According to a study by CNBC, nine out of ten consumers check the price of a product on Amazon as part of their product research. Consumers are constantly on the hunt for the lowest price they can find online, and while finding that low price may be a win for the consumer’s wallet, prices that are too low can have drastically negative effects on brands who don’t have effective pricing policies in place to protect themselves.
Why are pricing policies important?
They prevent price erosion.
Price erosion happens when a brand is forced to lower their pricing in order to compete with unauthorized sellers listing products at low prices or sellers violating pricing policies.
Say, for example, that a small retailer lowers the price of a product they’re selling online and big sellers like Walmart or Amazon match that price in order to compete. Eventually, the small retailer may run out of inventory, and Walmart and Amazon will be left to compete with each other, each refusing to budge on price because they’re matching each other and thereby, diminishing the price of the product. This is price erosion. See an example of price erosion below.
Price erosion not only decreases the perceived value of your product, but it cuts into other resellers’ margins (many who have lots of overhead costs already, like paid staff, advertising, etc.) and therefore your own profits.
“What happens is if your resellers, the retailers you sell to, aren’t profitable, they’re just going to stop buying your products,” said Newel Cobb, Senior Brand Manager at Pattern.
Ben Craven, Corporate Counsel for Pattern, said that without a good pricing policy in place, resellers in a brand’s supply chain can “price at whatever level they want, and if the manufacturer doesn’t like that, there’s not really anything they can do.”
The best way to stop this, Craven and Cobb said, is having an effective pricing policy.
“It protects all channels of distribution . . . and keeps brick and mortar retailers happy,” Craven said.
How do you create a pricing policy?
There are a few basic steps and things to consider when you’re beginning to draft an effective pricing policy for your brand.
Consult a lawyer.
According to Cobb and Craven, the most important thing you’ll want to do before setting up a policy is to consult with a lawyer who has experience drafting pricing policies. This is a critical first step because you want your pricing policy to stay on the right side of antitrust laws, and that requires appropriate language that doesn’t create unfair competition or indicate any kind of collusion between your brand and a reseller.
One way collusion could be indicated is if your pricing policy reads like an agreement or negotiation between two parties instead of an announcement with suggested selling prices, according to Harvard Business Review.
“If a manufacturer is agreeing with its reseller what the MAP price will be, then that could look like price fixing,” Craven said.
Consulting with a legal expert can help you draft a comprehensive and unilateral pricing policy that includes clear guidance on what your brand permits or does not permit (such as free shipping, product bundling, etc.), who it applies to, what products it covers, and the consequences for resellers who violate your policy, all presented in such a way that your brand doesn’t run afoul of antitrust laws.
Set up a MAP policy.
A MAP (Minimum Advertising Pricing) policy is a pricing policy set by a manufacturer that tells resellers and brands the lowest cost they can advertise or print for that manufacturer’s products. According to Cobb, brands creating a pricing policy should create a MAP policy.
MAP policies don’t limit the price at which products can be sold, but they do allow any retailer to have a fair chance at selling a manufacturer’s product in the market. When effectively enforced across the entire market, MAP prevents authorized ecommerce resellers from undercutting other sellers with unauthorized markdowns.
Aside from incorporating recommendations made by a legal counsel, there are a few things Cobb said MAP policies should do. One is to retain competitive pricing.
“You can lower MAP, you can raise MAP, etcetera, but if all of your competitors are selling their product at a significantly lower price, it doesn’t matter that your MAP is much higher. No customers are going to end up purchasing it to begin with,” Cobb said.
Brands may conduct analysis on similar products across the market to figure out what MAP pricing makes the most sense for them.
Another thing Cobb said MAP policies should include is specific guidance on warranties.
“If you have some kind of warranty, make it very clear that the warranty only exists with MAP,” Cobb said. “Somebody might buy a product and they might decide to sell it below MAP, but when they’re breaking MAP, they’re essentially going off-brand, which means they’re not an authorized reseller anymore, and if they’re not an authorized reseller anymore, any warranty that you would have had is no longer valid.”
Once your MAP policy has been created, it’s important to inform your resellers so they’re aware.
One thing to note is MAP pricing laws are only recognized in the U.S. and Canada, said Craven. MAP policies are still viewed as price fixing in the European Union, even if they’re unilateral.
Consult the data.
One thing Craven says is beneficial for brands creating a pricing policy is knowing where their prices are being degraded, whether that’s Amazon, eBay, or elsewhere.
Pattern’s multi-channel ecommerce software Predict can provide that data to brand partners so they know exactly where the issues are at and who the culprits are.
Make consequences clear and unilateral.
According to Craven, brands should be “explicit” about what their MAP pricing is and that they have the right to terminate their relationships with resellers if MAP pricing is violated. The consequences of violations should be made clear to resellers and serious enough that they want to avoid violation.
It’s also important to enforce your pricing policy equally across all channels for all vendors, even if one of those vendors (like Amazon) is pulling in a majority of your sales. Differential treatment can not only violate antitrust laws but accelerate price erosion, making the cost of not enforcing your policy consistently far greater than the cost of cutting off a reseller.
“If you’re not willing to cut somebody off as a reseller, you have no power whatsoever. If they call your bluff and you say no, you’ve essentially just destroyed your MAP policy,” Cobb said.
One way brands might enforce their MAP policies is by setting up a non-appealable strike system that ends in termination for sellers who repeatedly violate pricing policies. This way resellers are given notice that continuing their behavior will lead to termination.
Be proactive in enforcement.
“Once you have a pricing policy in place, it’s not enough to just have a policy in place. You have to be proactive in monitoring marketplaces to know where your issues are and then be active in enforcing your pricing policy,” Craven said.
According to a study conducted by the Harvard Business Review, unauthorized resellers violated policies about half the time and authorized resellers had a 20% violation rate. Without diligent attention to your resellers, violations can happen right under your nose, rendering your MAP policy useless.
Brands should carefully watch sellers so they can maintain the integrity of their brand and so their pricing policies can be as effective as possible.
Pattern provides brands with the tools to empower them to create and take control of their pricing policies. We also connect you with valuable partners that can give you the resources you need to know where price erosion is happening.
For more information about how you can create your own pricing policy, contact Pattern below.