How to Deploy Special Pricing Agreements Intelligently - Modern Distribution Management

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How to Deploy Special Pricing Agreements Intelligently

Mo Barsema outlines how both manufacturers and distributors can approach SPAs when it comes to negotiating and deploying them.
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Relationships between manufacturers and distributors are dynamic. Economic volatility, shifting markets, supply chain disruptions, and a wide range of other variables can alter the course of these relationships, which is why trading partners need to be capable of adapting to many contingencies. This is where special pricing agreements (SPAs) come in – by building adaptability into trading relationships with flexible contract terms and tools like rebates, SPAs help manufacturers and distributors account for ever-changing circumstances.

But trading partners have to ask themselves whether they’re deploying SPAs intelligently. There are many factors trading partners have to consider as they develop and implement their SPAs. Deciding which products qualify, margin conservation, process and cash management are just a few of long list of considerations. In all cases, these agreements are by necessity quite complex in order to accommodate the needs of both parties. This complexity is necessary to compete and win market share. This is why it’s critically important to have a centralized and streamlined tracking and analytics platform to manage SPAs.

By providing a set of mutually reinforcing incentives, SPAs strengthen relationships between trading partners and encourage behaviors that will drive growth. To fully leverage SPAs, manufacturers and distributors need to set competitive prices, minimize profit leakage, grow margins with the right discounts, and ensure visibility to track performance. These measures will maximize the value of SPAs and make them powerful engines of revenue and profit growth.

SPA Considerations for Manufacturers 

Manufacturers build relationships with distributors as a reliable way to get their goods to the market in the broadest way. Through the strategic use of SPAs, discounts, and other financial incentives, manufacturers can move larger quantities of products and infiltrate markets while securing long-term relationships with distributors. There is significant competition among manufacturers. SPAs can be a distinguishing feature that secures higher wallet share and partner loyalty.

There are several questions manufacturers should ask themselves as they develop and negotiate SPAs: Which products qualify? Will the agreement drive growth? How will price deviation and margin be controlled to prevent too much profit erosion? What tracking tools will be used to approve, maintain and manage claims and payments? How will performance be measured? At a time when visibility and resilience are key priorities for manufacturers, rigorously planned and executed SPAs should facilitate data sharing that make relationships with distributors more sustainable and profitable.

According to a 2022 McKinsey survey, 71 percent of supply chain leaders expect to revise their inventory policies: 81 percent have implemented dual sourcing and 44 percent are regionalizing supply networks. These shifts could cost manufacturers business, which makes SPAs all the more important, as discounts, pricing flexibility, and other financial incentives are increasingly critical to maintain relationships with distributors and attract new ones.

How Distributors Should Approach SPAs 

The relationship between manufacturers and distributors should always be symbiotic – while manufacturers create and deliver products that stock distributor shelves, distributors promote those products, get them to market, and provide invaluable data that tells a story about consumer behavior. Distributors lead by product availability and price – because price is the number one driver of purchase behavior, it’s crucial for prices to be competitively supported by their trading partners.   

Consider the following scenario: a distributor has an opportunity to quote a large job. To successfully compete, the distributor negotiates an SPA with the manufacturer. This agreement will secure the quote and give the distributor and manufacturer an opportunity to compete. Upon the job being awarded to the distributor, the manufacturer will support the job with product to fill the demand at the supported price, decreasing risk and maximizing revenue for all parties involved.

One of the main reasons distributors embrace SPAs is to secure relationships with manufacturers without being forced to bid with competitors who supply like products. SPAs allow distributors to offer more competitive pricing quotes, deploy more flexible sales strategies and cast its ability to compete in broader markets. To support this GTM approach, distributors need to be capable of meeting each manufacturer’s terms and conditions of complex SPAs with the ability to efficiently handle their partner’s unique request, approval, and claim processes. Distributor process compliance will forge long-term relationships with manufacturers, to ultimately build brand recognition and loyalty, improve time-to-market, and drive revenue growth.

RELATED: How Special Pricing Agreements Help Navigate Economic Turbulence

Negotiating and Deploying SPAs Effectively 

SPAs allow manufacturers and distributors to offer flexible and competitive pricing, expand their markets, and build sales strategies to gain deeper insights into consumer behavior, learning how they outperformed their competitors. But trading partners need to figure out when SPAs make sense and when they don’t. The goal is to construct a holistic pricing model that will make their products stand out from the competition. This means taking a close look at the relevant market data and maintaining real-time visibility across the supply chain.

The best way to negotiate and manage SPAs is to use a centralized digital platform that can support collaborative processes to streamline data sharing. This very data is the gold that manufacturers need to see into the markets they serve and steer their competitive approach.  More than 90 percent of supply chain leaders say they invested in digitization in 2021 – 77 percent of whom directed those investments toward improving visibility. Over two-thirds have “implemented digital dashboards for end-to-end supply chain visibility,” while significant proportions invested in demand and supply planning (74 percent and 69 percent, respectively). Visibility is integral to the negotiation and implementation of SPAs, as manufacturers and distributors need access to relevant information like projected sales and shifts in consumer behavior.

Over the past several years, relationships between manufacturers and distributors have been under strain. Supply chain disruptions and economic instability have led to a renewed emphasis on resilience, which is why many companies in the sector have shifted toward strategies such as dual-sourcing and regionalization. SPAs give manufacturers and distributors powerful financial incentives to maintain their relationships – a serious competitive advantage to keep those relationships productive.

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