Wednesday, April 28, 2010

MAP Pricing, Competitive Intelligence, and Anti-Trust Legislation

I became interested in MAP pricing in 2001, as we saw a continual downward pressure on retail prices.  The introduction was a rough one - having our eBay listings pulled under the VeRO program by the manufacturer who claimed we were violating their intellectual property.  We weren't - we were just selling a product at a competitive price, and they didn't like that.  At least that was our story at the time.

Obviously, it tainted my opinion about the subject.  But, over time, I started to see how MAP programs become necessary to protect the long term value of a consumer product, allow the manufacturer and their retail network to maintain reasonable profits, and to deliver consumers with a positive experience overall in purchasing and owning a product.  It wasn't about greed, it was about survival.

I have been helping companies create MAP programs for 6 years, and have extensive experience in determining policies and best practices for enforcement, as well as interactions with marketplaces such as eBay.

At the core of any good MAP program is software to gather intelligence on what the price of an item is at any given time.  While in the past, prices would change on a long-term schedule (maybe over weeks or months), the past 5 years have seen the introduction of software that literally moves the price of an item as though it was a commodity on the exchange.  Prices move in real time, and it is literally impossible to say that any single static number is the "price" or even "market price" of an item.

Internet retailers have become day traders in mundane consumer products such as blenders, cat toys, and even rubber gloves.  If you put an item in your shopping cart on Amazon and come back 6 hours later, you might find the price has changed by up to 20% over that short period.  Anyone who wants to survive in eCommerce in 2010 has to be using some form of software the guides them to the market price, and hopefully automatically moves their price to be in parity with the going rate for an item.

The problem with this software is that when two or more competitors use it, it tends to drive the price down to wholesale.  More sophisticated floors can be programmed, but there is no doubt that it drives prices to absolute minimum margins.

For many manufacturer's, the Internet accounts for less than 10% of overall sales.  It's not surprising that a price is lower on the Internet, but when it remains low for long periods, it eventually negatively affects sales in brick and mortar businesses.  Once those businesses either slow purchasing or stop purchasing due to the benchmark being set on the Internet, the manufacturer is forced to do one of two things - sell for less to the brick and mortars - giving away their margin, or convince retailers on the Internet to raise their prices.

This is often a difficult choice, and most choose MAP programs in some form.  Some are informal, where they just let the word out that it's not acceptable to sell below a certain price on an item, some have full-fledged legal contracts.  Enforcement varies, but it can be snitch-based, with competitors tattling on each other, or fully automated - with software and/or services from companies like Channel IQ.

Companies like Amazon attempt to paint this as an anti-consumer issue, but it's really a smokescreen to cover up the fact that they know MAP is like kryptonite to their loss-leader marketing strategies.  Of course they want MAP illegal - not for the consumer, but for their own competitive advantage.  It's a really smart strategy, not an evil one.

So, legislators who hear the voices of those who donate the largest amounts or pay the most lobbyists are tricked into thinking that they are eliminating MAP for the protection of consumers.  It's not true - for the vast majority of products, there are a gazillion ways to get a discount.  And, smart retailers know the acceptable end-runs around the minimum price.  The manufacturer's just want them to market more than a low price to get a sale - that is all.

I am hoping this blog helps educate all parties, and opens the eyes of many to this interesting new business problem of the 21st Century.

3 comments:

  1. Your one sided article neglects to point out all the harm MAP does to the smaller e-tailers. It also doesn't tell the whole truth, either.

    Firstly, MAP in 2010 is equivalent to price fixing, and you know it. Nearly all MAP statements from today's manufacturers dictate that pricing cannot be set below a minimum except for when the customer is in your retail location. Well, many of us have so such location, therefore, it's price fixing for us.

    Next, consider that "Joe's Dinky Online Store" is selling some widget for the same price as Amazon.com, Buy.com, or someone else you've heard of. Who are you going to buy the product from? Of course you're going to go with one of the bigger outfits. What incentive would you have to do business with Joe? MAP took away his only bargaining chip.

    Next, if Joe is efficient and intelligent enough to be profitable on a 3% markup, and you are not -- why should that be Joe's problem? Isn't that the nature of capitalism? You are less efficient and more expensive than is Joe. You damn well should lose. MAP is like stimulus money for the big boys who need to keep their fat salaries in place. Had you considered that notion?

    Lastly, MAP is truly a joke as someone will always violate it, and make a killing. It is not simply not 100% enforceable. Suppose Joe is violating MAP. Mr. Smart Guy Manufacturer sees this and says, "Block Joe's Dinky Online Store from buying our stuff!" The supplier complies, but Joe gets to go right on selling Mr. Smart Guy's products, because Mr. Smart Guy isn't so smart. See, Joe is unscrupulous and decided to setup duplicate accounts with his suppliers under the name "Joseph's Place" (some of his suppliers even made this recommendation). So, Joe just buys everything under "Joseph's Place" and sells it online as "Joe's Dinky Online Store." Shutting down "Joe's Dinky Online Store" did nothing to curtail the MAP violation.

    Sounds crazy, right? I can assure you that it is not.

    MAP = price fixing = unenforceable and it should equal illegal.

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  2. David said...
    "MAP = price fixing = unenforceable and it should equal illegal. "

    Talk about price fixing, what about big oil companies! They don't price fix, do they? yah right!

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  3. I've had manufacturer's contact me to say that I need to honor their MAP policy or they and their distributors will no longer sell to me. In many cases, the low-price-leader on those items on Amazon is Amazon.

    Some background:
    On eBay, I don't sell under my true business name, and MAP enforcement is pretty much impossible to enforce, as not many suppliers are willing to dedicate the resources (my theory). On Amazon, I do business under my bike shop's DBA - I didn't think I could hide who I was to avoid MAP enforcement.
    So, what are the suppliers doing when I ask them why they are supplying Amazon and not enforcing their MAP? They are paying lip service at best and most often don't respond. You'll never see Amazon raise their price to MAP, unless they can get it because everyone else gave up trying to make money on the item. These same suppliers required that I prove I had a brick'n'mortar store before they'd do business me. They haven't answered my question on how Amazon qualified to sell their products.
    The best strategy for me is to keep picking niche products that allow me to get good margins. If I want to keep a product line without being dropped for MAP violations, I just sell the stuff on eBay.

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