|
On Overage
I started in Lighting, after earning a PhD which came with no opportunities for employment; and I had a small child and a baby on the way; which didn’t bode well for the future of our young family. My Dad was an independent lighting rep; primarily for a small manufacturer, Wakefield Lighting. He had slowly added other lines and eventually took on Hubbell; which made him a ‘player’ in the Columbus, OH lighting market. His partner left to join a lighting manufacturer and Dad called me and said he needed a new salesman. I said yes… and my Lighting career began. The rep business was foreign to me; I enjoyed the technical aspects of calling on engineers and designers and working on lighting layouts, etc. The baffling part of the job was actually selling our products for those specifications through a tortuous maze of electrical distributors and contractors to finally arrive at a final pricing to land the orders. One practice I didn’t entirely grasp was ‘overage’… for some odd reason, Dad would get a quote from our manufacturers’ bill of materials and then auction those quotes through competing distributors and competing contractors and suddenly arrive at a number that was actually higher than the quoted numbers from our lighting alliances. It dawned on me that overage was a means to increase our revenues above the fixed commissions reported from the manufacturers. And the practice was actually endorsed by the manufacturers by paying us the commissions, plus a percentage of overage dollars. So a lighting rep could actually increase sales for their lighting vendors AND increase their profitability by retaining 20% of the overage revenues, created by their reps.
Synergy! Or Collusion? Or … it’s always been that way!?
In analyzing that transaction, the one thing that is apparent is the Rep is closer to the customers and able to manipulate the market in their favor; as well in the favor of the distributors. It could be the equivalent of owning the only McDonalds in town.
I believe overage is an aberrant process that strains the relationships between reps and distributors and contractors and… their vendors. I also believe overage is corrosive to the industry. It crosses the line of ‘competitive’ pricing and opens the door for partisanship in pricing and potential bid rigging processes. Overage steals from the building owner. I’d like to see the industry change the rep role to resellers.
Resellers are akin to distribution, whereas they act as a wholesale buyer of lighting equipment and a reseller to industry trade partners; which could include contractors, distributors and developers. I would envision a reseller to have warehouse space; especially for project business whereby they could add value to temporarily store project equipment and palletize the inventory for the contractors, etc. Pricing would be controlled by their manufacturers, with the reseller able to sell the products at their own market level price. “Overage’ would immediately disappear into the gross margin that the reseller would establish for their business. In reality, reps’ commissions from their manufacturers is at max 10% of sales; but only at full price from their OEM’s. Distributors often take project orders for 5% GM’s; as dictated by the rep to the distributor. Reps could easily earn higher than 5% GM as a functioning reseller. And the enduring process of sole or strong specifications enables the reseller to set the price at whatever the market will accept.
I believe the lighting industry needs to take a step forward in abolishing overage. Positioning their reps as resellers enables the OEM’s to give basic DN price lists to the reps at a no-commission level and allow them to determine the market price level and retain the GM. The rep influence on specifications would remain intact; as well as their contractor relationships and distributor relationships. Price would be subject to competitive pressures from the other lighting resellers; i.e. a competitive, open market.
I’d welcome your comments and thoughts on the practice of ‘overage’.
| 
