Amazon

There is much information on the Internet about MAP pricing, with parties taking sides.  This is an opinion on why MAP policies exist, and the motivations for creating them in relation to Amazon.com .  Amazon has recently created a forum where they openly challenge the ethics and ongoing legality of MAP programs.  


Below is a response posted in that forum that addresses the concept put forth by Amazon: That MAP is about manufacturer's being greedy at the expense of consumers.

1. MAP pricing, most often, is a REACTION by Manufacturers to retailers like Amazon (Wal-Mart, Costco, etc) who intentionally offer products at or below the wholesale cost.

2. MAP pricing does not force any retailer to SELL at a higher price. Retailers are allowed to use freebies, free shipping, coupons, and many other marketing tactics to give the buyer discounts and valued items.

3. It is a fact that on Amazon and most Comparison Shopping Engines, listings from various retailers are sorted by either price, or price+shipping. Because retailers must compete for exposure, having the lowest price is desirable. However, when competition heats up, and due to AUTOMATIC pricing software, a retail price is often driven to at or below wholesale costs by this type of marketplace.

4. When a manufacturer sells to Internet retailers, it is often only a fraction of their overall sales. There are exceptions, but it is not uncommon for established brands to do 90% of their volume in brick and mortar stores, and 10% online. Buyers from brick and mortar stores (particularly big chains) use Internet pricing as a benchmark - and Amazon is the #1 Internet benchmark used. When a buyer sees that a product is going on Amazon for the Manufacturer's wholesale cost, the Manufacturer risks losing that business. Therefore, it is necessary in some cases for the manufacturer to make sure that Internet retailers do not deflate the retail value - as it threatens the rest of their business.

5. Amazon has built their online business outside of media (books, music, video) by courting thousands and thousands of "Third Party Retailers". 3P Retailers currently make up fully 30% of Amazon's total Gross Sales Volume.

The beauty of Amazon's business model is that by courting 3P Retailers, they get something for free: Data Entry. The 3P Retailers gladly enter product information on millions of products for the chance to get a share of Amazon's massive customer base spending.

What most people don't realize is that after a few months, once Amazon gauges the sales of the 3P Retailers, they then go directly to the Manufacturers to get a direct supply, and then compete against those 3P Retailers (often to their surprise).

6. Once Amazon has a direct supply, they compete for the "buy box", which is the term used for having the #1 position in price+shipping search. The difference for Amazon is that they always have "free shipping", so any 3P Retailer who dares to compete and collect a reasonable shipping fee is always at a disadvantage. The 3P retailer has to lower their price in order to be at the top of the list.

7. Amazon reacts to the price drop by the 3P Retailer by lowering their price with free shipping to the level of the 3P Retailers price-only (without consideration of S&H). The back and forth only takes a few days, and suddenly the item is on Amazon for the wholesale price (or very near it).

8. The 3P Retailer often complains to the Manufacturer that Amazon has lowered their price beyond the point where they can make a profit.

A. Because Amazon charges 3P Retailers A FIFTEEN PERCENT FEE (15% of your dollars spend on a 3P Retailer go straight to Amazon's coffers!), Amazon has a 15% advantage over every 3P Retailer.
B. Because Amazon has economies of scale, they have rates with UPS and FedEx that cannot be matched by any 3P retailer. Therefore, if a 3P Retailer offers "free shipping", they are absorbing a greater cost.

9. The manufacturer usually reacts by calling the Amazon corporate buyer to find out what is going on. Amazon blames the 3P retailer for driving down the price. Some manufacturer's buy into this, others don't. Most walk away with a promise from Amazon to make some general improvement that does not materialize.

10. If the price deflation persists, and enough retailers complain to the Manufacturer (or cancel their wholesale accounts, when it gets really serious), the Manufacturer then finds they only have two options:

A. Institute MAP pricing
B. Stop selling to Amazon

It's pretty obvious that in a down economy, any person in business can be seduced by large orders from Amazon. But, when the manufacturer is faced with the fact that other large customers are using Amazon as a retail pricing benchmark, and THEY are threatening to cancel truckload orders, the manufacturer is forced to try to impose order on retailers like Amazon.

11. When the manufacturer imposes MAP, the people at Amazon will refuse to sign the contract that all other retailers are required to sign. The agreement is generally one that says if you don't follow MAP pricing, you are cut off from supply. You can still run sales. You can still offer discount codes. You can still bundle things together (which is why Amazon hates them, as they are UPC-driven marketplace). And, you can still all sorts of creative marketing things. You just can't use the price to get to the top of the list because that harms the rest of the manufacturer's business.

In the past, Amazon would actually say that they would follow the program, but then go and break the agreement in practice. Only in the past month have they become aggressive with this forum, and the wording on the "price masking" feature - their original end-run around MAP agreements. The forum and that wording are in reaction to manufacturer's putting anti-price masking clauses in the contracts.

12. So, while Amazon portrays this as a pro-consumer issue, and badmouths the manufacturers that need "education", the reality is that Amazon is being QUITE HYPOCRITICAL about their own business practices.

Amazon has tiers of 3P Sellers, and their most coveted relationship is to be a Gold Seller. This requires signing a 3-year contract with Amazon. There's lots of details, but one of the most striking is that Amazon requires those 3P retailers to maintain PRICE PARITY on their off-Amazon websites.

Yes, you heard right, Amazon requires by contract that the retailers who are ordained with "Gold Seller" status maintain a higher price on their website than they would if they pursued their own self-interest.

Amazon wants to make sure that retailers don't use Amazon to get attention, and then draw those retailers to their own sites where the total price is lower.

Why? Because then Amazon wouldn't collect their 15 PERCENT FEE.

So, while Amazon is making it sound like they are the consumer's advocate, in reality their purpose is just the same as any other business - they are motivated by maximizing profits, which in turn influence the value of their publicly available stock.

They are being hypocritical in their portrayal to consumers that manufacturer's are out to get more than their fair share by instituting MAP pricing. In reality, Amazon is a primary CAUSE of MAP pricing, and Amazon itself forces consumers to pay a higher price on THOUSANDS OF WEBSITES by trapping 3P Retailers in a long 3-year contract where they no longer are able to give consumers a break on their own websites where their costs of doing business is 15% less than doing businesss on Amazon.