Retail can often seem like a game of reverse one-upmanship. One retailer cuts prices and others scramble to match or beat them in order to be considered by consumers. This is problematic for retailers that want to preserve their bottom lines and move inventory, but the impact is detrimental for brands. Beyond sales and margins, their brand value is at stake.
Retailer and brand perspectives vary widely on the issue of price degradation. Retailers think that cutting price on certain items will bring in customers and lead to additional purchases. If there are only a few remaining SKUs left on a particular model, retailers may want to purge the remaining items and don’t see the harm in discounting. While this can be true at times, shoppers might get accustomed to those discounts and come to expect them in order to make a purchase.
Brands run into problems when one major reseller drops prices below established MAP price and other resellers call foul or follow suit. This is not a malicious move by retailers, but the lower price their competitor is charging makes them unable to compete. More than that, brands lose on their own margin when retail partners demand to negotiate a better wholesale price.
Beyond these incidents, a larger problem looming for brands is a gradual souring of their relationships with specific sellers. If a retailer is constricted by a MAP policy, yet unauthorized sellers consistently pop up and advertise the brand’s products below MAP, then the brand-retailer relationship is bound to degrade over time. It comes off as favoritism, as some retailers seem to be getting a better deal. Brands must take steps to prevent this false perception. Proactive price monitoring and channel management is a reassuring gesture to loyal retail partners.
Let’s go over some examples and discuss how brands can keep their products from being casualties of the price degradation domino effect.
Price Degradation Examples
Take a major bathroom fixture manufacturer, for example. Their products might sell at Home Depot, along with a number of other retailers. If Home Depot cuts their prices, Amazon will follow in their footsteps to stay competitive. In order to prevent this from happening in the future, this fixture manufacturer will monitor MAP across all their resellers to stay aware of any violations and stop them in their tracks. That initial price cut is the one to focus on, as it is the first domino falling that creates ongoing price erosion.
From the retailer perspective, let’s look at an example of a major automotive parts manufacturer. Their products are offered at Walmart, PepBoys, and beyond. If Walmart does their research into why sales of that brand’s products are lagging and find out that a number of small resellers are advertising the products at a fraction of the cost, a major conflict will ensue. In fact, a logical reaction would be to threaten pulling that manufacturer’s products off their shelves for good, unless they take MAP enforcement seriously and take action on disruptive (and likely unauthorized) sellers. MAP monitoring and enforcement protects both brand and retailer sales and margins.
Lastly, let’s think of a high-end LG TV. A shopper might walk into Best Buy motivated by reputable location and crisp picture quality, but they are conditioned to look for deals. As shoppers reference online offers to validate their purchase decision, if a substantially lower price is available through an online seller, Best Buy will likely be used as a showroom and lose the sale. Best Buy might be complying with LG’s pricing standards, but other sellers can easily eat into market share by undercutting on price.
So what’s a brand or retailer to make of all this?
How Brands Influence Discounting
The idea of discounting can be toxic. If a retailer has a predictable promotional calendar, then shoppers will simply wait. And if a brand discounts on their own direct to consumer channels as well, this will even further complicate this. How brands discount themselves impacts how resellers discount the brand’s products. Brands lead by example and give their resellers the idea of how to discount and, overall, that discounting their products is acceptable.
What Brands Can Do About it
It would be unrealistic to suggest all brands stop offering discounts, as some of us recall the backlash J.C. Penney received when they switched to an “everyday low price” strategy. Allowing more strategic promotions and discounts is a place to start. The brands that are most effective at quelling MAP violations are the ones that don’t allow any discounting, like Bose and Weber Grill. If resellers violate MAP by advertising any type of discount, they immediately pull their products.
Discounts are a necessary evil in retail, but once they get too deep, there’s no going back. Brands must keep in constant communication with resellers to understand the impact of their pricing. Managing their distribution, being aware of any MAP violations, and acting on them swiftly and uniformly are the only ways for brands to protect themselves against the price degradation domino effect.