The Use of Letters of Supply for Sales to a GSA Schedule Holder
For a variety of reasons further explained below, product vendors may choose to become suppliers to another company that holds a General Services Administration (GSA) schedule contract. In such cases, GSA requires that the GSA schedule holder (also called a reseller) obtain a Letter of Supply (LOS) from the supplier when the reseller does not have enough sales history to have established prices in the commercial marketplace.
Each GSA schedule solicitation contains a Commercial Sales Practice section that outlines the data the supplier must provide to the reseller. The reseller then plugs the information provided by the supplier into its GSA schedule proposal. Prior to finalizing the GSA schedule proposal, the reseller and supplier agree upon a price for each product and the reseller then marks up the agreed-upon prices to establish a final GSA offering price. The final markup is based on a number of factors including the value added by the reseller, the GSA-approved prices for the same product on other competitors' schedules, and commercial sales practice data.
The decision as to whether a company should obtain its own GSA schedule or sell to resellers under Letters of Supply is not always simple. Some of the factors to consider are the tradeoff between the anticipated volume of potential sales under a GSA schedule versus the administrative costs associated therewith, the company's past federal sales history, and whether the more traditional sales channels used by the supplier have been successful.
Companies (suppliers) often opt to sell under Letters of Supply when or because:
- The supplier does not intend to sell directly to federal customers.
- The supplier is new to the market and does not want to make a large initial
investment in obtaining and administering a GSA schedule.
- The auditing standards and requirements for a supplier under a LOS are less
onerous than those for a direct GSA schedule holder.
- The company intends to sell to only a limited number of resellers. If a business issues Letters of Supply to a large number of resellers, the administrative burden associated with monitoring pricing and other administrative issues under each Letter of Supply becomes too great. To reduce the aforementioned burden, consider employing a uniform pricing strategy with all of your resellers since a uniform strategy can be more easily maintained and controlled and is consistent with the value added by the resellers.
The primary drawbacks to Letters of Supply are the following:
- A supplier must pay a commission for any GSA sales that the supplier makes directly with a federal customer.
- The supplier loses a degree of control over his federal sales process.
- GSA pricing can be difficult to maintain.
In summary, product suppliers new to the federal market may want to initially sell to resellers under Letters of Supply and then later consider obtaining their own GSA schedule depending on the number of resellers you develop and your federal sales volume.
The following article, by Steve Charles of the immix Group, is a comprehensive analysis of PDA's and the GSA schedule program. See "The Role of the GSA Schedule in your Channel Strategy: Authorizing Participating Dealers," http://www.immixgroup.com/pslibrary/eu_display.cfm?ID=104.
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