Brand Management

What is Minimum Advertised Price and Why Do Retailers Need It?

If you’re a retailer, you’re probably used to small manufacturers reaching out to you to sell their products in your store. Many retailers often consider these requests to be burdensome, but really they are often gateways to incredibly valuable relationships. If the products sell well, you might have caught onto an incredible deal.

Now, of course, there are various conditions retailers and manufacturers alike have to consider. Retailers need to make a profit, but margins are highly dependent on the product’s category. This is largely due to the incredibly competitive nature of the retail industry.

In a price war, profits aren’t the only casualties. Manufacturers usually take a hit as well. Price has an incredible effect on brand value and when prices are slashed, they almost always negatively impact the consumer’s perception of that particular brand. Manufacturers are aware of this, and they have a solution to prevent incidents like this from occurring.

Minimum advertised price (MAP) policies are established by manufacturers to protect their products’ pricing and their overall brand. If you’re a retailer, you’ve more than likely heard of this policy before. It can be bothersome to hear the conditions of a MAP policy when the manufacturer approached you to sell their goods, but there are plenty of incentives within these policies for retailers as well.

Price Wars are Lose-Lose Situations

Price wars may win you sales and improve your conversion rate, but ultimately you won’t make much profit. Drastically dropping your prices to compete is a shortcut that is incredibly harmful to your business. There are other ways to compete, they just take more time.

There’s no reason to take part in price warfare of any kind. Retailers need to stop and think of their bottom line before they partake in any out of the ordinary price cuts. While changing prices can help retailers take advantage of demand and competitor prices, constant price cuts won’t do any favors for your business. Price wars do more than just hurt your profits. The manufacturer is not only losing brand value, but it’s also losing future sales to other retailers. If the price of a product is incredibly low, other retailers are not going to bother purchasing it again. Customers are going to notice the price increase, and you might just lose a customer.

Unless you have an incredible loyalty program in place, incentivizing customers to return to your store is going to be just as difficult as it was before you sparked a price war. And when they return to your store, they’re more than likely going to see an increase in the product’s price and just leave. Not only have you lost your profit margin, but you’ve also lost your customers’ loyalty as well.

A Marked Boundary

While it might be tedious to lend an ear to manufacturers pitching you their product and MAP policy, retailers should seriously consider obeying the brand’s requests. Obeying MAP has two initial results that can benefit not only the manufacturer but the retailer as well.

First, retailers should know that MAP is uniform. Everyone shares the same price floor, which will halt price wars and keep one retailer from taking cheap shots at another. Instead of having it hold you back, MAP acts as an unspoken treaty between you and your competitor. Its uniformity can keep you certain that your competitor won’t violate it either.

Secondly, manufacturers can pull products after MAP violations. They can decide they no longer want to sell to the retailer because their reckless price war has put their brand image into serious jeopardy. If you obey MAP, and a competitor doesn’t, don’t stoop to their price. Even if you sell the product, you could be selling at a loss, leaving you with no product and no cash. If a violator gets their product pulled, you will have way more flexibility with your prices, and can even increase them to boost margins.

Once you find the sweet spot for your pricing, you can easily rake in greater profits and sales. Not only that, but the relationship between you and your supplier will be stronger. Soon, you can leverage your good MAP track record to obtain products at a lower price, or receive discounts on wholesale items. This can only widen your margins further.

MAP Obedience is a Win-Win Situation

Obeying MAP policies benefits retailers and manufacturers alike. The manufacturer’s brand is upheld, and yours is as well. MAP also offers retailers a solid price floor, acting as a boundary between safe selling and risky price wars. It might seem like obeying MAP is doing the manufacturer a favor, but ultimately you’re helping yourself in the long run.

Many believe that MAP inhibits competition. Retailers are not legally bound to obey MAP, so they can violate it whenever they like. However, a free market dictates that sellers are allowed to choose one retailer over the other, and online retail is far from a monopsony.  If a manufacturer does not wish to sell to a retailer anymore, that is their choice, as plenty of retailers are readily available. MAP violations can result in a terminated relationship, so it’s a good idea to obey.

MAP policies can lead to valuable associations between retailers and manufacturers. But beyond that, it levels the retail playing field and can curb price wars. So the next time you’re getting sold on a manufacturer’s product and they mention their MAP policy, be sure to listen attentively. The benefits will outweigh the drawbacks, and will ultimately improve both brands in the long run.

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  • Garret August 27, 2015

    @Brian you deserve a standing ovation. Protecting and controlling pricing across retail channels not only protects the image and value of a brand, it’s necessary in today’s omni-channel world where the same customer bounces from channel to channel engaging the same product brand in each channel.

    But what about marketplaces like Amazon that won’t adhere to MAP pricing and allows anyone to sell a product anonymously at any price they choose?

    What I’m finding is that as prices on Amazon are pushed down in the wild west of ecommerce marketplaces is that traditional retailers are undercut and as a result negotiate for lower wholesale prices. Over time this cuts margin AND the lifecycle of products.

    I thought I’d share how uncontrolled pricing on Amazon can affect a product brand’s overall retail strategy and present how to manage the problem.

    • Brian Smyth August 28, 2015

      Thank you for the kind words! Amazon certainly presents a problem to manufacturers for this reason. The solution presented in that article is indubitably important for manufacturers to remember. The task of “controlling the tail” can be a daunting one, but there are plenty of ways it can be accomplished. In the instance that a MAP agreement is not obtainable, it might be a better idea to pass on selling to that marketplace. It presents a true opportunity cost for the manufacturer: a wider audience, or the guarantee of preserved brand value. The “correct” answer to that scenario will probably vary across manufacturers.
      Of course, sometimes gray market sellers get their hands on the manufacturer’s product, and the product gets harder and harder to track. MAP monitoring tools can track the product’s UPC across every selling channel, raising red flags when MAP is violated. These tools can help manufacturers control who has the product, ensuring MAP is obeyed across the eCommerce landscape.
      It’s important for manufacturers to gain an understanding of who they can trust with their products. Here’s another blog post that covers how they can make sure they sell to retailers worth trusting.

  • […] (at least on the pricing side of things.) Stopping MAP violations before it’s too late can curb price wars and extinguish any competitive fire between retailers. A mutually agreed upon floor may lead to […]

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