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Wednesday, March 29, 2006
There are several components or controls that must be instituted by vendors or distributors in order to run an effective Price Protection Program. It is imperative that the Management, Sales, Marketing, Logistics, and Finance teams all have a solid understanding of these programs and be fully versed in Returns management as well. For a starting point in understanding how to balance programs, please read the article "Price Protection versus Returns" Typical Components and Controls of Price Protection Programs 1. Price Protection formulas must be codified in writing. Ex. Price Protection = Old Price - New Price Price is defined as the price offered by Vendor to Customer. Neither Price nor Price Protection is dictated by market rates of Distributors or retailers reselling the product. 2. Price Protection should always be considered a renegotiation of sales of products. As such each group that would normally take part in setting appropriate prices and negotiating them with customers, must be involved in the determination. 3. Proper approval processes must be put in place to oversee dollar/quantity/time limits and to insure that the Vendor Company is not defrauded. 4. Standardized claim forms are recommended. Its impractical to accept non-standard claims from one customer to the next and creates the potential for user error or abuse of the program if key items are overlooked or obscured. 5. Inventory level reporting by distributors or retailers up to a vendor are typically preferred by Vendors such that they can make appropriate channell management decisions. Customers do not always willingly share this information however and as such a Vendor must be prepared to enforce rules that elliminate Price Protection elligibility or go to significant channel volume level forecast models to determine the levels that might be in the channel before a reduction in price occurs. Its common to have some customers reporting and some customers not reporting. This increases the risk of unknown risk if business intelligence practices are not utilized. 6. A documented signed copy of an inventory report should be provided by the customer to the Vendor to provide proof of inventory for which the claim quantity will be set. 7. Price protection can apply to inventory on hand, in transit, not yet shipped by Vendor, and against items in transit for a return depending on the rules of the policy or contract guiding the program. It usually has to be worked out with each customer according to their rules or contract whether or not unshipped PO's should be cancelled and rebooked, or shipped at a new lower price. 8. A claim period should be set. Typically a period of 30-60 days from the date of Price Reduction is typical. As the date of Price Reduction is key, it is very important to have and utilize excellent communication processes with customers that can be documented. Make them sign a statement that they have been notified and have X amount of days to act. Set a deadline for when the claim form must be received. Remember at the end of the process that they are your customers, and be practical where a grace period may be in order, but set tough rules at the outset. 9. Allow for the option to audit inventory levels for price protection claims, and send a team out to a random sample of customers a couple times per year to keep reporting levels honest and accurate and to keep in close touch with your customer. 10. Get the price protection policy set in a contract. Consider whether or not to allow a customer or vendor to withdraw or change a price protection policy. 11. Make provisions for accounts that are past due. If an account has past due invoices institute a policy that gives the Vendor the option to reduce outstanding uncontested open balances with any credits generated by price protection. 12. Remember that Returns or Stock Balances can be the consequence for an ineffective price protection program. For further analysis or information on this topic, please contact Softduit Partners.