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SPAs – Unique Value to Distribution Channels - Blog & Tips

Distribution Channel and Special Pricing Agreements

Are you Utilizing Special Pricing Agreements for Distribution Partners to their Full Effect?

The ability to maintain pricing flexibility in the distribution channel offers companies with an incredible advantage. Predominantly, manufacturers that offer special pricing agreements (SPAs) to their respective distributing partners can support a wide range of end-customer and market situational needs.

These advantages extend beyond increased profit margins, but also leverage end-customer loyalty, proactive sales activities, product-line control, while also negate channel conflict and margin degradation.

SPAs are powerful mechanisms for distributors and their supply partners alike.  However, SPAs are not without their fair share of controversy and complexity.

But first, let’s take a step back and validate why these ‘special’ programs exist.

Definition: Special Pricing Agreements
“An agreement to sell products to a distributor at levels below the ‘normal’ distributor price based on some competitive or commercial situation.” Source – Frank Hurtte, Distributor Special Pricing Agreements and Ship and Debit Programs, 2014
Special Considerations
The Robinson-Patman Act of 1936: Protects businesses from price discrimination, prohibiting “anti-competitive practices” that specifically discount the sale of commodities to “equally-situated” distributors. It should be noted, however, that the Robinson-Patman Act applies only if “all things are equal;” in other words, any transit that involves a unique competitive situation—or the distributor provides some sort of additional service—negates the legitimacy of this Act.

Frequent situations of SPAs as they apply to different market situations:

  • Very large volume end-customer that requests additional service(s)
  • Hold of product-line position against competing new player
  • The procurement of a new market
  • Competitive pressure from distributor pricing
  • The recent acquisition of a distributor to maintain end-customer’s business

SPAs will typically fall into one of three categories when manufacturers offer distributors discounted pricing:

  1. on everything
  2. for specific end-customer or group type
  3. of certain products from the catalog

The Recent Rise of SPAs in Today’s Distribution Channel Marketplace

Over the past decade and change, we have seen countless mergers and acquisitions that have given rise to SPAs. When a manufacturer acquires a new business, they are introduced to a wave of new distributors.  Many of these distributors maintain deeply rooted relationships with end-customers. A buyout, merger or acquisition of a manufacturer (in replace of another) can evoke hesitancy in the end-customer to continue the relationship it has built with the distributor.

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The manufacturer, burden with sorting through hundreds and even thousands of intricate business rapports, must invest time, money and resources into these accounts. One false move, such as the erroneous firing of a distributor that maintains business with profitable major accounts, can put the manufacturer at risk of losing on sales volume and market share.

That is where SPAs can be used as a tactical weapon in the distribution channel.

End-customers will stay with their distributing partner if the manufacturer serves the relationship. Savvy distributors should, and do, leverage SPAs to alleviate end-customers’ business concerns.

Monitoring One of the Most Common Channel Issues

Let’s explore one of the most common benefits SPAs provide distributors and their supplying partners: The eradication of channel conflict.

SPAs are particularly valuable as they eliminate channel conflict. SPAs eradicate conflict by putting the power back into the distribution channel’s possession without disrupting the manufacturer’s overall channel policy.

Take this common hypothetical example:

A manufacturer that sells circuit breakers has six authorized distributors in a specific market. Each of the six distributors serves a different market segment. Although channel conflict occasionally surfaces, most of the time transactions occur without conflict. One day, one of the distributors takes it upon itself to expand its end-customer base; inevitably crossing paths with two of the manufacturer’s authorized distributors. Suddenly, the distributor’s sales team is providing discounts to adjacent end-customers in the hopes of building volume outside its common segment. The strategy works, but to a fault; end-customers’ price eventually matches the discounted level, eroding margins, diminishing profits and forcing two valuable distributors to focus on other product-lines in hopes of higher margins and lower after-purchase competition.

Situations such as these often prove devastating for strategic distributors that insert a tangible value for end-customers. The real, proactive selling of demand creation and building relationships essentially stops, as distributors shift gears into other products due to margin degradation.

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However, successfully executed SPA programs can protect distributors to maintain exclusivity with end-customers. When a manufacturer grants its distributor with “specialty pricing,” channel conflict is far less likely to occur due to unmatched pricing flexibility. The Darwinist, “survival of the fittest” conundrum of channel conflict is destabilized and manufacturers have more control to build specific distributor/end-customer relationships.

 

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