Why do customers continue to buy from big distributors despite the fact that promised savings goals are rarely met?
Why must you deal with a sales rep to receive any discounts from (artificially inflated) published list prices?
What forces are motivating the company representative and do they hurt or help you, the customer?
Why don’t more customers complain when prices are increased dramatically? Does it do any good?
Does your current distributor take you seriously when you threaten to go to the other big distributor if things don’t change? Assumed competition means that many customers use this tactic as a bargaining chip.
How do you go about negotiating a “good price” for an item when you really don’t know how much profit margin the distributor has to work with?
How do big distributors keep their reps from “giving away the store?”
Is your choice really between one big distributor or the other? The choice is no longer binary.
I have been writing blog posts for many years that in one way or the other state that you are a prime target for large distributors to make excessively high profit margins. How do I know this? Because I spent my 45-year career either as a sales representative or sales manager working for one of the two large distributors: I have first-hand knowledge.
Nobody wants to pay more than necessary. If you decide that you aren’t satisfied with your current distributor, what is your recourse? Sign on with the other distributor and deal with all the hassles that switching entails? The reality is most customers effectively lock themselves into a contract/agreement with one of the two distributors and choose to do so because the perceived cost of change is so high
I have often speculated how people would react if they actually knew the extent of the planning and plotting that goes on within a distributor organization to extract more profit from the sales made to customers who don’t have a “watchdog” monitoring pricing and (if applicable) contract compliance? Big customers all have people monitoring activity but few small to midsize customers can justify the added expense of hiring an expert just for this task.
The sales rep for the big distributor is often referred to as “the face of the company.” Whether or not you see an actual face, or just hear a voice over the phone or a name on an email signature depends on how much you buy. Whatever the case may be, that rep is the person you must deal with if you don’t want to pay the ridiculous published list prices.
So the question being addressed here is what incentivizes a sales rep to convince their company to lower prices and provide better customer service for you?
Distributor sales reps are commissioned on “gross margin” - Selling price - Cost✤ = Gross Profit. The more profit they make selling products to you, the bigger their paycheck. How can they increase the profit margin?
Increase the selling price.
Get you to buy items with more profit margin (e.g., private Label products)
Get you to pay fees (e.g., Freight, Fuel Surcharges, Handling Fee, Pallet Charge, etc.)
Increase your business with them. (I.e., “sell more stuff.”)
The forces working against the distributor sales representative are:
Increasing business alone is difficult because most customers buy nearly everything from their current distributor. Increased sales nearly always happens only if your customer is doing more lab testing.
Convincing lab people to begin using “knock-offs” (i.e., private label products) can be nearly impossible. For the most part, they prefer to stick with a brand that they trust; expensive and labor-intensive evaluations of alternatives are seldom justifiable.
Adding shipping charges to a customer who has not been paying these costs in the past could touch off a major battle. But if you have been paying for shipping and the rate just increases, no problem. Who really monitors all those tack on fees anyway?
Increasing the selling price - especially on so-called “hot list” items - can be tricky. It should only be done at the first of the year when you can blame it on manufacturer cost increases. But for people under contract, the ability to incrementally increase prices even if costs have not increased is baked into most contracts☩.
✤The distributor controls the definition of “cost.” It is almost never the actual transfer price of the item, but rather a “fully burdened” cost to which any number of arbitrary expenses are added to reduce the amount of commission due or to discourage customers from buying the product by artificially inflating the cost.
☩ A favorite explanation distributors use to justify increase is based on percent increase of their cost. If the cost of an item is increased 10% and that item costs $10, the cost is now $11. But if the selling price is $50, the new selling price is $55 - a net profit gain of $4. Often 3 - 5% is added to “adjust for inflation.”
Some customers actually do push back on the price or fee increases! But it is not common. Why?
It’s hard to get an audience. Many small to midsize customers no longer have any sales rep assigned to their account, or they have a telesales rep. You can bend their ear all you want, but they have the perfect defense: “I have no control over the situation. It’s above my pay grade.”
You get the quid pro quo response. If you do manage to get an audience with someone who actually has the authority to adjust prices or terms, then you will always be asked: “If we yield to you on price, will you make it up to us by giving us additional business?”
