The 7th in an 8-part series titled: “The View from the Other Side”
When a lab distributor is interested enough in your business to offer you a written agreement, it is logical to assume:
- - The distributor is making concessions to win a larger share of your spend.
- - The incumbent distributor is making concessions, because other distributors are making an effort to win your business (competition.)
- - The distributor will ask you to make concessions but once the contract is signed, your interests and their interests (saving money) will be aligned.
- - Once the contract/agreement is signed, that for a long period of time, you will be protected and there is no reason for you to devote resources to establish prices or make decisions about who to purchase from until the contract any extensions expire.
From the distributor’s perspective, there is an entirely different set of expectations:
- - The distributor wants to capture market share from their competitors.
- - The distributor wants to reduce the resources required to encourage you to buy from them and let their sales reps focus on converting the competitors’ business.
- - If the award is made to a non-incumbent vendor, it is highly likely that they will “front end load” the concessions in order to win your business.
- - The distributor will increase their profit margins throughout the term of the contract.
The term used is “profitization.” This is an internal term because no customer on contract ever wants to think about the distributor constantly working to increase profit margins at their expense! You were looking for a partnership and a supplier you could trust.
With a written contract, how is an account “profitized”?
Manage the mix
Distributors have enormous portfolios of products. The profit margin on these products range from zero margin to over 95%. Lab managers and workers are often reluctance to switch from a product (brand) that they know works and trust to anything else. Contracts and agreements are what give distributors leverage to break this impasse.
The products that distributors will focus on are:
1.) Private label
The reps compensation plan provides high rewards for sales of private label products and little or no compensation for low margin items to drive the desired behavior.
Those who are concerned about the budget and spending will often see that they can save tons of money simply by switching to another brand. Lab personnel will agree that saving money is a good idea however...
- Who is in control here, the accountants or the scientists?
- I don’t have time to get lab work done AND evaluate new products!
- I must be in control of the products I use to produce quality results!
- I’ll try it but I’m telling you ahead of time it probably won’t work. (It seldom does.)
This dynamic exists and will continue to exist no matter what language is in the contract. During negotiations, don’t accept language that makes promises your organization will never keep.
The annual price increase shell game.
Every year, prices go up. At least that’s what we all assume. It’s not necessarily the case. Many manufacturers in really competitive markets (e.g., pipet tips) know they can’t raise prices without consequences. There is virtually no way for the end user to know. So if the distributor raises prices and tells you that they just hate to do it and that the increase overall is in keeping with the cost of living, you accept that explanation as reasonable.
The main reason labs deal with big distributors is in the belief that their billions of dollars in sales each year gives them the best buying power. That is an absolute fact! Do they share that success with you each year when they tell their vendors if they raise prices they will have hell to pay and the vendors back down?
Items with manufacturer price support (SPQ).
If a manufacturer, say Corning or BD, really wants your business, they can offer you a special price quote (SPQ). This is a side agreement between you and the manufacturer. This is handed off to the distributor you designate who does the fulfillment and then is paid afterwards in the form of a rebate for their services by the manufacturers.
When you sign a contract or agreement will the deal you have with the manufacturer still be in place or does the contract take precedence? Distributors will never object to an SPQ. Since the sales dollars are much lower and they get reimbursed in arrears, they have no incentive to work on your behalf to obtain one. This is especially true since you have already pledged your business to them.
It’s a poor way to profitize an agreement since when you see a price spike by 2X or 3X on an item you are going to do something about it. But if it takes you a few months to sort it out, that’s more money in their pocket.
The category shuffle gambit.
If an item is discounted by category and an item is classified as being in category “B” which had a 35% discount from list, what happens if the distributor reclassifies that item as being in category “C” which has a 25% discount from list? The distributor just raised your price by 10%!
This practice began shortly after distributors stopped printing price books. It went on for many years until the word got around that this was going on. After people started keeping an eye out for this distributors gave it a rest. Now with portfolios of well over a million items, spotting these reclassifications is nearly impossible unless it’s on an item purchased frequently.
There ARE cases where this is perfectly legitimate. If a vendor reduces the discount to the distributor, then reclassification is warranted. This is an extremely rare event.
No contract I have ever seen contains language to counter this tactic.
Contract vs. agreement. It makes a big difference here!
A pricing agreement that you have signed onto such as the Bio/Biocom agreement means you have access to favorable prices and terms. You are under no legal obligation to utilize the agreement. An agreement is just that: If you choose to buy from this distributor, THEN you will get these prices and terms.
Most labs view these agreements as contracts. The distributor counts on this. Most labs interpret their use of these agreements as supporting their organization. In reality this is the easy road. When you have one of these, you let someone else negotiate for you and you can just buy and pay the bill.
This sign-it-and-forget-it approach plays right into the distributor’s hands. LPS helps customers with these type of agreements get more from the agreement and avoid being profitized with no fees whatsoever! We will discuss this at greater length in part 8 of this series.
What we will discuss in this series:
- 1.) Contract Terminology 101 - what are the components and what do they mean to you?
- 2.) Contact vs. Agreement - What’s the difference? Do you have the right to shop elsewhere? What about a “generic” or group contract?
- 3.) The Hot List and Price Caps - The pros and cons.
- 4.) Guaranteed Cost Savings - Hard vs. soft cost savings. Metrics. Penalty clauses.
- 5.) Cost Plus Pricing - Depends a lot on how you define “cost.”
- 6.) Rebates and Prebates - Sound too good to be true? Most likely it is.
- 7.) Profitization - How it’s done and how you can protect against it.
- 8.) LPS On Your Side - The LPS approach. How it addresses these issues and is a better fit for many lab