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The Perils of Pricing

May 1, 2003
Seventy years ago, electrical distributors and manufacturers debated the need for a centralized source for accurate pricing information. The kevetching

Seventy years ago, electrical distributors and manufacturers debated the need for a centralized source for accurate pricing information. The kevetching hasn't stopped. Just ask Mike Rioux, president of the Industry Data Exchange Association (IDEA), Rosslyn, Va.; the folks at i2 Technologies Inc., Dallas, who work closest with the company's Trade Service pricing service; or Doug Smith, vice president of sales for Material Express Corp., Encinitas, Calif., a new company offering a pricing service that competes with the i2/Trade Service offering.

Says industry sage Dick Noel, who has followed the pricing scene in the electrical industry as closely as anyone for the past 50 years, “If there is any common denominator in our business, it's correct pricing.”

However, pricing is an inherently complex issue, particularly when one considers the variable market-price levels for a product, says Hank Bergson, president National Electrical Manufacturers' Representatives Association (NEMRA), Tarrytown, N.Y. “A wiring device might sell at one price in New York, but in Florida where it is a real hot residential market, and there's a lot of competition for big-volume orders, it might be at a lower number,” he says.

The electrical industry isn't unique in its need for centralized pricing; virtually any retail business or distribution-based industry has companies, associations or publications that publish pricing. Whether distributors sell cinder blocks or circuit breakers, they want a place to go where they can find prices of manufacturers' goods, as well as the pricing that competitors offer for their products.

One reason pricing is such an emotional issue for the electrical wholesaling industry is because one pricing company is so interwoven into the fabric of the industry's history: Trade Service Corp.

Soon after Trade-Service-founder Bill Gudie's failed attempt to transform his electrical contracting company into a radio parts business in 1928, Gudie went to work for a local California electrical contractor association. One of his duties there was publishing an engineering data book that included some pricing information. He eventually left the association and started a pricing business that evolved into Trade Service Corp.

Gudie heard the same arguments against a centralized source for pricing when he launched Trade Service in 1932 (first known as the Biddle Trade Bureau, after an attorney who owned the service in its earliest days) that i2/Trade Service, Material Express and IDEA hear today. Opponents to centralized pricing say a third-party company should not have any control over manufacturers' pricing.

Specifically, they are most concerned when a third-party pricing vendor “interprets” manufacturer data, or develops pricing on their own when a manufacturer doesn't provide it for a product in a price sheet or catalog. But as Bill Gudie explained in a 1984 Electrical Wholesaling article, often-times the pricing his company got from manufacturers is incomplete. “In many instances, the information we obtain is not usable by the distributor in the form in which we get it. Much of it has to be interpreted or reformatted. This cannot be done without exercising some judgment. Our service would have little value if we could not include our own judgment or interpretation.”

Gudie, who said he would often get “Check No. 3” from a new distributor — after that distributor paid the landlord for first month's rent and the telephone company for a phone — built a pricing empire that started in California and spread nationwide. Its success, and the monopoly that Trade Service enjoyed for decades, was based on the simple fact that distributors and their customers would pay for pricing information.

Distributors and manufacturers might have argued with Gudie over the years that he and his company had no business gathering or interpreting manufacturers' pricing, but no one could dispute the fact that the market needed — and still needs — timely, accurate pricing information. The customer demand for the service that Trade Service has provided over the years cannot be underestimated, says Dick Noel. “Trade Service was always ubiquitous. Any time a distributor opened up, it didn't take them long before they became a Trade Service customer.”

A contributing factor to the angst that many in the electrical business feel toward Trade Service is that for most of its history, Trade Service has been a virtual monopoly and has not had a strong competitor. Industry sources say when the company was feeling some heat from National Price Service, a spirited competitor in the 1980s, it bought out that company.

Today, there's a new competitor on the scene: Material Express. When Trade Service itself was acquired in 2001 by e-business giant i2 Technologies Inc., Dallas, some in the industry saw an opening to offer a competitive pricing service. Among them was Doug Smith, who worked for Trade Service for years in sales.

Smith and several other Trade Service executives left the San Diego-based operation seven years ago to start up VisionInfoSoft, also based in Encinitas, Calif. Initially, VisionInfoSoft offered a pricing service and estimating package to electrical contractors, and now has 6,000 users of its estimating software. But Smith saw the changes and reports of widespread layoffs at Trade Service as an opportunity, and in August 2001 launched Material Express.

