The expansion of ecommerce has made the already competitive consumer goods market even more cutthroat. This is where Minimum Advertised Pricing (MAP) policies come in. But what is a MAP pricing policy, exactly?
A MAP policy is a policy or condition that dictates the absolute cheapest price a distributor or retailer can advertise a product for outside of the store. These policies usually include incentives for companies to comply with the terms, and equally include repercussions in the event of a violation of the policy.
While distributors can break MAP policies, as this in itself is not illegal, suppliers can penalize them in accordance with the agreed-upon terms or simply terminate contracts. Such penalties can include withholding of orders or contract termination and so on.
Traditionally, manufacturers offered a “Manufacturer’s Suggested Retail Price” (MSRP) or sometimes referred to a Recommended Retail Price (RRP). This system allowed retailers to set prices. A television with an MSRP of $400 could be sold by a retailer at $300, with the retailer advertising this item at 25% discount. However, with a MAP policy, this is not possible.
As previously mentioned, MAP policies benefit all parties involved, including the brand owner, manufacturers, distributors and retailers. The advantages of implementing such a policy are clear. The benefits include:
In the fiercely competitive world of retail, matching your competitors for price is a must, if possible. This means that when one retailer offers a discount, it’s likely that their direct competitors will follow suit. They can also implement this through in-store price-matching schemes.
This issue has become increasingly problematic in the realm of e-retailers and resellers who sell via Amazon. Auto-repricing tools and Amazon repricer can automatically detect when a competitor has dropped their price below your own, automatically repricing your products within a set range. This repricing technology means that a price war turns into a price cascade, with suppliers left wondering how in the space of a few days their products have all dropped to near or in some cases below wholesale price.
This form of price fall benefits neither retailer or reseller.
By agreeing upon a minimum advertised price at which a product can be sold, it sets a bottom limit to the price for all parties selling the item.
As part of a price war, many retailers choose to sell some key items for either almost zero profit or as loss-leaders, making a small loss on each sale. They do this to drive customer traffic to their store and sites, and to capitalize on accessory products such as cables, that have higher profit margins.
The danger of such deeply low pricing is that it will affect manufacturers’ brand value or market positioning. In addition, this can set expectations among distributor networks for lower prices across the board, as both retailers and customer are likely to notice substantial price rises when product prices return to normal level.
Again probably best embodied by GoPro and few other tech products, a MAP policy means can prevent suppliers from being outcompeted by their own partners. An enforced MAP policy means distributors and retailers can only offer a limited discount, meaning a supplier store or website can remain competitive.
The prices on the GoPro website are only slightly higher than ones found through legitimate distributors and resellers, which keeps sales on their own site coming in.
Having a strong MAP policy allows you to easily terminate contracts with distributors who are not providing enough value to your company and endangering your brand value.
At the same time, while suppliers are able to cut low performing distributors, they are able to reward those who comply with more profitable margins. Not only is this good for the supplier, but the loss of distributors who break MAP policies will reduce competition for the remaining distributors.
As previously stated, online retailers can afford to operate with smaller margins on product lines due to their minimal overheads. If store-based resellers can see that online retailers regularly sell for way below the MSRP, at a price they cannot afford, it is likely they will be less enthusiastic about using precious shelf space on your products, where they will be acting as a physical display for their online competitors.
Having a well monitored and rigorously enforced MAP policy means that stores will recognize the suppliers’ attempt to level the playing field. This can help make your product more attractive to these stores and in some cases even allow suppliers to push for better margins.
The trend towards online shopping over physical stores seems to be unstoppable. Operating online as a business can massively cut overheads, meaning products can be offered to customers at a greatly reduced price, enticing customers away from the high street.
With pressure to retain their market share, retailers have been forced to slash prices. However, the margins required for physical stores and ecommerce stores is not the same. This has left product suppliers with increased pressure to lower their wholesale prices or manage with unhappy retail partners. This constant downward pressure means suppliers run the risk of potentially undermining their own brand positioning.
However, including and enforcing (more importantly) MAP policies can help suppliers and manufacturers keep both online and offline distributors and retailers happy while protecting their brand and future margins.
Red Points’ MAP ebook, available for free by clicking the banner below, will outline why an enforced Minimum Advertised Pricing policy makes for a better business relationship for your entire business network.