Electronics Production | December 02, 2009

Tip 5: Seek out transparent catalog pricing

One of the most frustrating parts about shortage buying is that the more urgently the part is needed, the higher the price goes! After all the effort to locate the part they need, buyers have to haggle their way through the price negotiation.
They may not have many options so a bad deal is better than no deal, but the core of the problem is the total misalignment of incentives between buyer and seller in today's secondary market. For both short- and long-term benefits, buyers should seek out transparent catalog pricing.

This is a problem that affects buyers at manufacturers and independent distributors alike. When they first have a shortage or requirement, buyers will reach out to several brokers or independent distributors to seek their help in finding the part. Most will respond with claims that they have the part in-stock or available from another supplier; so, with great effort and time, the buyer has to filter out the less convincing claims until only one or two credible options remain.

Under significant time pressure, they have to make a decision with imperfect information, so buyers must take the best price they can get. Therein lies the rub; after all the time and effort to identify credible options, shortage buyers have sacrificed any negotiating leverage because they are simply out of time.

The secondary market makes its money by exploiting information asymmetry. Like any good trader, a broker or independent will soak up as much information as possible before revealing any to their counterparties. For independents, brokers and buyers alike, every detail given to a secondary market supplier is a loss of negotiating leverage.

The more specific the need, the less leverage one has. The most variable detail, the one that affects price the most in a shortage buy, is time. A buyer with an assembly line about to go down or a requirement that is about to expire is totally vulnerable to price gouging.

Because the financial incentives of a transactional relationship are zero-sum, the buyer and seller are locked into an adversarial relationship. The basic misalignment of interests prevents companies from developing genuine partnerships and, at the end of the day, everyone loses.

The breakdown is a major driver behind the rise of online part catalogs. Beyond faster connections and great comfort when purchasing via the web, online part sales are booming because transparency gives buyers better information faster. The level of transparency demanded by selling parts through a catalog shows a level of respect for the buyer, because the seller forfeits the short term opportunity to exploit the buyer's desperation for the longer term benefit of a relationship.

Some firms will publish catalogs with obviously inflated prices only to drop prices substantially when the buyer calls to haggle. While this is an improvement over the information void that is the secondary market, it still puts a burden on the buyer. Real transparency provides buyers with everything they need to know about a part: its history, the real pricing, date code, actual quantity available, etc.

Many catalog distributors do not have the parts needed in a shortage, but buyers are demanding that the shortage market be as transparent as the franchised market. A distributor who is genuinely interested in partnering with a buyer will be as transparent as possible, and that means catalog pricing.

Author: John P. Brown is co-founder and VP of Marketing and Strategy at Verical


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