When a lab distributor is interested enough in your business to offer you a written agreement, it is logical to assume:
From the distributor’s perspective, there is an entirely different set of expectations:
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.
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 reluctant to switch from a product (brand) that they trust, and know works, to anything else. Contracts and agreements are what give distributors leverage to break this impasse.
The products that distributors will focus on are:
The rep's 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.
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 due to 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?
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 your designated distributor, 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.
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 it was going on. After people started keeping an eye out for recategorization, distributors gave it a rest. Now, with portfolios of well over a million items, spotting a reclassification is nearly impossible unless it’s on an item purchased frequently.
There ARE cases for which reclassifying a product may be 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.
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 it. Most labs interpret their use of these agreements as supporting their organization. When you have one of these agreements, 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 have discussed in this series: