Manufacturers: Your Rebate Process is Costing You
We tend to neglect special pricing agreement (SPA) contracts while focusing on the day-to-day operations of business, but now is the time to get a firmer handle on our internal processes.
The benefit of SPA contracts is they help manufacturers earn large contract business and support a wide range of end customers with varying pricing needs. The reality is SPAs get lost in the shuffle and aren’t properly tended to because these unique contracts need regular administrative management. Many of us simply don’t have the time to dedicate to this task. As the pile of SPA contracts grow, operations carry on and your revenue slips through the cracks by way of unmonitored rebates.
SPA Contracts Are Here to Stay
One of the first steps in addressing the problem is acceptance that SPAs are here to stay and at some point, you have to become great at managing them. If you’ve been supporting an SPA process for the last 20 years you already know they’re going nowhere, but often we hear people wish they could just get rid of them. While they are an administrative pain, they’re a reality of having a diverse customer base. Unless most of your customers are the same – same markets, same competitive situation, same buying volumes – then you’ll never be able to make them all happy with just one price level.
As a manufacturer, if you think the solution is to conduct an endless series of one-off negotiations as project jobs you drop ship, consider that your customers likely want to be able to collect product as needed rather than in one lot. Your distribution channel is there to handle your logistic costs and perhaps you’re dictating to the customer how they buy from you rather than asking them how they’d like to buy from you. If you’re not utilizing your distribution channel, how much cost are you adding compared to your peers? How much business do you lose by neglecting SPAs?
SPAs are here to stay so long as we want to sell to a wide range of customers. You maximize your profits, and your distributors’ profits by being selective and targeted with strategic pricing rather than applying the same arbitrary number. You need customer–specific pricing agreements sold from distributors inventory and trued up with after–sale rebates. In short, at some point you have to improve how your SPAs are managed or you’ll be left behind.
Improve the Administrative Process
Become great at managing SPAs by setting the right price from the start, making administrative tasks efficient, and monitoring SPA business throughout. Here are the ways to streamline the administrative process of managing SPA contracts:
Know how to set the right prices, not just initially, but as business conditions change.
The SPA contract differs from a normal project job. There is no fixed bill of material. This is a negotiation based upon expected demand, but business circumstances often change, and SPAs soon bear no relation to the actual buying behaviors of the customer. When first setting up a contract you depend on your sales force to negotiate effectively, but salespeople aren’t always the best guardians of price, nor are they designed to be detail orientated. Professional contract negotiators are often used in other industries and manufacturers can benefit from using these trained experts.
At the end of the day, without a fixed bill of material you have to take your best guess on price, but that guess will be set around certain expectations. Therefore, it is reasonable to review business after a certain time period to see if those expectations were met, and that rarely happens. Discipline is really needed when the opportunity comes for renegotiating, but again sales forces see this as unnecessary administration and do as little as possible to support it. A contract then exists for years at the wrong levels with manufacturers giving away profits unnecessarily.
Make the administrative tasks as quick, clear and convenient as possible.
The administrative process should be electronic and involve little to no duplication of effort. Document and centralize communication to make changes easy to track. Today, most manufacturers negotiate through emails, customer service representatives key in the setup for contracts by reading said emails, and any changes require several people to communicate in a chain. This makes contracts burdensome and unresponsive, and every step increases the likelihood of human error.
Laying out the time it takes and the work involved in contract administration is a good first step. The challenge is that the SPA involves distributors rather than just internal resources, so there’s a need for collaboration. The cost of administrating SPAs is not just the labor itself, it’s the misinformation, confusion, lack of discipline, and time involved. An efficient administrative process saves time, money, increases sales, and improves profits.
Monitor and analyze your SPA business.
This requires a dedicated reporting platform for SPA contracts. It should be a system that puts together key measures and metrics, that has reports to identify early warning behaviors or analyze the buying patterns of contracts. As many SPAs are set in advance, they don’t cater to the specific customer dynamics – which products are frequently bought at volume, compared to the products bought only occasionally. Contacts often only have a small percentage of the product offered at discount being bought at these levels. That means that you don’t have strategic levels of pricing.
In addition, the buying volume of a customer can fluctuate wildly, so are you negotiating with the $100k account you thought they were, or have they become a $20k customer who is still getting a large discount? For most manufacturers, the SPA claim transactions aren’t integrated into their main reporting tools as its outside information, hence the need for a dedicated SPA reporting suite.
Are Your SPA and Rebates Managed Effectively?
When SPAs became widely used, there was no standard process in place and no purpose-built solutions to turn to for guidance. As a result, manufacturers built their own internal mechanisms, which led to inefficient practices and costly systems to support and tools that didn’t work as they should.
It’s even more frustrating for distributors, as each will have to deal with dozens of different SPA processes, each with its own settings, terminology and methods. As a result, most of the energy and effort regarding SPAs is spent simply trying to keep track of contracts, with less time spent being good guardians of price or serving the customers. Remember, these are customers important enough that you’re negotiating discount pricing for them. You’re expending a significant amount of admin and sales energy to capture their business. Are you putting in the right energy to make sure your agreements are executed well?
Whenever processes struggle, frustration sets in and everyone wishes SPAs would just go away again. Except SPAs are necessary to better serve the different kinds of customers you may have. Examining your SPA contract processes is key to making improvements.
Use these five questions to gauge how well you’re managing your SPA processes. Can you answer ‘yes’ to the following questions?
1. Do you have a strong analysis methodology that allows you to understand, track, and react to your SPA business?
2. Is it clear (and convenient to look up) to all parties what’s agreed to be in the pricing contract and what changes have been made over time?
3. Do you have full visibility to the rebate calculation process and comfort that the calculations are made accurately?
4. Do you use your pricing contracts to boost product launches, product lines expansions or as a tool for revenue growth?
5. Can you clearly identify your trajectory in your SPA business, rebate exposure, pricing margins, and are they following your business goals by market, product and customer segment?
Whether you’re a distributor or manufacturer these questions apply equally. For many years most companies knew their special pricing contract process wasn’t great but were unsure how to improve it (or perhaps unwilling to invest in changing things). Like with other parts of your business, now is a great time to explore fresh ideas to address this.
Taking control of the complicated process of rebates means first deciding to fix the process. We offer solutions that simplify the administrative tasks involved in managing records for each of your customers. Contract business with special pricing for various customers requires thoughtful processes and consistent monitoring. Need help? Explore our RebateGPS™ solution and feel free to contact us to learn more.