Why Having a Pricing Policy Matters & How You Can Create One

John LeBaron

May 6, 2020

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 as part of their ecommerce growth strategy 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 policy ecommerce, price erosion, Pattern

Price erosion not only decreases the perceived value of your product, but it cuts into other re-sellers’ 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 to ensure brand control.

“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 in the face of emerging ecommerce trends. 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 to ensure their ecommerce growth.

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 re-sellers 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.

ecommerce pricing software | Pattern

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 and decreasing brand control. 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.

What now?

Pattern provides brands with the tools to empower them to create and take control of their brand. 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.

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Slowing Inflation is Music to Consumers’ Ears
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Slowing Inflation is Music to Consumers’ Ears

**Instrument Pricing Changes Tune Amid Record Inflation** Compared to 2022, consumers should expect to pay more for musical instruments, but the rate of inflation shows signs of slowing. **The backstory:** America’s most popular musical instruments saw a notable price increase in 2022 compared to 2021, but the rate of inflation eased in Q4 ’22. **Why it matters:** Slowing inflation within this product category could indicate economic pressures like increased demand, rising labor costs, and supply chain disruptions are easing across the consumer landscape. **What we’re seeing:** The average cost of musical instruments increased 7.5% from 2021 – 2022; however, when analyzing individual increases year over year, some instruments saw price increases as high as 21%. <iframe title="YOY Price Change for Instruments — 2022 vs. 2021" aria-label="Bar Chart" id="datawrapper-chart-02Lwk" src="https://datawrapper.dwcdn.net/02Lwk/2/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="379" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> * Trombones experienced a 21.73% increase compared to 2021 * Trumpets +20.08% * Flutes +18.6% * Recorders +16.13% * Saxophones +13.63% * Clarinets +10.55% * Drums +5.41% * Ukuleles +5.17% **However:** Inflation among these same instruments was significantly less in Q4 ’22 compared to Q4 ’21. In some cases, prices decreased from Q4 ’21 – Q4 ‘22: <iframe title="Price Change for Instruments — Q4 2022 vs. Q4 2021" aria-label="Bar Chart" id="datawrapper-chart-6X6GZ" src="https://datawrapper.dwcdn.net/6X6GZ/2/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="379" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> * Trombones +11.23% * Flutes +10.41% * Saxophones +5.94% * Clarinets +5.59% * Trumpets +3.10% * Recorders +2.85% * Drums -2.59% * Ukuleles -8.46% **Moreover:** Certain instruments saw inflation reverse in 2022. On average, prices for melodicas, guitars, and violas saw their prices decrease by 4.41%, 3.19%, and 0.97%, respectively. <iframe title="YOY Price Change for Instruments — 2022 vs. 2021" aria-label="Bar Chart" id="datawrapper-chart-0Tefk" src="https://datawrapper.dwcdn.net/0Tefk/3/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="259" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> **Diving Deeper:** Inflation was more significant when comparing Q4 ’21 to Q4 ’20 than when comparing Q4 ’22 to Q4 ’21, indicating a slowing down of price increases for consumers. <iframe title="YOY Q4 Price Change for Instruments — 2020 – 2022" aria-label="Stacked Bars" id="datawrapper-chart-p6iqt" src="https://datawrapper.dwcdn.net/p6iqt/1/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="206" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> * In Q4 ’21, average prices for all instruments were up 8.89% compared to Q4 ’20. * When comparing Q4 ’22 to Q4 ’21, the average price for all instruments only increased by 2.65%. **The takeaway:** While consumers should expect to pay higher prices for instruments this year, overall inflation impact within this product category appears to be slowing down. With National Ukulele Day coming up on February 2, now is a great time for ecommerce brands to take advantage of slowing economic worries and reach new consumers. * Want Pattern’s data science team to power your brand with consumer insights like these? Contact us to [request more information](https://pattern.com/contact-us/) today.

Slowing Inflation? What Musical Instrument Pricing Tells Us
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Slowing Inflation? What Musical Instrument Pricing Tells Us

It’s safe to say consumers and brands alike are eager for a change to the pattern of rising inflation, steadily increasing in many ecommerce categories . Pattern’s internal team’s data scientists analysis of instrument pricing shows a glimmer of hope that inflation may be slowing, which would be great news for brands selling online.

