Monday, April 11, 2011

BEST PRICING CLAUSES, BEST AND FINAL OFFER LANGUAGE


Should you use Best Pricing language for your agreements or best and final offer language for your bids and proposals?

In the U.S. and other countries, pricing is subject to the Anti-Trust laws.
Under anti-trust laws a company is required to offer you similar pricing for purchases of like quantities under like terms. So the laws give you
basic underlying price protection. When you seek "Best Pricing" without tying it to similar commitments you usually run into problems with the supplier's legal counsel because of the anti-trust risk. If they offer it to you, irrespective of quantities and terms, they legally have to offer that pricing to all other customers.

The Robinson-Patman Act is a United States law that prohibits anticompetitive practices, specifically price discrimination. The Act prohibits sales that discriminate in price on the sale of goods to equally situated purchasers when the effect of such sales is to reduce competition. Included within the determination of Price are the net price and all other compensation paid. The value of any goods or services that the Seller throws in at no additional cost, would be part of the compensation

For liability under the Robinson-Patman act a number of things must occur:
§  There must be discrimination in price
§  On at least 2 consummated sales;
§  From the same Seller;
§  To 2 different purchasers;
§  Sales must be contemporaneous;
§  Sales must be for "commodities" of like grade and quality;
§  It must be sold for "use, consumption, or resale" within the United States;
§  The effect may be "substantially to lessen competition or tend to create a monopoly in any line of commerce."

It is unlawful to knowingly to induce or receive discrimination in price, which is prohibited by this section.

Defenses to the Act include:                                                                                            
  • Cost justification (where the cost to sell to one customer may be different than the cost to sell to the other)
  • The need to be competitive (matching the price of a competitor). 

Some Suppliers will clearly try to use the act as a way to avoid best pricing clauses.

Knowledgeable Suppliers would be aware of the risk and would never accept a best pricing provision without the appropriate ties to quantities and terms.

A Supplier’s reluctance to agree to price reduction could be driven by either the desire to increase their profit at Buyer’s expense or they're simply not convinced that they will be able to drive the cost down to make the firm commitments on reductions.  One way to flush that issue out is to suggest that instead you approach it on a benchmarking basis where you would agree on the cost formula for the product or service and then do annual benchmarks to see if the underlying cost in the market has changed that would allow them to reduce the price.  Another approach could be if there are or will be competing products, you could get them to agree to benchmark their cost to you versus what you could buy a competing product for from a competitor.  It would not give you guaranteed reductions, but it would be ensuring that the product remains competitive in the market.  If there is a firm purchase obligation that should absolutely be linked to their on-going competitiveness.

A fairly common form of best pricing provision that I’ve seen is something like the following:

Most Favored Customer.  The Prices provided by Supplier to Buyer under will not exceed those offered to other customers purchasing similar products and services in like or lesser quantities to be produced under similar terms and conditions.  If Supplier offers prices to other customers for like or lesser quantities under similar terms and conditions during the same time period that are lower than those offered to Buyer, then those prices shall become available to Buyer at the time of availability to that other customer.

The problem with this type of provision is that it is relying upon the Supplier to voluntarily disclose those situations and does not provide any right to audit their sales prices. The other problem is that the requirement for purchases under “similar terms and conditions” provides a significant loophole where a Supplier could easily argue that because the terms and conditions are not similar, they are not obligated to offer lower the price. I personally don’t like this type of best pricing clause as I think it allows the Buyer to sit back and do nothing under the assumption that they will get the best pricing when that may never occur.

Another approach at best pricing is to use benchmarking. Here’s an example of one:

         Benchmark Studies
At any time during the term of this agreement Buyer may do benchmark studies with other suppliers to determine whether Buyer is receiving competitive prices.  Benchmarking may consist of RFI’s, consumer indexes, consumer/industry consultants, qualified supplier pricing, technology efficiencies or any other vehicles Buyer reasonably determines to be valid.  In the event that Buyer learns of lower prices for similar products or services for like or lesser volumes under similar terms and conditions, Supplier agrees to reduce the current agreement Prices to the mean benchmark price. Both parties agree to update the current agreement Prices to reflect any agreed to changes.

The advantages of this type of approach is:
  1. The Buyer is not relying on the Supplier to disclose price reductions made.
  2. There is no need for an audit provision that most Suppliers would refuse to allow.
  3. The Price is not limited to what the Supplier does with their other customers; it applies to their competitiveness in the marketplace.
  4. The adjusting of the Supplier’s price to meet a competitive benchmark would be one of the allowable exceptions to Robinson-Patman that allows for price differentiation. 


For example you agree that you will take in a certain number of competitive quotes or benchmarks and if their price is above the mean/average of those, they must lower it to the mean.  If you had 4 or more you could also offer to throw the high and low out. Then the market would drive the price you pay.

I don’t like "Best Pricing Clauses" as they allow the Buyer to be sloppy or complacent. It allows them to feel that they do not have to make the extra efforts to pursue the best deal, as they will get the best deal automatically if someone else does. It's a false sense of security as Suppliers won't advise you of when they have offered a better deal and most buyers don't have the time or right to verify that they are in fact not getting the best deal. Including a "best pricing" provision or other similar provisions in an agreement is "window dressing" unless you can actually use and enforce it. Suppliers may be willing to allow you to include a best pricing provision in an agreement, but most would not be willing to allow audits of their actual sales records. They would also not be willing to allow you to audit the terms. So you would have a provision with no substance and not easy means of identifying if the commitment was not met.

Should you use "last and final offer" language in your bid or RFP? I can think of hundreds of times when I have been told that what was offered was the lowest possible price, only to be able to negotiate it down further.

 "Last and final offer" language also allows the Buyer to be sloppy or complacent. It allows them to feel that they do not have to make the extra efforts to pursue the best deal, as they will get the best deal automatically as a result of telling the supplier to provide it. If you tell a supplier, who knows that they are the preferred supplier, to provide a last and final offer, the odds are that you will be paying more than you would if you negotiated. Once you seek a last and final offer, the Supplier will consider any further negotiation activity beyond that un-ethical. If you negotiate, they know the additional concessions may be required.

1 comment:

  1. Excellent Article. Veery useful. Thanks

    ReplyDelete