How big distributors rig the game so they always win.

 

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Executive Summary

Large lab supply distributors have in most cases been in business for over a century.  The “secret of scientific supply” is to put you, the customer, to not shop, but rather just keep buying, comfortable in the knowledge that you are getting a fair price and never questioning.

“Vendor consolidation.”  “Single source for all your scientific needs.”  “A world class web site.”  These words weren’t developed with no purpose in mind.

• 80% of their revenues come from just a small number of very large customers with global footprints primarily in the pharmaceutical sector.  The remaining 20% is scattered among tens of thousands of small to mid-sized labs throughout the world.

• The big customers field a team of procurement specialists who are skilled negotiators and extract huge concessions in contracts.  Small to mid-sized lab owners or C-suite people often choose to take whatever is offered with little negotiation or proceed in negotiations feeling they are capable of going toe-to-toe with the big distributor negotiators for whom they are no match.

• The big distributor contracting and pricing teams have a wide array of methods to enhance their revenues.  Many of these are poorly understood by the customer.

 

Overview

2002 was a pivotal year in the lab industry.  On October 4th of that year the Sarbanes-Oxley act was passed (SOX) to protect shareholders and the general public from accounting errors and fraudulent practices in enterprises, and to improve the accuracy of corporate disclosures.

This law put an end to many, but by no means all, of the questionable and often unethical practices that had been going on in the lab industry for decades.  Customers realized that to protect their own interests they had to “get it in writing.”  Distributors now realized that if they put it in writing and didn’t abide by the written agreement that heavy fines or even jail time could be the result.

Like many laws, these big companies sought ways to be in technical compliance but developed numerous ways of boosting profits without violating the letter of the law.  One obvious way to do this was to avoid contracting with the customer.  No contract, no compliance issues.  Any contract written thereafter looked significantly different than those written pre-SOX.

So here is a partial list of the main methods or “tricks” that have persisted.

 

List Prices vs. MSRP

The one thing that makes people feel “comfortable”, especially unskilled negotiators is a hefty discount from “list”, When you get it in writing that you are getting a 45% discount on an item, don’t you feel good?  Sure you do!  The problem is “list” is a totally arbitrary number.

The “trick” is that on any single item in the vast majority of cases the distributor sets the list price.  Before the internet came along, the only way the list price became public was in a printed price book.  Those were the “good old days.”  Today, the internet tells all.  Here is the 1/1/2023 published list price for one of the most common items - Parafilm M, P/N PM999 from the big three distributors:

• Fisher Scientific (13-374-12) - $191.00 each.

• Avantor/VWR (52858-032) - $264.68 each

• Thomas Scientific (7315D45) - $82.96 each

• Amazon.com - $94.88

So if you were getting a 50% discount on this item from Fisher, your price would be $95.50 - 15% higher than Thomas List price!  But would you go to the trouble of doing this comparison shopping?  The big distributors are betting you won’t.

 

What is “List” price? 

As I write this, I imagine my readers thinking “this guy is nuts!”  Nobody would do this!  But I’m not making this up!  This all began back in the days where a price book was just that - a book.

The old “price book” hasn’t gone to the grave.  It still lives in many contracts that are written to very large buyers such as Universities and State Governments.  The list price, on which discounts are taken, is tailored to the specific contract.  They are not the same as is shown on the distributor’s website at all!  They are just fabricated so that the discount being offered ends up being a highly profitable sale.  Of course these custom “price files” are generally distributed on a DVD and who takes the time to look at a few million items on a DVD?

So there are two definitions of list price.  1)  Anything the distributor says it is and it may be different for different customers.  2)  What the manufacturer says it MUST be, which is what we all think of as Manufacturer’s Suggested Retail Price (MSRP).

Most manufacturers, if given the choice, would rather set the retail price and ask that all their distributors stick with it.  A “clash of the titans” occurs when a major global player like Mettler Toledo negotiates with a huge distributor like Thermo Fisher or Avantor/VWR.  A huge sticking point is over the published list price and who controls it.

Manufacturers don’t want steep discounts advertised because they perceive it as “cheapening the brand”.  Further, they don’t like smaller companies “stealing business” from the big distributors who have large sales forces and promote and spend huge sums on advertising and training annually.

 

The Compromise - the MAP Policy

Many manufacturers now have implemented “Minimum Advertised Price” policies and have given up on the fight over list prices.  What is a MAP policy?  It states that:

• We will specify the minimum price you may advertise our items for on your website.