At Pattern, we’re interested in and monitoring trends and news related to pricing since price is a key factor in a brand’s profitability (as explained in the Ecommerce Equation). When brands are able to optimize their price, conversions, and traffic, they can optimize their profitability. And profitability leads to better allocation of resources, better brand control, and gives leaders the ability to expand their presence to new markets worldwide.

YoY Instrument Pricing Increased at a Slower Pace

When analyzing the pricing changes of instruments from 2021 to 2022, our teams found that prices increased, but at a slower rate than from 2020 to 2021.

As shown below, the year over year Q4 changes show quite a lower rate of increase.

Inflation Improvements Raise Profitability

Because inflation impacts online shopping behaviors, lower inflation can lead to better overall profitability for brands. This idea, of course, is nuanced, but Pattern’s Ecommerce Equation can help illustrate the general principle.

When inflation rises, consumers change their spending habits. Shoppers spend more time researching products, forego premium, higher-priced brands, and buy more in bulk. Brands tend to see a loss of loyalty as they’re forced to raise prices.

Price is a key variable in the Ecommerce Equation: price x conversion x traffic = profitability. As inflation lowers, brands can expect better performance in all of these areas—more traffic as spending habits return to normal, higher conversion from returning customers, and price that better fits consumer demand. As inflation lowers and these variables stabilize, brands will see profitability increase.

Raise Your Profitability with Pattern

As an ecommerce accelerator, Pattern is obsessed with gathering data that helps our brand partners succeed. We’ve created best-in-class technology, models, and analytics to understand changes on the horizon and inform our decisions. With an incredible team of data obsessed Pattern employees, we see what makes the difference in truly great ecommerce performance and apply those learnings for brand partners. 

Ready to improve your profitability? Contact us here.

Inflation hits LEGO, but lighter than you’d suspect
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Inflation hits LEGO, but lighter than you’d suspect

**Some sets get more expensive, while others become cheaper** In June 2022, LEGO announced it would be increasing the prices of their sets. Ever since, consumers anticipated their favorite plastic construction toy prices to increase [by as much as 25%](https://9to5toys.com/2022/06/02/lego-officially-confirms-price-increases-coming-to-most-sets-later-this-fall/). **Why it matters:** Consumers are feeling the sting of inflation in all areas of their lives, from groceries and gas to entertainment. With LEGO Day right around the corner (January 28th), fans may wonder whether it’s a good time to purchase a set. **What we’re seeing:** While inflation continues to ravage the economy, consumers are seeing a small reprieve when it comes to the pricing of LEGO sets. Despite the anticipated 25% price increase, average prices among the top LEGO sets only increased by 4.7% year over year when comparing Q4 2022 to Q4 2021. <iframe title="YOY Price Change for All LEGO Sets – 2022 vs. 2021" aria-label="Interactive line chart" id="datawrapper-chart-3gn9L" src="https://datawrapper.dwcdn.net/3gn9L/3/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="393" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> * During this same period, annual prices for some of the most popular LEGO sets were up as much as 23%. <iframe title="U.S. Price Change for LEGO Sets – Q4 22 vs. Q4 21" aria-label="Split Bars" id="datawrapper-chart-vh7B2" src="https://datawrapper.dwcdn.net/vh7B2/1/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="708" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> **Yes, but:** Prices of other popular sets were down by as much as -12% during this same period. Depending on the kit, consumers might actually find some popular LEGO sets have gotten less expensive since 2021: * LEGO Star Wars Imperial Probe Droid was down -6% in Q4 2022 vs. Q4 2021 * LEGO Creator Tuk Tuk was down -7% * LEGO Star Wars Ultimate Millennium Falcon was down -10% * LEGO Ideas Tree House Business Kit was down -12% **However:** Even for the sets that experienced a price decrease, the decrease was less significant in Q4 2022 as set prices increased across the board following the June 2022 announcement. <iframe title="YOY Price Change for Individual LEGO Sets – 2022 vs. 2021" aria-label="Interactive line chart" id="datawrapper-chart-KjSXz" src="https://datawrapper.dwcdn.net/KjSXz/1/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="400" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> **The takeaway:** While prices didn’t increase as much as consumers anticipated, inflation still had an effect on the cost of LEGO sets. As ecommerce brands prepare for increased demand ahead of LEGO Day, they could increase customer interest in all sets by promoting the sets that have seen a price decrease. * Pattern’s data science team analyzes consumer demand on Amazon to understand how economic forces impact pricing and shopping behavior. If you’re interested in using insights like these to propel your ecommerce strategy forward, [contact our team today. ](https://pattern.com/contact-us/)