In distribution, contract pricing is a price agreed with one customer for a set of items and a set period, which overrides your normal price list. It takes two main forms: customer-specific pricing, where you and the customer agree the price, and special pricing agreements, where a manufacturer funds a lower price for one end customer and pays you back after the sale.
Contracts are where a large share of a distributor's revenue sits and where margin leaks most quietly, because the price is fixed while the cost behind it keeps moving.
Four ways to write a contract price
- Fixed price
An agreed price per item, held for the contract period.
- Discount off list
A percentage or multiplier off list, so it moves with the list.
- Cost plus
Landed cost plus an agreed percentage, often audited.
- Supplier backed
A manufacturer SPA funds the price for one end customer.
Fixed prices are what customers ask for, because they can budget against them. They carry the most risk for you. Discount-off-list and cost-plus contracts move with your costs, so they protect margin at the price of being harder for the customer to predict.
How a special pricing agreement works
A distributor stocks an industrial contactor at $48. An OEM customer will place a large order if the price is $52, which leaves almost no margin. The distributor asks the manufacturer for support, and the manufacturer agrees an SPA: for this end customer, it will credit $10 for every unit sold.
The real margin depends on the claim. If nobody files it, or files it after the agreement expired, the distributor keeps 7.7% on a deal that was meant to make 26.9%. The other common leak runs the opposite way: the SPA ends, but the customer keeps getting the $52 price, now with no credit behind it.
Every SPA price needs an end date in the system, not in an email. When the SPA ends, the price must end too.
When cost moves under a fixed contract
A contractor signs a 12 month contract on the 6205-2RS bearing at $15.50. At signing, landed cost is $11.60 and the margin is 25.2%. Four months in, freight rates rise and the next shipment lands at $12.90. The price cannot move, so the margin drops to 16.8% for the rest of the year.
There are three common protections, and most good contracts use at least two:
- An end date and a review point, so no price runs for years by default.
- A clause that lets prices move with documented supplier increases above a threshold.
- An alert when the margin on a contract line falls below your floor, so you can talk to the customer before the year is gone.
Which price wins?
Contracts sit on top of price levels and quantity breaks, so the system needs a rule for which price applies. Most distributors use an order like this one:
- Active contract price
The customer has an agreed price for this item, and today is inside its dates.
- Price level with breaks
The customer's level, with the quantity breaks for the line.
- List price
Everything else falls back to the price list.
Some businesses choose "lowest price wins" instead, so a customer never pays more than their contract when a promotion runs. Either rule works. What causes trouble is having no rule, so that each rep decides on each quote.
Managing contracts without leaking margin
- Keep every contract in one place with its items, prices, start and end dates and any committed quantities.
- Link each SPA to the contract lines it funds, so claims can be filed from what was actually sold.
- Review margin on contract lines monthly against current landed cost, not the cost at signing.
- Start renewal talks before the end date, with the margin history in hand.
Where contract pricing breaks down
Most contract leaks come from where the contracts live. Prices sit in an ERP field, an SPA sits in an email, the end date sits in someone's calendar, and nobody sees all three at once. Reps quote a contract customer from memory, or forget a contract exists and quote the price level instead.
A pricing engine that checks every quote line against the customer's agreements, their dates and the current landed cost catches both: the contract price that has quietly gone below the floor, and the expired one that is still being honoured.
Check a contract price after rebates
- Cost
- $11.60
- Margin kept
- $4.79
- Rebate paid
- $0.51
Common questions
It is a price agreed with one customer for a list of items and a fixed period, which overrides the normal price list. It can be a fixed price per item, a discount or multiplier off list, or cost plus an agreed percentage. Contract prices usually cover a customer's regular items and leave everything else at their price level.
A special pricing agreement, or SPA, is a deal where a manufacturer supports a lower price to one specific end customer. The distributor sells at the agreed price and claims the difference back from the manufacturer, usually as a credit per unit sold. It is common in electrical, HVAC and industrial distribution.
Unless the contract says otherwise, the price stays fixed and your margin absorbs the increase. That is why most distribution contracts carry an end date, a review point and often a clause that lets prices move with documented supplier increases. Without them, a cost rise turns a good contract into a loss.