They hide behind the contract. Many smaller customers sign on to group or “generic” agreements / contracts. The distributor will always be able to insist that what they are doing is within the bounds of the agreement, unless, of course, you want to cancel out and try to do better on your own.
Most customers don’t bother to complain. What’s the use?
Not necessarily. Big distributors know who the big buyers are. These are either 1) A current customer of theirs who buys a lot, and the sales rep has reported that there is a lot more being bought from the other guys, or 2) They have never heard of you because you’ve been buying from the other company for so long.
When you show up, as an unknown entity to the other distributor, and think they are going to be itching to bring you onboard, you may be in for a rude awakening. One of the main reasons this rare event happens is because an account fails to pay its bills to their current distributor, and goes on credit hold until their account is current. They immediately go to the competitor who wants to avoid risky customers and they end up getting the cold shoulder.
There is always a big red flag flying in the air when a non-customer just shows up one day with the promise of new business. Keep in mind, there is a lot of “cross talk” between these two giants.
Capitalism is how business is done in the U.S. and in many democratic countries around the world. Businesses are expected to try to get the highest price possible for items they sell and to never “leave money on the table.” What is money “left on the table?”
Let’s take an example. The seller has an item that he buys for $10. The seller knows that the market price for this item is $50. He has set his list price at $100. You have been buying a similar product and paying $70. What price would the vendor need to quote you that would cause you to start buying from him? $65? $50? $25? (This is not an unrealistic example. Some chemicals actually have a margin of this magnitude!)
If you would be willing to switch for $65, which was the vendor’s first offer, then the vendor has “not left money on the table.” They are making $55 every time you purchase. What COULD the vendor have offered? Even a price of $15 would still have been a hefty 50% profit margin!
The problem here is that you had no way of knowing what the vendor was actually paying for this item so you had two options:
Offer a “fair” opening price of say $50. That would save you $20 on each item and be a win for you. But the vendor, always a more skilled negotiator, would say “let’s split the difference” and make it $60? Fair? And you would go home happy. Not nearly as happy as the vendor who just went home with $50 profit margin in his pocket on every unit sale when he was prepared to go as low as $25 if that’s what it took to secure your business.
Offer an “unreasonable” opening price of $35 - 50% less than what you are currently paying. You know full well the vendor is going to first laugh at this offer and counter with something much higher. This is especially true if the vendor knows you are paying $70 now for this item.
The vendor hasn’t done their homework and walks in and just shoots you a price of $25. You immediately think this price is too low and it can’t be an apples-to-apples deal and you reject the offer.
Sales organizations' most closely guarded secret is what they pay a vendor for an item. Consider the risks:
If sales reps know the true cost and they want to impress a customer and make a quick sale will nearly always price the item too low and leave lots of money on the table.
Distributors want control of the setting of the list price, so by setting a list price of $100 they can quote a 50% discount on the item, and still make an enormous profit margin.
They need to avoid general price erosion, but keep enough margin available in case of a competitive situation (such as negotiations with a really big customer.)
A number of years ago I was a new sales rep selling to hospital labs. My competition at the local hospital was a long-term, highly esteemed Fisher representative who had the account under his complete control. I could hardly get an appointment.
One day, I was granted an appointment because the company I worked for had recently obtained exclusive rights to sell a product line their hematology department used extensively. For many years, these products had been purchased through Fisher.
“What is your price?” I was asked. I quoted them what I thought was a reasonable price with a modest discount considering it was only available through my company.
I was unexpectedly called into a meeting that was far larger than I expected; all the department heads were sitting at the table, all of them armed with Fisher invoices. As a 20-something sales rep, I was a bundle of nerves and very unsure where this was headed. It looked like a lynch mob and I thought I was the target! In reality, I was just an expert witness at a customer’s hearing.
It was revealed that the Fisher rep had been telling them they were getting huge discounts but, in fact, had been charging this customer straight list price for years and nobody realized it. In those days, all list prices were only available in a printed price book that resembled a Webster’s dictionary and it took an act of congress to obtain one. A single informed competitor was all it took to shed light on the situation.
