Table of contents
There is a little accounting trick at the heart of electronic component pricing that makes all those prices you see online meaningless for production volumes.
Finally, your product is ready for production, and it’s time to rule the world. But there’s a catch: No one on your team truly understands how electronic component pricing works. Let’s fix that.
The Players
Before we reveal the trick, let’s introduce the players in this show.
- Original Component Manufacturers (OCM) – the guys who make the parts, like Texas Instruments or ST Micro.
- Authorized Distributors (Disty’s) – Officially authorized by the OCM to sell their products, think all the usual suspects like DigiKey, Mouser, Arrow, Avnet, etc.
- Original Equipment Manufacturers (OEM) – That’s you.
The Setup
When Disty’s buy parts from OCMs, they always pay a single price no matter how many they buy. You read that right, there is no discount to the Disty for buying large quantities. The price they pay is called the ‘book cost’ (because back in the day prices were published in a book).
Disty’s apply margin (not markup) to the book cost to determine the ‘book price’, which is the pricing you see online. Here, the volume matters because Disty’s will want something like 50% margin if you buy 1 unit, 40% if you buy 10, 30% at 100, etc.
OCMs cannot by law dictate the book prices Disty’s offer…but they can make suggestions. This is why the book prices online are usually very similar at each Disty.
The Misdirection
Step right this way my friend, have we got a deal for you! While Disty’s will usually adhere pretty closely to the suggested book prices when they publish online, they are certainly willing to offer private prices (Customer Specific Pricing) to special customers just like you. This explains the secret pricing you see when you log into your Disty account. This pricing is based on margins being offered exclusively to you, but the key thing to know is that the Disty’s book cost is still the same.
Getting this special discount can lead OEMs to think this is the path to the best prices. It’s a great path for low volume, but for production volumes, you need to understand the trick.
The Accounting Trick
The OCMs have a secret magic wand they can wave to effectively lower Disty’s book cost, even after Disty has already paid for the stock. It’s an accounting entry that works like a rebate. When Disty sells the stock, it can claim the rebate.
This little accounting trick is called a ‘debit’. It lowers the cost to the Disty, which in turn lowers the price the Disty quotes to you.
Every debit comes with two conditions:
- The Disty must ship the stock.
- They must ship it to the specific OEM the debit was issued for.
Read #2 again. Debits are for specific OEMs only. This is strictly enforced, it is very bad karma for a Disty to violate this rule.
A Disty with a debit adjusts the book cost by the debit amount and calls this the ‘contract cost’ (or ‘special cost’, or ‘broken cost’ because the OCM ‘broke’ the book cost) and then applies their margin to determine the price they quote you.
Pro Tip: Debits are usually good for 1 year and are based on anticipated annual volume. When quoting for production, always include your anticipated annual volume, even if not placing hard purchase orders for the year.
The process of the Disty requesting special pricing and waiting for the OCM response is why production quotes can take 3-5 days. These prices are not available online.
This system is called ‘ship-from-stock-and-debit’, or ‘debit’ for short. Neat trick, right?
Why All The Trickery?
Put yourself in the OCM’s shoes. You design and manufacture the most amazing and valuable products in the history of mankind, and you want to get paid for the value they bring to the world…otherwise known as the market price. You do not want to get paid based solely on marking up your cost and selling in volume to Disty’s, who will turn around and sell at the market price. You would be very unhappy if you sold all your parts to a Disty for $1.00 and the Disty turned around and sold them for $10.00.
The debit system is 40+ years old and is not a trick at all. It is a remarkably efficient method of ensuring the right parties are compensated for their value-add.
Why haven’t you heard about this before? Because you’re the audience for this magic show. No one particularly benefits from explaining to you how the trick works, so no one offers it up out of the blue. But just like a real magic trick, people will tell you what goes on behind the curtain if you ask.
Practical Magic: What Really Drives Pricing
Quick review: now we know the prices you are quoted are composed of two parts:
- Cost – Either ‘book cost’ or ‘contract cost,’ and the price is controlled by the OCM. There are exceptions, but usually, you will not know the actual cost.
- Margin – The profit margin is controlled by the Disty.
The Mystery of Scale
You’ve probably heard that big companies—massive EMS giants and distributors—get better pricing because of their volume. Sounds logical, right? It’s also wrong. Pricing in the electronics world doesn’t work like a wholesale club membership. The truth is, the most critical factor in getting the best deal isn’t your Disty or EMS suppliers' size. It’s you.
Always remember that special costs are specific to the OEM (you). The OCM offers special costs because it wants your business. It doesn’t especially care which Disty or EMS company you choose to work with.
Your decisions, your relationships, and how you play the game matters far more than the supposed clout of big suppliers.
What Drives OCMs:
- Commodity Spend: The more you buy within a specific product category (e.g., analog), the more eager the OCM is to cut you a deal. This is because the individuals responsible for quoting at the OCM work for a specific product category, and they care most about their category.
- Geography: U.S. and European buyers usually are quoted higher prices than those in Asia, where markets are high-volume and more cost-sensitive.
- Strategic Value: If your product is a game-changer or a marketing win for the OCM, they’ll fight to get on your bill of materials.
What Drives Distys:
- Market Dynamics: Supply and demand dictate margins. Scarcity equals higher prices.
- Relationship Value: Distributors adjust margins based on how much potential they see in you as a long-term customer.
- Market Share: For reasons too complex to describe here, Distys are very focused on local market share in their franchised lines. If you have the opportunity to impact local market share for a Disty, you have a friend.
Pro Tip: For start-ups and small to mid-size companies, Disty relationships are crucial. Disty sales reps are the eyes and ears of the OCMs. You need the Disty’s to say positive things about you to the OCMs so you get the best cost. Court your Disty’s more like you would court an investor because they are investors in your business. Sometimes, you’ll need to be firm but fair, just don’t become adversarial.
Showtime Script When It’s Time to Act
Let’s assume you’ve built solid relationships with two or more Disty’s, and it’s time to quote production volumes. Here’s what to keep in mind:
- You Are the Key: Your reputation and potential will shape pricing more than the size of your suppliers.
- Request Special Cost: Explicitly request your Distys ask for special pricing from the OCMs based on your projected annual volume (be optimistic, but not unrealistic). Most Distys will do this without prompting, but it's good to be sure. If using 3rd parties like EMS or logistic providers, be sure to prompt them.
- Highlight Strengths: Keep your best features as a customer front of mind. They might include your annual spend, your 1-3 year potential, your strategic value if you’re a leader or potential leader in your segment, or your ability to move the market share needle if applicable. You want your strengths communicated to lots of people you’ll never meet, so keep repeating them.
- Focus on the Cost Drivers: Most BOMs are cost-dominated by just a few parts. Focus on applying these techniques to those few parts.
- Trust but Verify: If you choose to outsource your BOM costing to a 3rd party, make sure that you choose a trusted partner that offers 100% transparency. Value and appreciate everyone’s input, but blindly handing it off is not the best practice for discovering the lowest prices in the market.
It’s Your Show – Be Great
Electronic component pricing isn’t really a trick or as mysterious as it might sometimes seem. Now that you get the ship-from-stock-and-debit system and the factors that influence pricing decisions, you’re ready to take control. The best deals aren’t just handed to you—they’re earned through strategy, relationships, and a little savvy negotiation.
So get out there and be great. After all, you’re the star of your own procurement show.