This year, the company launched two pricing products under the Material Express banner: EPIC (Electronic Price Information Catalog) and APEX (Advanced Pricing Electronic Exchange). “EPIC is a stand-alone system and doesn't integrate with distributor software,” says Smith. “It compares to the old Trade Service price books. APEX integrates right into the distributor's business software.”

Smith says Material Express now has several hundred distributor users onboard and is proud that the company recently won endorsements from three of the four largest buying groups: IMARK, Oxon Hill, Md.; Equity Electrical Associates, East Walpole, Mass.; and Electrical Distributors Network (EDN), Concord, Ohio. He is in discussions with Affiliated Distributors, and hopes to get its endorsement soon.

“We are not trying to put anyone out of business, but the timing is right and our company is strong,” he says. “The future is wide open.”

The good old days

Many things have changed about the pricing business since Bill Gudie's days. Pricing sheets are no longer published with the help of a mimeograph machine, which he used 70 years ago and for years proudly displayed in the lobby of the Trade Service headquarters.

Today providers of pricing employ more modern and usually digitized mediums. Manufacturers can now send their updated pricing information at the speed of light in a standardized Electronic Data Interchange (EDI) format. However, an unfathomably large percentage of manufacturers in this electronic age still send price updates via fax, which oddly enough, isn't too different from what Bill Gudie did with his mimeographed price sheets so many years ago.

Don Lesem, i2's vice president of content product development, has seen the electrical pricing industry and Trade Service's role in it from several different angles. While working with Howard W. Sams Inc., Indianapolis, for 12 years, he often incorporated Trade Service pricing into Sams' databases and catalogs. He also worked for Aspect Development, a software and e-business firm focusing on supply chain solutions. i2 bought Aspect in 1999. At i2, Lesem has worked with i2's pricing service for the electronics market, which has a 7-million item database (its electrical database now has about 1.1 million SKUs). He was also part of the management team that worked on the Trade Service acquisition.

Lesem says 60 percent to 75 percent of the 500 to 600 electrical manufacturers that provide pricing data for the i2/Trade Service PFMS (Product File Maintenance System) pricing data send it in “spreadsheets or other electronic formats,” but that the rest comes in faxes or price sheets.

“They don't send us changes,” he laments. “We have to go in and figure out what the adds, deletes and changes are. Probably the lion's share of our effort focuses on validating data, and going back to the manufacturer and saying, ‘You took this out. Is it obsolete? Is it no longer available?’”

Data control

Part of the thinking behind the creation of IDEA in 1998 was to eliminate the potential for inaccurate pricing or product information that could occur when a third-party pricing service like i2 or Material Express interprets manufacturer pricing data. Indeed, some of the initial developers of IDEA's Industry Data Warehouse (IDW), a centralized repository of electrical manufacturer product, pricing and packaging information, were true crusaders in their quest, and spoke out vehemently and publicly against Trade Service interpretations of pricing and product data. They also used their clout with manufacturers to demand that they take control of the transmission, updating and general maintenance of their data.

For years the biggest bone of contention has been when the third-party vendor's interpretations include developing prices for products. These prices are usually based on their own research on distributors' current pricing or historic pricing trends in that particular product category, and are used only in the cases where the manufacturer does not offer a price. It's a concern that Bill Gudie heard about in the 1930s and 1940s, and it still colors the arguments against the use of third-party pricing services.

Indeed, one of the core selling points for IDEA and the IDW, which went live in 1999, is that manufacturers control their own data, says Mike Rioux. “Our customers (distributors) are looking for information directly from the source. They don't want to get information that may not necessarily be from the manufacturer, or that has a disclaimer with it. We are getting almost 65 percent of our information directly from the manufacturers. They own it. They control it. They update it, and they are responsible for everything.”

Currently, 42 manufacturers of the more-than-80 manufacturers subscribing to IDEA supply direct data feeds into the IDW with this information. While these numbers are not large in relation to the total number of manufacturers in the electrical market, Rioux says these companies are among the largest in the electrical manufacturing community, and that they are in the product areas that account for the bulk of distributor sales.

