“If a manufacturer, on its own, adopts a policy regarding a desired level of prices, the law allows the manufacturer to deal only with retailers who agree to that policy. A manufacturer also may stop dealing with a retailer that does not follow its resale price policy. That is, a manufacturer can implement a dealer policy on a “take it or leave it” basis.”
Choosing the right products and the right prices for them can be a difficult task. But don’t worry, we’re here to help you write a flawless MAP policy.
Where do you start when it comes to drafting a MAP policy? You and your retailers have agreed upon a suggested retail price, but you want to make sure they’re respecting your prices to provide consumers with a consistent impression of your brand’s value across all sellers and channels. Do you use MSRP as a starting point? Or will you establish an entirely independent price? What will you do to combat MAP violators? We’ll help you create a template that can help you establish a policy that will be easy to sell to your reseller network and will be respectful of your brand value.
Why Have a Policy?
MAP policies arose from the result of two landmark Supreme Court cases. Dr. Miles Medical Co. v John D. Park & Sons Co made minimum prices illegal, citing it as a violation of the Sherman Act. This ruling was overturned by the Supreme Court in 2007, saying minimum prices are not unlawful per se but must be judged under the “rule of reason.”
United States v. Colgate noted that a company has the power to decide who they do business with, and can revoke business on the basis of price. Colgate had a policy of refusing to deal with vendors who sold below MSRP, and its policy was upheld in court. The case created the Colgate Doctrine, which states that the individual action in the refusal to do business with another entity is acceptable unless it’s to create or protect a monopoly.
Since manufacturers can choose who to do business with on the basis of price, imposing a policy is the best way to keep retailers in check when it comes to your pricing.
So we’ve established that a MAP policy is within your legal right as a branded manufacturer, but other than that, what’s the point of having a MAP policy? Well, your brand value needs to be perceived uniformly across your entire reseller network, especially since consumers are very price sensitive. Effective pricing can keep your brand strong across selling channels.
Retailers don’t have the best track record when it comes to respecting MAP. One in five retailers violate MAP all the time, and the average violation is 14.5% below MAP. But why? Retailers aren’t inherently trying to abuse your brand’s prices. It has to do with the competitive eCommerce landscape.
Online retail is growing at a remarkable rate. The market has grown to be saturated, and that gives the consumer a lot of options to choose from. And since it’s all online, price transparency is at an all-time high. Because of this, consumers know how to find the lowest price fast and easy, and that means retailers slash their prices to stay competitive.
Since price wars run rampant, retailers regularly break MAP policies. But sometimes the policies are not broken in plain sight. Many retailers use tactics to hide the fact they abused a manufacturer’s policy, such as in-cart pricing and “click to view price.” We’ll explain later how to curb these tactics.
With this in mind, how can you build a policy that will incentivize retailers to uphold your minimum price agreement?
What to Consider
When considering a new MAP policy, you have to check to see if there is any gap between the way you view your brand and the way customers perceive your brand. You might think of yourself as a value brand, but you could have room to qualify as a premium brand. You’d be surprised to see how much you could get for your products. Don’t sell your brand short, try for a premium to earn more money and build stronger brand value.
Look at your competitor’s’ prices for similar products, or observe popular prices of your products if you already have a reseller network. They can be a useful benchmark for your prices to keep you competitive, and help resellers choose your brand over a competitor’s. Keeping your brand value central to your pricing decision is imperative to having a successful MAP policy. It’s also important to consider how your reseller network is branded. Don’t price too high if they identify as value brands.
And of course, it’s important to put your cost of goods into consideration. The average manufacturer profit margin is between 25-35%, so use that as a benchmark when selling it to retailers. Your own selling price should respect your MAP, or else you and your retailers are going to go head to head in your pricing negotiations.
- How is my brand positioned?
- How do consumers perceive my brand?
- How do I want to be perceived, and is it in line with how consumers perceive me already?
- Are others selling similar products?
- If yes, how are they priced?
- If no, how much does it cost to produce and what is my desired margin?
- **Quick Tip: If you’re the only seller in the market, test price elasticity until demand is solidified
- Do I sell direct to consumers?
Stay tuned next week for Part II, covering what to include in your MAP policy, and how to monitor resellers for effective enforcement.