• We will monitor your website to ensure that you are in compliance.

• We will terminate you as a distributor if you repeatedly violate this policy.

O’haus, owned by Mettler Toledo, has a MAP policy.  Here is the advertised pricing on their P/N 30139510 Explorer Semi Micro Balance:

• Thermo Fisher  (01-919-370) - $8,120

• Avantor/VWR (10013-898) - $7,332.61

• Thomas Scientific (1184J93) - $6,636

• Amazon.com - $5,641

• LPS 30139510- $5,641

Any guesses as to which is the MAP price?  How do you know when you are encountering an item that has a MAP price policy?  In some cases the website will display a “Call for Price” or “Price shown in cart” by the item.  You can always comparison shop and when you see the same, identical price displayed from site to site, call to obtain a quote.  At LPS, our clients always see the net price in their own price file.

 

Let’s Make Contracts Really Complicated!

Customers are always striving for simplicity:  “Give me one discount number I can apply to every item!”  Not a problem, you get one discount and the DVD mentioned above with your own custom list prices.

Since most distributors shun this practice, the strive for simplicity when creating a contract with the following components:

1. Preamble and legal verbiage along with Terms and Conditions that have no impact on the price of any items.

2. A Hot LIst - limited in number and is where the price is quoted on a per item basis.  The distributor's goal here is to limit this list to as few items as possible as this keeps items away from being priced on a list-less basis.

3. A Discount Schedule - This is where things get tricky.  The distributor would like to sell you on the idea that a discount in a category where you make no purchases serves no purpose.  So their goal here is to only offer discounts on categories you mutually agree are relevant.  There are so many categories, bins and buckets that it will baffle you if you are shown all the various options.  So they don’t.  You have to ask for them.  And you don’t know what to ask for!

4. Cost Plus - Most customers are extremely fond of items priced on a “cost plus” basis.  Equipment is frequently priced this way.  Cost plus 10% is a common number.  How could you go wrong?  The problem is, they won’t reveal to you what their true cost is.  You just have to take their word for it.  Distributors carry multiple costs on their books - “fully loaded”, “transfer price”, net price after rebates, etc.  You have no idea what cost your item will be marked up from and you have no way to audit it.  

5. Caveats - Then their are the completely innocent looking, completely incomprehensible little “gotcha’s”.  My favorite is the Minimum Margin clause.  It states that on any item that is not NET priced (see Hot List above) that if the discount prices that item below a certain margin threshold that the item price will be raised back up to this minimum amount.  This effectively negates any really sweet deals from arising out of the discount schedule.  This is not rare.  It’s in nearly every contract and is nearly impossible to police.

6. Bucket Pricing and Vendor Pricing - Some vendors offer a uniform discount on all their products.  Most do not.  As an example, repair parts on Ohaus products don’t have nearly the margin that a balance does.  So while you may be negotiating for a set discount by the vendor (something you can understand) the distributor, if forced to may offer it but will then layer in “bucket pricing” on top.  Bucket pricing modifies higher level discounts based on the range of margin that an item falls into.  

We are in the weeds here but you are now starting to see my point.  There is no way that on your own, you can come out ahead without expert help when you are trying to get things in writing otherwise known as a supply agreement or contract.  I have only scratched the surface here.

 

Transportation Costs

Free shipping.  Everyone wants it.  Few get it completely free.  For example, here is a partial lists of exceptions lumped into “free shipping”

• Fule surcharge.

• Hazmat charges

• Bulk shipping exception (55 gal barrels, furniture, refrigerators)

• White glove service

• Overnight shipping (when the error is the distributors)

• Handling fees

• Exceptions for drop shipments

• Exceptions for “cross docking.”

• Warehouse fees for aggregated shipments

• Restocking fees

• Return shipping

All of these are negotiable but only the very largest customers check all these boxes.

Finally, make sure and check the actual written agreement before you sign it.  I have seen several cases where “free shipping” was negotiated but then “accidentally” left out of the final document.  

 

Rebates

Thermo Fisher is extremely fond of rebates.  These are also called by other names”

• Signing bonus or “prebate”

• Compliance bonus

• Growth incentive

• Loyalty bonus

• You paid us on time bonus

• Manufacturer incentives

• Hard cost savings rebates

The image at the left sums up your chances of getting one. You will have to remind them and keep your lawyer on speed dial..