The total electrical product database in the IDW is over 800,000 SKUs. IDEA works with i2/Trade Service to supply the 35 percent of its database not yet provided via direct feeds from manufacturers. However, Rioux says once a manufacturer begins providing a direct data feed, it no longer takes in the i2 pricing and product information. i2 does have access to the entire IDW database and can use it to update its own product records.

“We still provide a lot of data to the IDW for the manufacturers that are not providing it via EDI transmission,” agrees i2's Lesem. “There is a ‘quid pro quo’ here. We get the data that 40 to 50 manufacturers provide only to the IDW, and we put it into PFMS.”

Lesem and Rioux have been able to look past the contentious relationship that IDEA and Trade Service had in the early days of the development of the IDW, and agreed that i2 and IDEA are now exploring other avenues of cooperation. They hinted that the two entities might be able to work together with i2's “attributed data,” which offers longer product descriptions, images and other product information in a standardized format. Lesem says i2 is almost finished providing these attributes to its 1-million-plus SKU electrical product database.

Concerns of ‘commoditization.’

Rioux and Lesem also agree on another major point — that some manufacturers still have an unsubstantiated fear of product ‘commoditization,’ and in particular the use of universal UPC codes to describe products. This fear, they say, has stopped them from providing their pricing and product data in industry-standard electronic data formats.

“There is always a CEO who has a fear that they are going to be compared to someone else, and that everybody is going to be vanilla or chocolate ice cream,” says Rioux. “Before I came to the electrical industry, I was in another industry and we went through the same drill. They realized if they didn't have the capability to compare products and shop, they would be in deep trouble.

“All of those fears of ‘commoditization’ went away, because it made the supplier of the product do a better job of differentiating their product and handling their data. For those that fear this will take them to ‘commoditization,’ they may as well get over it, because that's where we are going to end up anyway.”

“If we are going to take some cost out of the supply chain, then we are going to have to have some standardization,” agrees i2's Lesem. “The manufacturers will have to compete on the quality of their product, inventory availability and their price.”

IDEA's Rioux believes that in the near future, databases with the “enriched” or “attributed” electronic data records will actually allow manufacturers to differentiate their products more easily. Attributed data in databases such as the E-Dataflex Catalog Content offering that i2 is working on will also allow for the creation of e-market storefront and parametric searches by product feature, similar to the product discussed earlier. “The marketplace is going to drive the industry in that direction,” says Rioux.

The future is now

Customer demand for accurate pricing information won't go away, but the entities providing it are evolving. Each of the major players has different challenges — and advantages. Material Express may be the new kid on the block, but its management team is made up of Trade Service veterans who understand how the electrical industry works.

Trade Service is no longer the only game in town, as Material Express and IDEA offer viable alternatives. Trade Service's critics are quick to point out that the company was acquired by an e-business colossus from outside the electrical industry, and that i2's primary business interests are not pricing.

Although other manufacturers and vendors in the electrical business have farmed out some back-office functions overseas because of cheaper labor, i2's critics also like to point out that the company moved much of the price editing work that was done in Trade Service's San Diego headquarters to Bangalore, India.

Don Lesems defends this move, and says i2 had company-employed data editors in India for years before acquiring Trade Service, and that i2's operations in India were integral in building its database for the electronics industry. He also says that i2 is hardly an outsider in the pricing game because of its experience developing its 7-million SKU pricing file for the electronics industry. Additionally, Lesems says i2 has given Trade Service access to resources that it never could have had on its own.

“We took what we were doing in the i2 content business and bring it to Trade Service,” he says. “We have expanded the capacity and capabilities. We can build more data faster than Trade Service used to be able to. We have a large content operation with about 700-800 employees.

“We have been in that business for 12 to 15 years building a database for electronics, and we brought in some of the processes to automate the building of the data. We are an ISO 9001 workshop. We are really focusing on expanding the pricing data to include more catalog data — long descriptions, images, attributed information in a very standardized format.”

At IDEA, Mike Rioux's biggest challenge is recruiting more electrical distributors and manufacturers to fully utilize the capabilities of the IDW and the IDX2 network. The “early adopters” have already signed on, and though his list of IDEA partners reads like a “Who's Who” of the electrical industry, he wants more manufacturers to provide direct data feeds, and more electrical distributors to sign on and use the IDW as their primary source for product and pricing data. IDW's critics say low usage rates have stunted its growth.

