In my last blog, I explored variable pricing: its unique importance, purposes, challenges and needs. I also touched on how special pricing agreements (or SPAs) can be used to support your variable pricing strategy. However, while SPAs are one of the best ways to provide custom pricing to target customers, their undeserved reputation prevents many businesses from taking full advantage of their benefits.
Are SPAs Worth It?
The prospect of taking on special pricing agreements intimidates many businesses, as they are often perceived as a source of administrative confusion. Companies fear that claims may be rejected or overlooked altogether, or that SPAs may be exploited to undermine pricing in a competitive environment. Despite these doubts, SPAs remain the most efficient and cost-effective solution to support variable pricing. When companies commit to streamlining their processes and expanding their capabilities, SPAs become an invaluable asset to your variable pricing strategy.
What are Special Pricing Agreements (SPAs)?
A special pricing agreement is a mechanism that adjusts the stock price for an item after it’s been brought into stock and sold to a customer. Here’s how it works:
First, a manufacturer agrees to a discounted price for a distributor. The distributor then purchases the product at full price, but sells the product to their customers at a discounted price, taking a temporary hit to their margin. Once they’ve sold the product, the distributor submits their claim — along with proof of sale data — to the manufacturer. After validating the claim, the manufacturer pays it out to offset the distributor’s loss, allowing the distributor to realize their full intended margin. For example, let’s say a distributor brings in a product at $100. Once he sells that product to his largest customer, the price is reduced to $80. This reduction allows the distributor to sell the product at a lower price to that customer.
SPAs are essentially a way to give discounts without the full burden being placed on the distributor. This is critical in industries where manufacturer profit margins are larger than distributor profit margins.
Why Do Businesses Use SPAs?
Special pricing agreements allow businesses to target certain customers with custom pricing without expensive logistical support or absorbing lower pricing for all customers. Logistically, SPAs allow everything to be sold from a distributor’s inventory at custom pricing, taking advantage of local inventory and fulfillment without the need for special orders, direct shipments or consigned inventory.
SPAs are linked to a larger price optimization strategy. By using the SPA mechanism, companies can decide if their focus should be on revenue growth, operational efficiency, gaining market share, increased customer retention, protecting existing business or improving profits. A successful SPA strategy can improve all levels of a company’s metrics.
With this powerful mechanism at your disposal, you can grow your business in many ways, such as:
- Improve local inventory levels
- Reduce operational costs
- Increase revenues with greater flexibility
- Respond to market opportunities faster
- Maximize your profitability in the marketplace
Mastering the SPA process is a crucial differentiator that can give companies a competitive edge in any market. It is as important as timely product delivery for manufacturers and knowledgeable staff for distributors. However, an unfortunately small number of companies excel at managing SPAs (only 2.9%, according to a recent survey).
Variable pricing, complex business requirements and the desire to automate processes are here to stay. It’s essential that companies commit to adapting and improving their SPA process if they hope to be successful in this environment.
Developing a Successful SPA Process
A successful SPA process is one where price negotiation is fast and easy, where the customer can buy product on demand at a price tailored to them and a distributor can receive their correct rebate due without any administrative burden. In short, you need speed and automation in the process.
Another key aspect of a successful SPA implementation is your reporting and metrics capabilities. You need to be able to monitor the performance of this critical aspect of your business, ensuring correct pricing decisions and tracking your success rate with SPA contracts and customer purchases. While SPA reporting is just as important as normal business reporting, the unique challenge is that the data comes from distributors’ point of sale (POS) rather than internally generated data. This means that you’ll need to have a firm POS reporting infrastructure to ensure a best-in-class process.
It’s critical that you regularly assess the strength of your own SPAs process. Here’s what a strong SPA process should look like:
- Price and contract negotiation is simple and quick
- All parties can easily update system with contract terms
- Changes to terms can happen at the speed of business
- No delays or surprises during claims processing
- Teams can analyze SPA data and create accurate reports quickly
- Monitoring and governance ensure prudent price and discount decisions
Most companies have room for improvement in their SPA processes. You should never stop working towards improving your SPA systems and practices – a robust and streamlined process can benefit both you and your trading partners.
Streamlining SPA Administration
One persistent issue that companies face when administrating SPAs is that most of the processes they’ve developed to handle these deals are arduous and complicated. For many years, a lack of capable off-the-shelf software forced most companies to create their own approach, ranging from automated claims processes to manually reviewing emailed invoices. With substantial financial stakes involved, it is imperative that businesses become proficient in SPA administration. Companies should be able to negotiate prices quickly, automate claims and calculations, measure the success of their SPAs and share key data with their trading partners. Your SPA management system and administrative processes should be capable of handling these tasks in as timely and accurate a manner as possible. Many businesses have turned to automated software to manage these responsibilities. Implementing a dedicated software solution can help businesses streamline their processes and free up valuable time for their teams.
To maximize the potential of special pricing agreements, businesses must prioritize a strong SPA process and support it with capable software. Don’t settle for less – the success of your SPAs depends on it.
