One common trend within the electrical industry has remained over the past few decades; competitive pricing tends to fall within a relatively narrow band of variability. Product categories differ, of course; with wire/cable the price fluctuates with the value of copper and aluminum, but all manufacturers are similarly affected, so the overall price is still relatively consistent. When over 80% of your COGS is held in one commodity…pricing can’t vary too widely over a long period of time.
Power distribution equipment also tends to stay within a bandwidth of narrow variability, for basic equipment; transformers, reclosers, rubber goods, etc. But over the past several years, major manufacturers have moved into engineered systems with the inclusion of sensors, data acquisition systems and software solutions; where price has become far more variable. And the margins for engineered systems have similarly improved.
Tools, commodity construction materials and similar basic materials generally have narrow bands of competitive pricing as well. And there is some movement in ‘smart’ tools and even smart commodities; e.g. sensor-enabled boxes. Many of these products are subject to the manufacturer support deals: rebates, terms, marketing group participation, etc.
And then there’s lighting. Since the advent of LED, over 10 years ago and the introduction of smart-enabled systems, pricing is no longer a predictable feature. LED components have been dropping regularly for the past ten years; as have gross margins within many manufacturers. But in a market that has high price elasticity, there must be winners out there. And the winners are…reps?
Lighting reps have always had market level pricing authority for project business. When the rep is successful in garnering a strong specification, their package bid on a project is subject to large swings in price elasticity. Look at the changes in the rep market:
- Many reps have expanded their territory, and several are now multi-state. Expanded territory fosters more elasticity in price.
- Line cards. Most reps have expanded their line cards significantly. With the entry of over 700 LED companies into the market over the past 10-12 years, reps have been the target of many hungry manufacturers that have little to no market experience in selling products. The layers of product lines that can enable a rep to package products within a specification or a value engineering project is unprecedented.
- Expansion of products. The recent trend of supply reps adding lighting or buying/merging with full line lighting reps is new to the industry. This affords a potential bargaining and packaging strategy that has never occurred at the rep level; negotiating a complete power/lighting package by one singular rep firm.
- Specialty solutions. The lighting market has changed, with the entry of lighting specialists in varying alternative approaches; e.g. Datacom providers are adding LED lighting and controls to their proposals, there are new LED franchise ‘distributors’ that function as lighting ESCOs. HVAC and plumbing firms can now offer lighting solutions and integrate smart lighting into their control systems. Security companies, building automation companies and more are now marketing themselves as lighting providers. With multiple entrants into a lighting market, price becomes unpredictable.
In the late 1900’s (like 1995), lighting was simpler. Every contractor and every distributor knew the price of a 2×4 troffer within 50 cents, same with a recessed can and trim or a basic flood light. Pricing was less variable and provided fewer options for an overage strategy than now.
So, is overage more prevalent? Have rep total commissions (i.e. revenues) increased with the increase in price elasticity? I can honestly say I don’t know. But over the next few months, Egret will conduct a professional, confidential rep survey of how the market compares today, with the breadth of technology and multitude of manufacturers versus pre-LED days. With a database of over 1,700 rep firms, we’ll try to see how the rep market has changed from an old formula of 1 person per $1M in product sales and a ratio of 1 indoor support to each outdoor sales person. My suspicion is lighting isn’t the same business it used to be.
And in the power distribution products world, we’ve heard reports of major manufacturers adjusting commissions down to reflect the higher price points of the engineered equipment.
In short, the rep business has changed and as they are the front line of every product sold, it would be interesting to carefully assess how the rep world has changed with the expansion of technology: training, compensation, even how they make calls on customers. In a recent discussion with a rep I learned that they make video conference calls for technical presentations; working from a very sophisticated computer monitor setup that enables them to bring up technical data sheets, schematics, warranty, installation, applications and more. The rep can do a video conference in far less time than driving to an actual customer.
We would welcome your comments or insights into how the rep market has changed. I believe rep firms are far more complicated of a business now than 2006… but stay tuned, we’ll report the findings in the coming months.
Ted Konnerth, Egret Consulting Group’s founder and CEO, recruits on a retained basis, helping leaders in the electrical and lighting industry identify their next C and V-level hire. He is also the executive director for the International Retained Search Associates, allowing him to liaise with skilled recruiters around the globe. To learn more about how Ted can help your company attract talent view his biography, check him out on LinkedIn or email him at firstname.lastname@example.org.