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Manufacturer Suggest Retail Price (MSRP) vs Minimum Advertised Price (MAP) - Explained
Due to the fierce competition in the online shopping world, one of the common questions we’re asked by clients, is how they can keep control of product pricing. After all, when you sell to a distributor or to a retailer you’re selling at a discounted rate. The price resellers pay is determined mostly by your MSRP (Manufacturer Suggest Retail Price). But once they’ve paid, they can then sell at whatever price they deem profitable to them. So if your MSRP is $50.00 and you sell to a retailer at 50% discount, they have the potential to make $25.00 profit. But if they’re willing to make less they can undercut the competition.
When this happens, and the price war kicks in, your MSRP goes out the window and your phone starts to ring off the hook with complaints from resellers. Usually it’s the brick and mortar stores complaining about the cutthroat pricing the online players are offering. But it can be other online resellers complaining too.
The solution (or rather prevention) is MAP
When we’re working with new companies and we’re discussing pricing strategy and sales channels - we always bring up their reseller agreements. It can be a dicey conversation, since many eager entrepreneurs will take any order, and don’t want to potentially complicate sales with legal agreements. However, the smartest will listen and can understand how implementing reseller agreements from the start will circumvent problems (such as price wars and reseller disputes) later.
Reseller agreements can be complicated things and its definitely a document you’ll need legal counsel to do right. But virtually all of them should stipulate that the reseller agrees to a minimum advertised price.
So what exactly is MAP?
A minimum advertised price is just that - it’s the agreed price a reseller agrees to advertise a brand or product at. There may be some wiggle room, but generally, when a reseller accepts the agreement, they’re stuck. They can’t advertise a product for sale any less than the agreed price. This means in print, online, or any where. Of course, this doesn’t mean they can’t sell the product cheaper, they simply can’t display a cheaper price. And well, if the lower price isn’t shown, it’s hard to discover it.
MAP does not equal price fixing
While collusion to maintain a fixed price or profit margin is illegal in most circumstances MAP policies are legitimate and valid - if done correctly. First, and here’s the big differentiator - MAP pricing does not limit the actual selling price. It simply sets the minimum price a product can be advertised at - whether that’s in print or online.
Apple computer is a perfect example of this policy. It’s rare that you’ll see any sale or larger discounting on Apple products - regardless of the size of the reseller. Apple controls their displayed pricing in two ways. First, their reseller agreements certainly dictate MAP price points - and secondly, they offer slimmer than normal margins to their channels - the later reduces the incentive to discount heavily. They also strictly control the inventory levels dolled out to resellers - to prevent steep discounting or clearance pricing. In fact, one of the few times you’ll ever see bargain pricing on Apple products is when a retailer has decided to discontinue selling Apple. But because they’re usually not sitting on a large stock pile of inventory, this rarely happens.
Why would a reseller accept MAP?
Resellers are adverse to risk. They certainly don’t want to take on new brands and products that they’ll be undercut on by other resellers. They want to have some cost control and profit assurances. MAP affords them some protection. They know that if they buy your product to sell, they won’t necessarily see it online tomorrow advertised for way less. Likewise, generally, by accepting MAP the reseller will gain something in return. And this is the important motivator. It may be co-op advertising dollars. It may be exclusivity or specific territories. Or it could simply be better wholesale pricing.
What about eBay and Amazon?
Of course, the “right of first sale doctrine” and the abundance of steep discount offers means you’ll always find “deals” online. Steeply discounted products that don’t adhere to your MAP - and probably don’t have to. For instance, if you or a reseller, offer a promotional discount, perhaps buy one get one free (BOGO) - you’ll get savvy shoppers that scoop up these deals and then resell the products at a discount. And since they’re working with virtually no overhead, they may be willing to live on a few dollars of profit.
Our advice to clients in this area is usually two-fold. First, limit or at least monitor these types of sales and promotional offers. If you make such an offer and a customer suddenly orders dozens of them, there’s a good chance they’ll be on eBay in the morning selling for much lower than your agreed MAP. The end customer isn’t bound by any “reseller” agreement. So be careful when making BOGO offers. Secondly, if it’s possible, custom code products sold to resellers - so you can police products sold at steep discounts on eBay and Amazon stores. If the products all originate from a single reseller, they’re most likely running a dark retail site and are violating your reseller agreement. What’s a dark site? It’s simply a concealed retail footprint - usually on eBay or Amazon - where they sell their items under a different company.
So to recap - MSRP is what you’d like everyone to sell your product at - and you’re discounting levels are based on it. While MAP is the price resellers agree to advertise your product at - provided you’ve had them sign reseller agreements. So, make sure you have reseller agreements in place. Because after the price war is raging, it’s very, very hard to stop it - and resellers will be unlikely to either A) sign onto a reseller agreement or B) they’ll just stop selling altogether - since they don’t want to be undercut. Oh, and there’s a corollary too - if you plan on selling direct to consumers - you’ll want to sell at MSRP (so you don’t turn off existing or potential resellers) - and by having the MAP safeguard - you’ll protect your most profitable sales channel - direct sales. Just make sure you do MAP right, with the help of knowledgeable legal counsel, or you could run afoul of the law.
Feb 24, 2013
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