In this post we will focus on state or regional life science agreements. For a regional distributor, securing business with clients who have entered into one of these agreements can prove to be a major obstacle. From the customer perspective, are they worth the price of a membership? Do they deliver value? What are the pros and cons?

These agreements had their genesis in the Bio and Biocom organizations in the late 1990’s in California. Bio.org is the current umbrella organization, and there are 47 states with participating Life Science associations.

These organizations and others, such as the E & I Cooperative Services in the education sector, and group purchasing organizations such as Premier in the healthcare sector, were and continue to be the magnet that attracts the big distributors such as Avantor (VWR) and Thermo Fisher.

Why do these agreements appeal to big distributors?

First and foremost, they allow these large companies to garner new small- and mid-sized customers with little effort or expense. It’s like putting your fishing boat in the lake and letting the fish jump into the boat.

Second, the vast majority of customers who sign up for these agreements interpret them as being “contracts.” Customers are given every reason and incentive to never buy anything anywhere else. Rebates, growth incentives, and discounts on freight are all designed to keep customers from purchasing elsewhere. Many customers who participate in these agreements, when asked, state “I am under contract with [Distributor]. I cannot buy from anyone else.” This statement, of course, is not true and we will further explain below. For more on this topic, read our blog post “Contract vs. Agreement.” The legal text states: “Primary Laboratory Supply Purchase Agreement.” This is not a contract. However, a later clause in the agreement strongly implies that it is: “Member's participation under the Agreement may be terminated by [Distributor} in the event that Member is in default of Member's obligations under the Agreement and fails to cure such default within sixty (60) days after written notice of such default.” 

What is a “Primary Supplier”? Here’s what the agreement has to say:

“Member agrees to use commercially reasonable efforts to purchase at least 80% 

of its requirements for laboratory supplies and related products from [distributor] of 

the type available from [distributor] under the pricing and other terms of the 

Agreement, provided that the pricing provided is competitive. If not we ask that you give 

us the opportunity to quote the product to you at a competitive price.” Even if you are following this agreement to the letter of the law, this leaves 20% you are free to purchase anywhere you like. By the way, what is a “commercially reasonable effort?” 

Big distributors can effectively lock out smaller competitors. With their deep pockets and resources, they are the only players in this high stakes poker game. With just two big distributors, there is an illusion of competition when one or the other distributor is selected by a group purchasing organization as the preferred vendor. For more on this, see blog post “Tricks of the Trade” 

Where are the best deals in these agreements?

Big distributors piggyback on manufacturer contracts to offer low pricing without having to sacrifice margins. Manufacturers normally do not set the selling price, distributors do. Since big distributors typically set selling prices high then apply a big discount to make it seem as though you are getting a great deal, some of the largest manufacturers realize that they cannot rely on this method to gain market share. BD products, such as the 50ml Falcon Centrifuge Tube, are currently advertised at $578.00 per case on Thermo Fisher’s website. If BD didn’t control the selling price they would compete against Fisher’s private label tubes and a host of other competitors whose tubes would sell in the $120 per case range. By taking over control of the selling price of their products and reimbursing the distributor for all sales made under these agreements, they no longer have to worry about the distributor preferentially pricing a competitive brand. Corning is another manufacturer who utilizes these contracts and this strategy.

These are some of the best deals you can get under these agreements. The problem is the manufacturers offer such aggressive pricing that it is far below the standard costs any distributor has, effectively locking out all other competitors.

Even though these brand name products may look incredibly cheap, the peril is to assume that everything in that vendor's product line will also be an unbeatable deal. Many of these products are “loss leaders” that are priced such that you will assume everything else is similarly priced. 

“Free Shipping” But Read the Fine Print

Shipping is expensive for the little guy. But if you ship a lot (e.g., Amazon or Thermo Fisher who is UPS’s second largest customer) you get huge discounts. Big distributors leverage these deep discounts and offer the most attractive perk of all - “free shipping,” which likely includes hazmat (which is also negotiable) and dry ice fees.

In most cases these free shipping deals are restricted to items shipped from “the distributor's primary warehouse,” the distribution center closest to your location. Any item shipping from a different warehouse, or directly from a supplier, will incur freight, hazmat, and other applicable fees. In many cases, free freight may not include fuel surcharges, or extra charges for bulky items such as 55-gallon drums of chemicals, large equipment, or furniture.

What are the Downsides to these Agreements?

The hotlist. A hotlist consists of the items you buy the most frequently. Distributors try their best to keep this list as short as possible. Most agreements state that if an item is placed on a hotlist and not purchased frequently it will be removed on the agreement anniversary date. Hotlists are priced by the sales rep. Sales reps have little flexibility in their ability to discount. Most customers just assume that if they are being quoted an item and it is 50% or more off the published list price, then it’s a great price. This is seldom the case.

The discount schedule. The distributor rakes in the profits when you purchase discount schedule products! The more items you buy off the discount schedule (especially capital equipment), the higher their profit margins! 

The goal here is to have customers who are 100% loyal, who never question the price of an item, and to restrict the hotlist to the smallest number of items possible.

The Minimum Margin clause. Here is the actual text of the biggest “gotcha” in the agreement:

”All pricing shall be subject to increase in the event that the price extended 

hereunder results in a price below [Distributor’s] cost plus 18%, in which event the price 

charged shall be [Distributor’s] cost plus 18%. In the event that [Distributor’s] cost for a Catalog Product increases within a calendar year more than 3%, and [Distributor] provides Member with thirty (30) days notice of such extraordinary increase, the resulting price increase shall be passed through to Member.” 

This statement is the most frequently overlooked clause in these agreements. It is the source of innumerable disputes and misunderstandings. Why?

First, the clause supersedes all discounts and net prices. The distributor is guaranteed to always make at least an 18% profit margin no matter what.

Second, there is no way to verify what the distributor's cost truly is! That’s confidential. You will just have to take their word for it.

This is the killer clause and the one that ensures that the game is rigged in their favor.

How do customers leverage these agreements?

As a former manager with sales reps reporting to me on customers who “refuse to honor their agreements” I speak from personal experience. Some customers have figured out that they can legally and ethically “cherry pick” these agreements. They have figured out that the loyalty incentives - a 2% rebate as an account credit or the year-over-year 2% growth rebates - amount to less than the extra money they would spend on even a single capital equipment item that they could buy from any other seller for thousands less!

Is it ethical to “cherry pick” these agreements? Unless the word “contract” is in the document you signed, then yes, you are adhering to the terms of the agreement..

As stated above, some products you can purchase under these agreements are well below standard distributor costs. You can’t do any better. If these happen to be the items you buy in large volume, by all means sign up, pay the fee and enjoy the savings! If these low-priced items do not represent a large spend for your company, then in all likelihood, you would probably be wasting your money.  The problem is, you may not find out until you’ve signed up!

The Biggest Risk You Face

The biggest risk you take in entering into one of these agreements is to never look at it again, or believe you aren’t allowed to even consider purchasing from a competitor!

Once you sign one of these agreements, the distributor representative will give you every reason to believe that you are “under contract.” I know from firsthand experience that they will even go so far as to make legal threats. This scare tactic will only work if you allow it to happen.

These organizations do require substantial annual membership dues (typically based on the number of employees working at your company). My advice is if you are only paying this fee to gain access to these lab supply agreements, you should consider other options with better customer service - such as LPS!