Originally Published MX November/December 2003
ADVERTISING, DISTRIBUTION, & SALES
The Sales Contract: Commitments and Incentives|
Return
to Article: |
The following scenario is a simplified example of a contractual commitment structure. An actual sales contract can cover multiple business units and product categories, and thousands of stock-keeping units. Manufacturers offer different price levels based on the purchase commitments the customer is willing to make. In this example, the customer has contracted to purchase in patterns that qualify it for the best, Tier 1, pricing for Product Category 1.
The Commitment. To qualify for Tier 1 pricing, the customer agrees to two contractual obligations: a specified minimum market share guaranteed to the vendor for all products purchased in a product category, and a specified minimum unit volume for two specific products (widgets and wodgets) in that category, here called Product Category 1. Qualification requirements for Tier 1 pricing in Product Category 1 for this customer might be 100% market share for Category 1 purchases (sole-vendor commitment for all products in the category), and a commitment to buy at least 350 widgets and 400 wodgets quarterly.
The Price Structure. Product Category 1 contains five products. Their Tier 1 prices are $875 per widget, $200 per wodget, $65 for Product 3, $40 for Product 4, and $50 for Product 5. Prices in other customer tiers are higher. The Tier 1 pricing applicable to this customer must be entered into the ERP or order management system to ensure that the customer is charged correct prices on its orders.
Incentives. The customer can earn additional price advantages by surpassing purchase commitments. An incentive could be a rebate program that runs in one financial quarter. For example, in the third quarter this customer might receive a 2% rebate on each widget purchased after the 350th of that quarter and a 1.5% rebate on each wodget after the 400th.
Copyright ©2003 MX
