pricing-agreements