PPB May 2015

tor, add to my cost?” That said, the buyer may wish to negotiate a rea-

sonable maximum margin that the distributor may charge.

The Competitive Bid Scenario

A competitive bid scenario will likely include a limited number of

pre-qualified vendors only. For example, those in the vendor pool may

qualify based on their financial stability, labor practices, business ethics

and other factors such as environmental responsibility, ensuring they

align with the purchasing company’s values, etc. Consider asking the

client how many distributors have been invited to participate in the

bid. The more information you can glean from the client or other

sources (hint: ask industry suppliers), the better equipped you

will likely be to respond to the bid competitively. The

process should clearly articulate the evaluation criteria

and requirements for success. The competitive ideas

and bid methodology provide due advantage to

those who buy best (not just well), who operate

efficiently and who bring forward the best and

most effective ideas. The process should be

designed to allow significant room for creativity

and competition in order to adequately differ-

entiate similar but different proposals.

While there may be merit in a well-

designed competitive bid model, two disadvan-

tages come to mind. First, if price competitive-

ness is the key driver for the buyer, with

enough price pressure a distributor, or its sup-

plier or the manufacturer (sometimes unbe-

knownst to the distributor), may cut corners on

product specifications, the manufacturing

processes (i.e., running equipment at higher

than desirable speeds to achieve greater cost

efficiency at the expense of quality), minimize

due diligence or overlook quality in order to

achieve a particular price. Also, competitors

looking to “buy the business” may go in at an

unrealistic and unsustainably low margin on

any given order. For some, this approach may be questionable in

terms of ethics, and many times the “low-baller” approach leads to a

brief distributor-client relationship. It may also leave the buyer with a

distributor (even if just for the short term) who is unable to stand

behind the sub-standard product or service delivered, whether because

of the supplier’s or an upstream entity’s corner-cutting tactics.

There are also variations of price competitive models including; e-

auctions, English auctions (also known as “open auctions”), reverse

auctions and Dutch auctions. A detailed analysis of these variations is

beyond the scope of this article, however, I would be pleased to discuss

my views on the advantages and the disadvantages to each of these

types of auctions upon request. First and foremost, however, each of

these models often assume 100-percent commoditization.

Guaranteed Savings Model

Another interesting pricing model is a guaranteed savings model.

Generally speaking, this type of model can be advantageous because it

can provide a measurable savings over a defined baseline. The follow-

ing two particular iterations come to mind:

A guaranteed savings over published pricing.

In this model, published

pricing is used as a baseline against which savings on commoditized

items can be measured. Generally, this model is fairly easy to

administer, illustrates savings and encourages distributors to buy

well and operate efficiently. Since custom products and products

from other industries may not feature published pricing, this

approach may be most effective for commodity items where

quantities purchased are within the scale of published pric-

ing. An argument against this model is that it encour-

ages a distributor to suggest products from vendors

they buy best from, which are not necessarily the

vendors that offer the most effective products for

the buyer. For any distributor interested in keep-

ing a client long-term, a common goal is to pro-

vide clients with the most effective solutions (at

a reasonable and competitive price). If a distribu-

tor is not suggesting the best products for the

client’s needs, then the distributor should not be

surprised if the client seeks business elsewhere.

A guaranteed savings over a baseline of client’s

historical purchases.

This is similar to the version

above in measuring savings, except that the

baseline is generally what the client previously

paid for the same or substantially similar items.

While this approach sounds attractive, it can be

difficult to administer accurately unless the

products purchased year over year are exact

repeat orders of the same products in the same

quantities with the same decoration methods

and decoration particulars such as number of

colors, imprint size, etc. Even still, this model may require greater

transparency into what was purchased previously, which, despite the

buyer’s best efforts, is not always available. This model becomes

even more complex when taking into account currency fluctuations

and variances in other input costs such as raw material and labor

costs. This model may also fail to adequately address current market

value of the items purchased. (For example, I can tell you that USB

drives have more memory now than in years past and they cost less

than they did a few years ago.) This model, therefore, may not be a

reasonable indicator of cost savings relative to what the buyer could

buy elsewhere today, which is likely a more reasonable measure of

savings. Nonetheless, the guaranteed savings model may have its

place in the industry.

MAY 2015 •

PPB

• 73

PRICING

IN THE PROMOTIONAL PRODUCTS INDUSTRY

“The more

information you

can glean from the

client or other

sources (hint: ask

industry suppli-

ers), the better

equipped you will

likely be to

respond to the bid

competitively.”

201505_Pricing Feature_PPB 2013 4/14/15 6:23 PM Page 73