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Finance
Delivering Increased Profitability: Building and Maximizing a Workbench
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Understanding special pricing agreements (SPAs) is crucial in today's complex business landscape. These essential deals help businesses navigate the complexities of pricing, drive growth and compete strategically in adverse market conditions. In this blog, we'll delve into the challenges of SPAs, the power of pricing, the mechanisms behind SPAs, the pitfalls of ineffective SPA management and the six critical aspects of successful SPA implementation. We'll uncover the true potential of SPAs when implemented correctly and why companies should embrace SPAs as a core capability.
By gaining a deeper understanding of SPAs, businesses can unlock their potential to enhance profitability, optimize their operations and achieve a competitive edge in the market.
A Rebate by Any Other Name
Special pricing agreements can be difficult to discuss due to their localized and industry-specific nature. They go by many different names across different industries, making communications about them a challenge. The lack of standardized terminology complicates matters, with distributors dealing with multiple suppliers who each have their own terminology.
These are a few of the other names you might know SPAs by…
- Distributor Pricing Agreement
- Customer Pricing Agreement
- Ship & Debit
- Long Term Agreement
- Strategic Pricing Agreement
- Distributor Rebate Contract
- Contract Pricing
- Customer Specific Pricing
- Vendor Chargeback
- Supplier Rebate Agreement
- Product Billbacks
- Reseller Rebate
- Customer Specific Discount
- Market Price Rebate
- End Customer Discount
- Price Driven Rebate
We need a common reference point for these complex agreements, and while it hasn’t yet achieved consensus, "special pricing agreements" is quickly gaining traction.
Fundamentally, SPAs are complex incentives that facilitate price negotiations to meet competitive market conditions. They act as rebates that return money to the supply chain after a sale, impacting the cost of goods sold or the offered price to a customer.
Pricing Negotiations
There are many different types of customers who want to buy your products. Price negotiations are a necessary and integral part of the sales process, with customers always looking for better prices. Even if you have a superior product filling an urgent need, the first conversation you’ll have with your customers is likely “is there anything you can do on the price?”
Customers are well versed in tactics to justify why they deserve a lower price than the initial offer:
- “I buy MORE than the other guy!”
- “Your COMPETITOR has a better price!”
- “You NEED me if you want to grow in the market!”
- “Give me a good price now and you’ll get my next order!”
In many industrial B2B settings, salespeople are rewarded for securing the most deals – not necessarily the most profitable deals. This results in a willingness to make price concessions that can drive profitability down, even as the amount of deals you make is increasing.
To safeguard profitability, core rebates play a crucial role for companies. However, in certain distribution channels, distributors may struggle to accommodate variable pricing if their margins are limited by suppliers or manufacturers. As a result, they rely on manufacturer support, and the administration of these processes becomes more challenging.
SPAs: an Essential Mechanism of Price
Almost every business has a variable demand customer base. In a retail setting, customers pay the same price for everyday items. However, in B2B settings, even smaller accounts specialize in specific product lines and purchase more than others. In the electrical industry, for instance, a significant portion of an electrical distributor's revenue comes from a small percentage of customers who have diverse purchasing needs. This complexity extends to other industrial sectors and construction, where contractors specializing in different areas may pay different prices for the same product. Such a diverse sales environment leads to negotiations and price discrepancies among customers. A mechanism like SPAs is essential to facilitate this process, acknowledging the need for individualized pricing based on factors such as customer identity and purchase volume.
Companies without a robust SPA system often treat variable pricing as a painful process (akin to going to the dentist). However, targeting a variable demand customer market requires more than one-size-fits-all pricing, or as I like to call it, "Baby Bear" pricing. You can't target a variable demand customer marketplace with only Baby Bear’s small bowl of porridge and expect Papa Bear and Mama Bear to be comfortable with the same. Instead, embracing a mix of pricing based on the changing demand portfolio allows companies to sell to all types of customers effectively. By relying on a single price, they limit their revenue, profitability and the potential of their distribution channel.