After winning the account, I later ran into my competitor who was much older than me; he was surprisingly jovial considering he had lost a big account. He said:
I made more commission off this account over the years than you ever will. I’ve won sales awards and bonuses because of my high margins. If these people were too blind to see what was going on, that’s on them. I did what my company expected of me.
The lesson it taught me: Treat customers fairly and honestly and you will never worry about a competitor capturing the business you worked so hard to attain. This is a lesson that has stuck with me for nearly half a century.
If you’ve read this far, you must be wondering how much you can actually trust a distributor sales rep to look out for your interests, establish trust with them and to be your advocate. This is the delicate balance every sales rep struggles with. After all, they interact with you far more often than they do with their own company.
The company is acutely aware of this tug-of-war. On the one hand, they strive to have sales reps who have “account control.” On the other hand, they constantly strive to keep sales reps from “giving away the store.”
There are numerous strategies companies use to control sales reps:
With quote restrictions. The sales rep can’t quote below a given profit threshold without management approval. The bigger the sale or deeper the discount, the higher up the ladder it must go.
By taking the decision away from them. The company always has the choice of raising prices or reducing discounts for non-contract customers and the sales rep has no say-so in the matter.
By setting high quotas. Reps that don’t meet their quotas are penalized by low commissions and may be fired. Quotas are often set based on prior year performance. Plans are often left unset well into the calendar year so the company has the flexibility to determine who is doing well, then assign that person a high quota to reduce the potential commission liability.
Via complicated commission plans. Clauses in pay plans penalize the rep often for factors beyond the reps’ control.
By threatening their employment. Newer sales reps are always in jeopardy of being terminated if they don’t meet company objectives. Longer-term sales reps, who are typically placed in charge of major accounts, have less to fear. Suffice to say, a sales rep has a lot lower probability of remaining with the distributor long-term than the average customer service rep. This is a very high turnover position.
So is a sales rep a friend or foe? An unhappy, inexperienced rep who is out looking for a better job will be of no help. If you are aware of all the forces at work and you have a competent sales rep (i.e., one worth keeping around) then you should work with that rep to do what you can to keep them as much on your side of the fence as possible and out of hot water. But keep in mind, even the best reps need to be vetted. They may even be unaware of changes made that negatively impact you! If you’ve got a loser on your hands, cut your losses. If you simply don’t have time or the inclination, your best bet is to deal with a smaller company with satisfied employees.
While many labs are locked into this cycle, an increasing number are breaking out, or at least buying more and more from other vendors while still doing most of their business with one or the other big distributor.
For those labs willing to do a little investigating on the web for items they spend a lot of money on, they quickly realize:
Numerous other options are now available, and many of them advertise prices online that make it far easier to see what a competitive price really is. Even if they don’t choose to buy that item online, they are in a much stronger negotiating position with the big distributor who will most often match or beat that price rather than lose the business.
Many regional dealers, who will have a high appreciation for your business, call you by your name and genuinely care about your business, would be glad to take over your account from a dealer who provides you with a telesales rep and relegates you to “online only” status.You don’t have to use a big distributor to obtain “vendor consolidation” (a selling point they drive home at every opportunity.) In fact, companies like LPS will purchase from virtually any vendor on your behalf - TRUE vendor consolidation.
Other suppliers may require “product switching” or the learning of new catalog numbers. LPS has overcome this objection by making it possible to shop for items using your existing vendor catalog numbers!
Do you still believe your choices are one or the other of the big two distributors? Or are you signed into an agreement that you think obligates you to buy from a single large distributor? Do you have a sales representative or telesales rep who goes the extra mile for you, and is willing to help you get better pricing on items you buy or help you find alternatives when an item is backordered?
Or do you wish you had someone who will look out for your best interest, a representative who answers your emails, chats or phone calls right away with accurate information and advises you when and when not to buy a particular item?
More and more people each year are breaking out of the “either or” cycle and finding service and savings by utilizing LPS. When you are ready to explore, we are here to help and would welcome the opportunity to serve you, no matter what size business you are.