Illegal price fixing or good business?
February 22, 2011 7:21 PM   Subscribe

Supplier wants my company to sell a 'combined product' at a specific price in order for my company to get his best price. In the relationship, his company would be a supplier to me, and I would sell to the end user. There's a potential recurring revenue stream on the other end of this deal that could be big for the supplier.

So here's the story...

This company has a widget which would integrate with a product from my company. This other company wants to sell their widget to my company, have us combine it with our product, and sell to our customer.

At the same time, this other company has approached our largest customer, and told them that "the price for this combined product should be $x" without consulting with us. The customer wants this combined product, and of course would like to pay less for it.

Then the other company has turned and told us... "if you can meet $x for your customer, you will get my best price; otherwise my price is 2 times $x"

Putting some hypothetical numbers...

Other company tells customer: Price for the combined product should be $50.

Other company tells my company: If you sell the combined product at $50, I will sell my widget to you at $20; otherwise, I will sell my widget to you at $40.

Our actual cost of goods sold is $40.

Note that the other company expects to make their money via a recurring revenue stream once the combined product is sold. We would also receive a portion of the recurring revenue.

So we're in the position of losing a small amount ($10), or (because the other company is integrating their widget with our competitors as well as with us) being left out in the cold with our largest customer.

So the question is... is the practice of a supplier setting a price based on the price I charge my customer on the up and up?

If it makes a difference, my company's product works without the other company's widget, whereas his widget requires my product (or the product of my competition) to work.
posted by dyerfr to Law & Government (11 answers total) 2 users marked this as a favorite
Quick note... the lower price in return for meeting the $50 price point is in the form of a rebate after the other company has verified my invoice to the customer...
posted by dyerfr at 7:37 PM on February 22, 2011

So the more you sell the more you lose?

Nothing about this sounds normal in any way. You need to tell the Other Company to stop doing what they're doing and consult you if they're interested in working with you in the future.
posted by ged at 8:05 PM on February 22, 2011

And yeah, judging by your tags you're aware of the legal ramifications of this arrangement.
posted by ged at 8:06 PM on February 22, 2011

Two things I see here:

1. Supplier went behind your back by going to your customer and then tried to leverage that over you.

2. Supplier tried to leverage a ridiculous pricing "threat" if you do not "comply" with their desire to provide them with a generous recurring revenue stream that you would presumably be cut out of (you didn't mention whether you would receive a cut of this for providing the sale).

I don't know your product but if they can't sell their product without yours, if you are able to find a new supplier, and there is not an easy competitor they can switch their business to, you have the leverage and you need to put them in their place. What they have done is shitty for your relationship and stupid for business. You do not try to man-handle your customers like that if you are a supplier. Period. It may also be illegal although I have no idea about that. I would think you would have some sort of contractual agreement about them contacting your customers behind your back like that (or at all).

If you don't have a new supplier that sells what they do (preferably cheaper than you currently pay) I'd highly consider sourcing a new one. Also, I'd also suggest sourcing what they are proposing as the combined product from someone else and simply offering the combined product yourself and thus obtain the recurring revenue stream they would have gotten. You can then give the boot to a shady supplier that should be supporting you, not making demands, and you also create a new revenue stream for your company.

Not sure if any of this is highly-specific to the widgets you sell, but I have to say I'm incredibly curious what they are now as I cannot think of anything that fits the logic puzzle you have outlined for us in your post, ie:
"What is a product that makes sense as a combined product, yet cannot be sold on its own."
posted by Elminster24 at 10:33 PM on February 22, 2011

I think the problem comes not from them setting prices based on what you sell yours for, but in creating a ridiculous product tying arrangement that aside from the antitrust issues has little or no upside for you, or Company A, or whoever. Dunno if trade libel or anything like that comes into them interfering in Company A's deals with third parties.
posted by rhizome at 11:20 PM on February 22, 2011

My gut reaction would be a smiling "no thank you" to the widget maker. He's trying to arrange a deal of tremendous benefit to himself, and he's screwing you in the process. If he asks why not, tell him that it's not to your advantage to engage in the deal, and leave it at that.

Companies I've worked for have arranged deals like this where interested parties sit down and work out the money so that it's to everyone's advantage. This requires candor and trust between parties (assuming it's not some shady anti-trust violation). The widget maker has already blown that by setting a price expectation for your mutual customer, so give them no beneficial feedback on how to make the deal work.

If the mutual customer asks why you're not willing to pursue the deal with the widget maker, you can, if you want to, stick the knife in the widget maker's back by saying "The deal he proposed was a money loser for us at the price he told you, and he told you that price to strongarm us. We don't do business that way."
posted by fatbird at 12:14 AM on February 23, 2011

"if you can meet $x for your customer, you will get my best price; otherwise my price is 2 times $x"


Other company tells customer: Price for the combined product should be $50.

Other company tells my company: If you sell the combined product at $50, I will sell my widget to you at $20; otherwise, I will sell my widget to you at $40.
I was very confused by this. Was one of the $x supposed to be a $y or something? According to what I see on the page, he was threatening to sell you the widget at $100, not $40.

Anyway. Not normal at all. If he goes around making wild promises he can't keep, blackmailing you is not the way to have them kept.

Is he the most senior person at the supplier? Maybe go over his head?
posted by AmbroseChapel at 12:24 AM on February 23, 2011

I don't see any anti-trust issues or price fixing here, this just looks like the rough and tumble of business. Its only price fixing when all/most the competitors get together and collaborate on setting prices. Anti-trust should only factor in if your company has a dominant market position and your using it to unfair advantage. IANAL, but I don't see any of that.

As you describe the situation, you have a competitor that widget maker can work with as well as you. Thus widget maker can enable your competitor to take your biggest customer. Well life ain't fair, welcome to the free market. Nobody is at fault here, your choice is how you want to compete given the current situation.

It seems to me that widget maker has some power here (your customer wants the widget, and you have competition) and they're using it pretty effectively to their advantage. Your options are to sell at the price widget maker set, call their bluff and tell em you can only sell at a higher price and hope your competitor also baulks at selling for the $50 price, lower your costs to make a profit at the lower price or develop your own version of the widget.
posted by Long Way To Go at 1:34 AM on February 23, 2011


Thanks for the inputs... some additional info...

The widget from the supplier is unique and today is the only provider of the widget.

Elminster... The supplier's widget enhances the functionality of our product, but requires my company's product to work...
posted by dyerfr at 1:48 AM on February 23, 2011

Your explanation of the situation is confusing; you mention an initial loss but also a potential recurring revenue stream, and it's impossible to gauge how this might work out for you in the long run without more specific info. Regardless, I'm inclined to agree w/Long Way To Go. This sounds like an aggressive move by a company that's not particularly interested in your welfare, but it doesn't sound illegal. They're playing hardball, and it sounds like they might have enough market power to disregard your feelings about that.
posted by jon1270 at 3:16 AM on February 23, 2011

Would it be out of the question for your company to source the widget separately and thus cut this jackass out of the picture? If it enhances the functionality of your product, perhaps its something your company should expand its product offering to include.
posted by Elminster24 at 6:25 PM on February 23, 2011

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