Article 2: Structuring Effective SPAs: Mechanics and Calculations

Chapter 3: SPAs - Special Purchase Agreements: Enhancing Pricing Flexibility

Welcome to the second article in our series on SPAs - Special Purchase Agreements. In this article, we will delve into the mechanics, and considerations involved in structuring SPAs effectively. This includes an overview on lift analysis and some math. By understanding these key elements, both suppliers and wholesalers can optimize the benefits of SPAs and ensure successful pricing arrangements that drive profitability and increase market share.

Defining the Scope and Duration:

The first step in structuring an effective SPA is to clearly define its scope and duration. Determine which products or product categories the agreement will cover and the specific timeframe for the pricing arrangement. This ensures that both parties have a clear understanding of the products involved and the duration of the agreement. Align this with your priority item or brand.

Establishing Pricing Parameters:

One of the crucial aspects of SPAs is determining the pricing parameters. This involves selecting the appropriate pricing structure based on the specific goals and objectives of the agreement. Here are a few common pricing structures used in SPAs:

Percentage Discounts:

This structure offers wholesalers a certain percentage discount off the regular price for purchasing a specified quantity or reaching certain sales targets. The discount percentage can vary depending on the volume commitment or sales performance. In some cases the supplier and wholesaler may agree to a mutually managed “bank”. This is another deeper aspect of these models that becomes more complex.

Formula: Discounted Price = Regular Price - (Regular Price * Discount Percentage)

Example: If the regular price of a product is $100 and the SPA offers a 10% discount, the discounted price would be $90.

Fixed Pricing Tiers:

In this structure, pricing is predetermined based on volume tiers. The more the wholesaler purchases, the lower the price per unit. This incentivizes larger orders and rewards wholesalers for higher volumes.

Formula: Total Price = Price per Unit * Quantity

Example: If the price per unit is $80 and the wholesaler purchases 100 units, the total price would be $8000.

Volume Commitments and Minimum Purchase Requirements: