By Ted Konnerth, Ph.D.
Over the years, I’ve met with hundreds of lighting representatives, and a broad assortment of reps from other sectors of the building materials industry: wire, wiring devices, power utility products, plumbing products and more. The one significant differential for lighting reps is overage. Overage is a practice that enables and rewards lighting reps for maximizing the price of materials supplied to construction projects. It is a unique and skillful negotiating tactic that outrages many and rewards even more.
For this article – the first in a series - I'd like to start by explaining how it works.
Most reps these days have over 100 lighting manufacturers listed on their line card. I’ve always found the concept that they ‘represent’ your company, as part of a pool of 100+ other product lines, as amusing, or trite.In a sizable construction project, there are often more than 50 type numbers (i.e. unique products). Lighting is a highly diverse category; troffers, linear, exits, under cabinet, cans, decorative, indoor/outdoor, accent, color-changing, etc. etc. plus controls. That complexity of applications and solutions opens the door for price obfuscation.
Lighting reps bid package prices. I have had several discussions with designers who claim they have hard budget numbers by SKU for the lighting they specify … and I praise them for having forced someone into giving an estimated price … but they will never know the actual price paid for any fixture. And why is that true?
Lighting overage is fungible. This is a very important issue to grasp. The rep bids its package price to electrical contractors, who in turn add their labor and submit a quote to general contractor. To prepare the lighting bid, the rep receives quotes from its manufacturers, adds a modest margin for the distributor and adds a typically more generous overage for himself to supplement the commission. Of course, the rep typically channels the overage through the manufacturer with the most generous overage policy. Many smaller manufacturers offer a 100% overage policy to increase the probability of selling even a few peripheral lighting products on each job.
Of course, the rep does not have a monopoly, and electrical contractors and general contracts all need to be competitive to win the business. The rep is typically challenged to reduce its bid, and then looks for opportunities to substitute inferior products (a process euphemistically known as “value engineering”) and asking their manufacturers to lower their prices to “meet the competition”. But the end game is to preserve or enhance the rep pool of overage.
In future articles, I’ll answer the following questions:
How does overage impact a manufacturer’s P&L?
Where do overage dollars go?
How did overage become so prevalent in the lighting industry?
Thank you!