I’m catching up with my email, and this post by Prairie2 is eleven days old, but it’s timeless. Go read.

The Colonel can sell cheaper if the chickens also pay the bills

Snippet:

Then there is the myth of low prices. The big advantage that the BBS has is that it can come into a town and sell goods cheaper than its competitors pay for them wholesale. This only lasts until competition is eliminated of course, but to make sure this always happens they dictate the wholesale price suppliers sell to “small” buyers. They do this simply by demanding that they always get the lowest wholesale price as they have “economy of scale“. Wholesalers can’t actually cut wholesale prices no matter how much you buy, but they can raise the price they charge to the small buyers. Same effect without violating the laws of physics. What did you think, it was a miracle?

Prairie2 has half the equation right, but let me tell you how everyone BUT the Big Box Chain gets screwed.

I used to work for an office supplies wholesaler.

In our case the Big Box Chains (the Big Three – you know who they are) would lock us into extended contracts that guaranteed the Big Box Chain a price list that very often got them the item at our cost or maybe just a percent or two above cost (maybe). By the way, this price list was only for the online portion of their businesses. For their brick and mortar stores they bought directly from the manufacturer. This is key to understanding the next part of the scam they run.

We supplied all stock for their online business, which meant we held it at our warehouse and shipped it out to their customers at no charge to the Big Box Chain. Got that? They got a heavily discounted price on the inventory, but we covered the costs to store it, box it, and ship it. No freight was charged to the Big Box Chain regardless of whether the customer was charged freight on their end.

How could we do that and still make a profit?

There was one more leg to the stool: Volume discounts from the manufacturer. That is, if their price to us for a box of toner was $100 and we sold over a certain number of them in a month, we got a rebate.  These programs generally ran a quarter at a time.

As long as all legs of the stool were in place, it all worked out. As the guy in the middle, however, we were really in a precarious position. First of all, the pricing negotiations with the Big Boys often took MONTHS to finalize, but they would hold us to the original price quoted them. By the time the price list was finalized, our costs often had changed (read: gone up), but we were still committed to selling it to the Big Boys at the original price quoted. In our case, our main business was inkjet and toner, which are particularly subject to the ups and downs of the cost of oil.You can see that by the time we paid the freight to ship to their individual customers, and taken it in the shorts on the cost we’d quoted to them, the only thing saving our bacon was the volume discount agreement with the manufacturer.

When the Big Name Manufacturer decided to end said program and instead extend rebates directly to the end-users, my old company was still locked in to its contract pricing with the Big Box Chains (the contracts were generally for a year). Needless to say, red ink ensued, the distribution center in Reno closed, and the only winner in this scenario was the Big Box Chain.

All the time I worked for said company and maintained all their pricing lists I never understood why we worked so hard to slit our own throats. It seemed to me that we should have been courting our small and mid-sized customers rather than chasing after the “big win,”  because Prairie’s got it right.  The mom-and-pops who were also our customers paid a quite a bit more for their merchandise.  I kept thinking that we could have told the Big Boys to go take a flying leap, offered some discounts to the smaller guys and earned their undying loyalty. Instead we chose to chase after the BMOC and lived in fear daily that he’d throw us over for a competitor.

I guess I just don’t understand business.