SPAs are a critical skill set that companies should embrace as a core capability. It is as important as logistics, recruitment, sales and accounting. It is unfortunate that many view SPAs as burdensome, seeking ways to minimize or avoid using them. However, the problem lies not in the concept of SPAs, but in their execution. The key to increasing profitability lies in flexible pricing, where different customers are offered tailored prices based on their unique needs and market position.
The Significance of SPAs
The marketplace often misunderstands the significance of SPAs and rebates. Despite their potential to contribute to net profits, many companies fail to grasp their value. Without SPAs, businesses resort to Baby Bear pricing, which deters potential customers and results in overall loss by selling at the lowest price to major customers.
The entire supply chain's profitability depends on selling products at higher prices, striking a balance between competition and maximizing profits. SPAs are crucial in achieving this balance. While they may seem burdensome administratively, SPAs exist to increase sales, boost revenues and improve overall profitability.
SPAs are the key to greater profitability: they allow for increased sales or smarter pricing strategies. They eliminate the constraint of a one-size-fits-all pricing model. Although SPA administration can be challenging, with claim filing, due tracking and meeting various requirements, embracing SPAs and implementing efficient management methods can yield significant benefits and contribute to overall business success.
A Perfect Storm of Complexity
The logistical and accounting challenges faced by businesses can create a perfect storm of complexity. One major hurdle is getting pricing right, as prices often change for each opportunity even before orders are placed, requiring negotiations with customers, distributors and manufacturers. Striking the perfect price point is a delicate balance where satisfaction can be elusive for all parties involved.
Another critical aspect is claiming rebates correctly. With price discounts automatically applied to each contract customer, it becomes an act of faith that every rebate claim will be accurately processed. Missing even a single claim can result in the loss of profits for distributors.
Additionally, syncing separate systems poses its own difficulties. This process is administratively complex and requires an exponential increase in data transactions and synchronization between companies, encompassing product data, pricing data, timing data, product hierarchy, price changes and new product updates.
Ensuring Proper SPA Management
Special pricing agreements have the potential to become a financial black hole if not approached correctly. To navigate this challenge successfully, several key factors need to be considered. First, establishing a robust infrastructure is crucial. This entails creating a disciplined approach to SPAs, ensuring effective communication, developing a strategic mindset and implementing measurements to track progress and outcomes. Aligning goals and objectives is also vital to steer the process in the right direction.
However, it is important to recognize that mastering SPAs cannot be achieved in isolation. It requires collaboration and participation from all stakeholders. The challenge lies not just within your own system but within the larger ecosystem involving various parties. Therefore, to truly excel in this area, it is essential to prioritize SPAs, considering them as a core capability that can act as a growth catalyst for your business.
The Six Disciplines of SPAs
How do you know if you’re handling your SPAs well? How can you measure the efficiency of your processes and the success of your deals?
There are six primary aspects of successful SPA implementation that you can use to evaluate your own SPA process:
- Negotiations can be documented and agreed within two hours of customer inquiry
- Distributor systems updated in advance of the first order once the pricing is set
- Contract data updated, modified, synced and maintained throughout the lifetime of the contract
- Automated, transparent & low-cost rebate calculation and dispute resolution process
- Robust reporting and contract visibility system available to all relevant parties
- Meeting goals at top and bottom lines that sync with your core business objectives
Mastering Special Pricing Agreements (SPAs) can be a dream come true for your business. With a robust SPA system in place, you unlock the potential for improved logistics, enhanced sales, increased profitability, accelerated growth and stronger customer engagement. Few other factors have the power to impact all aspects of your business as much as a well-executed and strategically-managed SPA system.
Successful companies understand that Special Pricing Agreements (SPAs) go beyond mere administrative tasks. They recognize that SPAs are instrumental in capturing market share, driving revenue growth, safeguarding existing business and strategically expanding into new areas. By learning to leverage SPAs to their full potential and viewing them as critical components of their overall business strategy, SPAs can help businesses position themselves for long-term success.
Looking to learn more about special pricing agreements? Download our report on The State of SPAs.