 

Out Clauses and Exclusivity

Never sign an agreement that locks you into a single vendor!  You will need to deal with other vendors and you don’t need to be harassed for doing so.  Make sure you have a way to exit any agreement on YOUR terms and without penalty. 

 

We Have Signed a Contract…

Or have you signed onto a “supply agreement” that the vendor would like you to think is a contract?  There is a big difference.  Let’s explore this further.

 

Contracts

Is your organization a small to mid-sized company purchasing less than $500,000 in lab supplies per year?  Then it is highly unlikely that your company has a true contract.  If you are working for a very large, Fortune 100 company then it is very likely that you are working under a contract.  For the big distributor, negotiating and signing a contract is very resource intensive (think expensive.)  Thanks to SOX this greatly restricts what the company can do to increase profits when needed.

If your distributor is cutting you a seven figure check as a signing bonus, you bet your bottom dollar they are going to do everything they can to make sure you abide by the agreement for the entire term.

 

Contracts Associated with Purchasing Groups

Purchasing groups (GPO) became popular in the 1980’[s in the Healthcare sector.  It is used with far less success in the Education market via the E&I Cooperative  The purchasing group contracts with the big distributor by “bundling” multiple organizations to achieve the volume that gets the big distributors attention.

The “dark side” of being a member is that contract compliance is not an option.  Without compliance, a GPO simply doesn’t work.  These groups are expensive to join as well.  They use both the carrot and a very big stick (wielded by their own auditors in many cases) to ensure you are only buying through their organization.

If you are a member of a GPO, you will know it.  You will be constantly reminded by your superiors.

 

Supply Agreements

There is a lot of confusion between a GPO and what I will call a buying group.  A buying group is modeled after a GPO but without the draconian compliance terms.  Big distributors often approach state or regional consortiums such as Tennessee Life Sciences and offer a discount schedule to any of their members.

Joining these groups is typically inexpensive and you can have a discount schedule in your hands quickly just by informing the participating distributor you are a member.  How good is the pricing?  These agreements offer some very good deals on frequently used items (the items people typically use for a quick check) but beyond this, the discounts are modest at best.

Regarding compliance, these agreements typically ask that if you are extended these discounts that you will “pledge” 80% of your business to the distributor.  Nobody will ever check this however aggressive distributor reps have been known to make threats if they discover you are buying elsewhere.  They know few ever read the fine print.  If they tell you “you are under contract” then most labs never point out that they are under no obligation to buy anything from them, however the distributor is obligated to charge the agreement price if you do.

Being a member of one of these groups places you at the highest risk of paying too much for an item.  The “loss leaders” convince people that they will enjoy similar savings on all the rest.  Further, you will turn your back to any competitive offer because you think you are under contract.  You are not.

 

“Profitizing” Your Written Agreement/Contract

Profitizing is an inside term with big distributors.  The day you execute an agreement is the day you will pay the least for the products you buy.  They pay their reps and their pricing teams a lot of money to steer you into more profitable items throughout the life of the contract.  You will constantly be called on to try a “Private Label” item instead of the brand name.  There is usually  no harm in this and may actually be a win-win..

The problem is that at the end of each year of the contract, when prices change, you will pay more for the items you buy and their profit margins will go up.  How?  They are allowed to pass on manufacturer price increases and that is certainly reasonable.  But how do you know if a vendor increased the cost or it’s just the distributor increasing the list price?  You don’t.

Most contracts and supply agreements are built so that profits increase annually until the agreement is renegotiated.  I have never seen a customer voice a complaint about this practice.  Even if you did, there is practically no way to prove it is happening.

 

Summary

This is not my first blog post on this topic. If you have gotten this far and you are an actual lab person getting set to negotiate with a big distributor, I can predict your reaction with great certainty:  “My distributor would never do this to me!”  “I’ve been a loyal customer for 30 years, why would they not want to reward my loyalty?”  “I have a Ph.D. in Chemistry and I graduated Magna Cum Laude. How hard could it be to negotiate a supply agreement?  I’m a member of my local LIfe Sciences organization and I have a signed contract already. 

After working for many years for a big distributor, many of them working on contracts, I know the inner workings.  Few reps or managers working for big distributors know this level of detail because this is a loosely guarded secret.  A secret they don’t want you to know.

If you do end up in a bind you will only blame yourself.  You have a choice:  Negotiate with the other big distributor or try something different such as LPS.  We are always here to help and to offer you an alternative way to help you save money.