Rioux knows he needs more users in the fold. He says IDEA got a big boost after dropping WorldCom as its VAN because potential members saw it as a “big-company-only” service. With IDX2, an Internet-based service, smaller companies are realizing substantial savings compared to their previous VANs.

“IDX2 has taken off like crazy,” he says. “We can beat any traditional or Internet-based EDI VAN in the business because we are owned by the electrical industry and we don't have a lot of overhead. We have a good contract and service offering, and we are starting to see a real good ramp-up.”

Rioux is also working hard with the distribution software providers such as TradePower, Blue Bell, Pa.; Prophet 21 Inc., Yardley, Pa.; Eclipse Inc., Shelton, Conn.; and NxTrend, Colorado Springs, Colo., to ensure that their systems can converse with the IDW. He expects these efforts to pay off soon with users of the TradePower distribution business software (the Array system provided by Trade Service Systems), and hopes to recruit many of the 300 users of this system.

It seems like such a simple equation for manufacturers: price a product and get that price to distributors and their customers. But as Bill Gudie found out when he began building Trade Service brick-by-brick 70 years ago, and as the folks at IDEA, i2 and Material Express know now, there's a lot more to pricing in the electrical business than meets the eye.


Material Express Corp.
Encinitas, Calif.
Key executives: Barry Mester, president; Doug Smith, vice president of sales

Material Express launched in August 2001 by the ex-Trade Service employees who founded the Vision InfoSoft estimating software company. Last month, Material Express released its Advanced Pricing Electronic Exchange (APEX) software, a pricing service that will compete with the Trade Service/i2 PFMS product. The company also produces its Electronic Pricing Information and Catalogs (EPIC) stand-alone service, which allows users to search PDF format files, cut sheets and manufacturers' catalogs. The company works with about 400 manufacturers and has more than 1.1 million items in its EPIC database.

i2 Technologies Inc./Trade Service
Key executive: Sanjiv Sidhy, CEO and president

i2 purchased Trade Service Corp. and ec-Content Inc. for approximately $79.5 million in March 2001. While not many people in the electrical industry know much about i2, the company knows the pricing business through its 7-million SKU database in the electronics industry. The company's primary focus is on developing software that helps manufacturers plan and schedule production and buy materials. It also develops software for supply chain management, content management and customer relationship management. The 4,800-employee company had $985.6 million in 2001 sales. The company's stock has cratered from a high of about $112 per share in the 2000 dot-com frenzy to about three dollars a share at press time.

Industry Data Exchange Association (IDEA)
Rosslyn, Va.
Key executive: Mike Rioux, president; Beth Badrakhan, IDW manager

The two biggest services that IDEA manages are the Industry Data Warehouse (IDW) and the IDX2 electronic network. IDW is a centralized repository of electrical manufacturer product, pricing and packaging information. It currently contains over 800,000 SKUs. IDX2 is an Internet-based document exchange to facilitate business-to-business trading and access to the IDW. The IDX2 was developed to provide all of the traditional Electronic Data Interchange Value Added Network (EDI VAN) services and also enables additional features and services using the Web at lower prices. At press time, IDEA's subscribers included more than 80 manufacturers and over 150 distributors.

About the Author

Jim Lucy | Editor-in-Chief of Electrical Wholesaling and Electrical Marketing

Jim Lucy has been wandering through the electrical market for more than 40 years, most of the time as an editor for Electrical Wholesaling and Electrical Marketing newsletter, and as a contributing writer for EC&M magazine During that time he and the editorial team for the publications have won numerous national awards for their coverage of the electrical business. He showed an early interest in electricity, when as a youth he had an idea for a hot dog cooker. Unfortunately, the first crude prototype malfunctioned and the arc nearly blew him out of his parents' basement.

Before becoming an editor for Electrical Wholesaling  and Electrical Marketing, he earned a BA degree in journalism and a MA in communications from Glassboro State College, Glassboro, NJ., which is formerly best known as the site of the 1967 summit meeting between President Lyndon Johnson and Russian Premier Aleksei Nikolayevich Kosygin, and now best known as the New Jersey state college that changed its name in 1992 to Rowan University because of a generous $100 million donation by N.J. zillionaire industrialist Henry Rowan. Jim is a Brooklyn-born Jersey Guy happily transplanted with his wife and three sons in the fertile plains of Kansas for the past 30 years. 

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