The US Supreme Court ruling in Leegin Creative Leather Products Inc. vs. PSKS Inc. (pdf) in June, 2007
made it legal for a manufacturer to set and enforce MAP (Minimum Advertised Price) for resellers of its product, and pull the line or sue retailers who violate.
Correction:The Supreme Court ruling found that minimum pricing policies are legal and do not represent a violation of U.S. antitrust statutes.
Why Manufacturers Enforce MAP
There are many reasons why manufacturers may impose such pricing policies:
- Manufacturers want to protect brand image, which discounting can work against for premium brands and new, innovative products
- High margin is an incentive for retailers (who are the manufacturer’s extended sales force) to promote these items more than others (although without the ability to offer price breaks, it’s harder to incentivize consumers to buy)
- Maintaining MAP or MSRP maintains retail value so manufacturers can retain wholesale pricing
- To prevent bargain basement retailers from underselling other resellers of the product (who may discontinue selling these brands or complain to the manufacturer)
MAP doesn’t necessarily apply forever, especially for seasonal products or categories like consumer electronics where new models are constantly hitting the market. But under a MAP policy, a product must be sold at a MSRP (Manufacturer’s Suggested Retail Price) until the manufacturer permits a markdown.
How MAP Affects Retailers
Some retailers will benefit from the level-playing field (smaller retailers, those with higher operational costs or lower efficiency and retailers with a reputation for excellent customer service), and enjoy extra margin to boot. Though certain industries will suffer, especially in this economy, as sales velocity doesn’t occur until the price moves South. For example, HomeCenter.com reports certain price-sensitive product lines sell $150,000 per month when discounted vs. $10,000 when sold at MAP.
Another downside is inventory costs. If in this economy, people are hanging on to their older model consumer electronics rather than buying the latest models, that inventory is going to back up. Without the ability to markdown, the retailer must deal with the stale stock. The manufacturer has received its money, but also loses as it won’t be refilling inventory for resellers.
And as with any rule, MAP is bound to be broken. Online retailers are already using “click to see price” in pop-up windows, “add to cart to see price” and “email for quote” tactics. Retailers who take the high road and adhere to MAP pricing often find themselves forced to lower prices to compete, or honoring price-matches once discounters run out of product.
Break MAP at Your Own Risk
Technically, concealing price from product pages is akin to a brick-and-mortar store showing one sticker price, and a salesperson verbally offering a price break to a customer in-store. It’s not an advertised price, nor a displayed price. But that raises the question — if it’s not advertised in email, PPC, shopping engine or other promotional material — is showing a sub-MAP price on a product page really “advertising”?
Retailers who walk this thin line must be careful not to let these prices slip through data feeds and into shopping engines, search engines or any other promotion. Even with diligence, it’s easy to get caught breaking MAP. Spy firms like NetEnforcers Inc charge upwards of $100,000 per month to mystery shop online retailers on behalf of manufacturers and have already caught many in the act. Offenders are notified by NetEnforcers to correct pricing which is typically restored within a few hours. If the seller is not a licensed dealer, the seller may be slapped with copyright infringement.
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Alternative Incentives to Discounts
Most manufacturers don’t balk when retailers offer free shipping, gift with purchase, gift cards with purchase or a % off an additional, non-MAP protected item when promoting a MAP item. So long as the dollar value of the product is not reduced, everything’s cool. Offering coupon codes is another way to reduce the price without reducing the price, but be very careful that you don’t advertise the coupon to be applied to the MAP product (that would be advertising). To be safe, if you’re offering a coupon code, always mention which items are excluded from the promotion. For example, Austad’s has a special landing page that lists all the excluded brands and a brief explanation at the bottom:
Landing page also shows the same image as above (to re-assure customer is in the right place) and includes this at the bottom:
What About the Consumer?
Obviously consumers don’t like paying more for products, especially in this economy where people expect everything to be on sale. (On the flip-side, if consumers stop buying non-essentials, however discounted, they actually come out ahead).
Consumers skilled at online comparison shopping might be frustrated to find no price breaks (with the exceptions of retailers who break MAP or on factory refurbished products), or may hunt out free shipping offers and other incentives. Comparison engines that display the total cost including taxes and shipping will aid these customers, as will those that provide seller ratings to help them decide who to ultimately buy from.
Internet Retailer raised the question “will consumers continue to shop the Web if they can’t get better deals online than in store?” and cite research by Forrester, the e-tailing group and Carnegie-Mellon University:
- 49% of counsumers shop online for convenience, 46% for selection and 43% for value (Forrester)
- Price was important to 80% of online shoppers, but ranked fifth among benefits of shopping online (e-tailing group)
- Online consumers are willing to pay $1.72 more on average to buy books from brand-name retailers than unfamiliar merchants (Carnegie-Mellon)
“I don’t see it leading to a mass exodus from the Internet, because lower price isn’t the dominant reason people get value from the Internet,” says Carnegie-Mellon professor Michael Smith. “But taking away the little guys’ pricing advantage will strengthen the hand of the large players.”
In this economy, manufacturers of premium brands and non-essential products (purchases which can be deferred without severe loss of standard of living) likely have to give a little, and remove restrictions earlier. So the whole MAP thing might not be as much of a headache for retailers after all.