Originally posted by: andrey
Originally posted by: chizow
No, resellers typically get some type of credit for existing inventory, which is usually applied to future orders rather than an actual repayment on the difference. As soon as the manu announces a price cut, the change should be reflected at the reseller. If not, your reseller is sketchy and you should let em know that
Chiz
Resellers do not receive any credit for their remaining inventory. The price cut is not be reflected at the retail level on the same day simply because existing batch of CPUs need to be sold before new CPUs are ordered, and that normally takes a week or so, depending on the retail.
--Andrey
I hope you are speaking from experience, because I know I am. Inventory pricing and product life cycle analysis are part of what I do in assessing a company's financial health. Maybe your experiences are different, but I'm not talking about mom and pop shops that buy 10 cpus a month to plop into some home built rigs, I'm talking authorized resellers.
In any case, price protection is one of the biggest concerns that must be overcome before a reseller agrees to sell a product. This is particularly true in market segments with high competition, short product life cycles, and high rates of depreciation. To convince a reseller to carry their product, manufacturers have to offer incentives, or else they simply can't compete. Essentially, they have to assume some of the risk and liability if the retailer can't sell the product. Here's 3 examples that quickly come to mind 1) Computers and consumer electronics 2) Automobiles 3) Magazines.
With all of these goods, everyone knows that something bigger and better and newer is right around the corner. Yet there is demand now. This uncertainty forces both the manufacturer and the retailer to shoulder the burden of risk, and here's some examples how:
1) Computers and consumer electronics: Typically, the manufacturer shoulders any decrease in price through MIR rebates (TVs, OEM desktops, Stereos etc). This allows the retailer to collect the full cost of the purchase and keep their target gross on the sale per item. On the manufacturers side, they keep the retailer happy, don't have to issue any refunds or credits, many MIRs are not redeemed, but they take a hit to revenue for whatever period it is issued. In cases of CPUs and larger volume consumer electronics, there is a credit or discount due to the constant change in prices and the volume involved. Think of it from your standpoint, would you want to purchase more inventory than what you had already sold (JIT, used by Dell among others) with the risk of being OOS and losing business? Or would you agree to carry more inventory provided the manufacturer bears some of the risk? Again, these agreements vary from B2B, obviously depending on how much leverage the reseller has. Like I said, if your reseller doesn't reflect new prices immediately, they're pretty sketchy and probably aren't authorized resellers, just selling on the margin and trying to make a few extra bucks. Then again, they probably don't have the purchasing power nor the need to stock as much inventory.
2) Autos: Factory markdowns rather than local dealerships taking huge hits. Factories need to put their cars on lots, but dealerships don't want to eat their margins since lot space costs money.
3) Magazines: Case where publishers take almost 100% of the risk. Magazines are sold on consighment. They aren't typically counted as part of a retailer's inventory, but retailers receive flat "showroom" fees as well as a % of what is sold. Any unsold that are out of circulation are either destroyed or returned at no cost to the retailer. Video games, DVDs, CDs and other items are sold in much the same manner. The manu/licensee bears much of the cost and profit on the goods, with a small margin going to the retailer.
I've had clients in each of these industries and its the same story whether you talk to purchasing managers, look at contracts, glance at the balance sheet or read the MD&A portion of a quarterly or annual report. These are pretty basic business concepts, but I felt the need to clarify since not everyone has industry experience.
Chiz
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