Manufacturer Suggest Retail Price (MSRP) vs Minimum Advertised Price (MAP) - Explained

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. Or 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.

More Reading:

  1. MAP Monitoring Service: http://www.mappriceprotection.com/home.html

Feb 24, 2013
By: William Levins


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There are 29 comments for this entry. Leave a comment below »


More comments

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aljorn Harry
Jan 17, 2017


@Melissa

I'm sorry Melissa, but sales tax is subject to so many variables, state to state, and even within municipalities - that we're not qualified to answer this question. You're better inquiring with your accountant or your State for information.

Bill Levins
Apr 25, 2016


Can you please explain the tax laws of an item at a register.
When using a coupon, and it says $10.00 dollars of purchase price of $20.00. Now is your tax rate based on $20 or $10?
Some coupons state clearly $ off of retail price and that is clear what I'm paying taxes on. Or I understand when an item is on sale I pay taxes on the sale price. I am confused however with the first example. At a particular store one manager said the taxes are based on the purchase price before the coupon is added and another manager stated the taxes are based at the purchase price which would be $10. After the coupon. I live in the state of California so or sales tax is 8%. Is my tax 8% based on $10 or $20? Big difference to me when you are on an extremely tight budget.
The coupon does not explain their (selling store) definition of a purchase price either.

Melissa A Roberts
Apr 24, 2016


@Jeannie

You’ve reached the morass that is the transition from direct only retailer to a distribution model. First, know you’re not alone, it happens to most. You sold direct, made a healthy margin, then as you gained popularity or as part of your strategy you started to connect with retailers and/or distributors. And while you might sell more items you’re earning less on each as you have to make room for their slices of the pie.

During the early stages of this transition it can become painful as your more profitable direct sales seep away to resellers (who offer better pricing or have existing customers). Which often leads folks to this blog post… once they start to research how to protect their direct sales and their profits. MAP offers protection against this dilemma but it’s difficult to grandfather into existing relationships unless you’re selling so well for the resellers that they’ll do anything to keep your line in their inventory.

The question you need to answer as quickly as possible is what type of company and sales channel do you want? You can either be focused on direct sales and higher margins but then must accept the higher cost of acquiring customers and marketing. Or you can choose to adopt a distribution model (which doesn’t preclude you from selling direct). Distribution offers benefits such as it’s easier to target resellers at industry trade shows and online. You can focus on marketing to resellers instead of the general public (though you shouldn’t stop advertising completely). The tradeoff is having to reduce your margins - often substantially.

You mention your profit is low… this can be an indicator that a reseller model isn’t workable for you. But then you also say the majority of your sales are derived from retailers now - so there is a mutual benefit to the relationship. You’re delivering a product their customers desire / need and they’re bringing customers to your brand (without you having to spend on marketing heavily).

It’s tough to advise whether you should abandon the reseller approach or embrace it with so little information. But MAP can offer you some relief, but as mentioned, it’s difficult to implement after you’re in a reseller relationship. I’ll assume you’ve already explored reducing your cost of goods and tried to increase or renegotiate reseller pricing (price increases do happen).

If you’d like to discuss this further we’d be happy to offer our consulting and marketing services.

William Levins
Dec 02, 2015


Lots of information here! Still trying to understand it all - we sell direct from our website; we are the manufacturer. We also sell to brick and mortar stores, where we offered a wholesale price. Now, many of those stores have taken to Amazon, etc, and they sell way more, at much less than our Website pricing. There are also some strictly on-line stores that we sell too. We do have a MSRP in place, but not a MAP. Should we have? We have lost more and more of our sales from our own website, because it seems everyone is purchasing from Amazon. Consequently, our profit margin has dipped. Do we continue to sell to the on-line retailers, at wholesale price, but create a MAP so our own website is not undercut? Or do we create enough of a profit margin that it won't matter if we are undersold? Currently, our profit margin on each product is very low. We started out in business selling direct to the consumer. This worked great. But it all seemed to change without us understanding, and now most of our sales are to retailers. Help!

Jeannie Tucker
Nov 25, 2015


@scott,

I’ll keep your latest info in mind. I’ll admit, my post is over two years old and the interaction with Apple pricing relies on much earlier experiences than that.

Apple long ago did have “MAP like” policies when it had many more smaller resellers. I knew and worked with many of them. But it’s been probably a decade or so since Apple reorganized its distribution and then started opening its own retail storefronts. And many of these former small Apple guys have transitioned or closed down. So perhaps Apple doesn’t have MAP policies in place currently but then again as a leader in several markets - they have the advantage already.

William Levins
Oct 03, 2015


FYI- Apple does not have MAP agreements with anyone. Their policy is that they sell for cost to authorized resellers and they believe that if the reseller wants to sell for more or less than that price its their prerogative That includes advertising it at a lower cost- Here is an example: This Best Buy Flyer is full of deals and they have even gone below their own cost in the past on iPads and Appel does not care. Of course that is why Best buy is closing stores left and right.

http://deals.bestbuy.com/?category=featured+deals

The reason I am also certain on this is because I am an Apple Specialist and our channel believes Apple should institute MAP for all partners to help level the playing field for us small guys.

Thanks!

Scott Kirchner
Oct 02, 2015


@Erin

You’re facing the dilemma many businesses face - the choice between direct sales and supporting a reseller and/or distribution network. Direct sales are always the most attractive since they provide more profit and near instant feedback. But in the long-run, building a network of retail, resellers, and distribution can lower overall marketing costs and provide more stable income (if managed well).

But to answer your question directly - if you start to sell (or more accurately advertise lower pricing) below your MSRP - your resellers will likely become unhappy you’re competing against them directly. They’ve paid you, you’ve made profit, and now you’re directly competing agains them - when they’re trying to build business on your behalf and for themselves. It generally doesn’t end well - the resellers simply drop out of competing with you - it’s not worth their time to spend money to try to advertise your products only to have the sale go to you (if someone searches and finds your site selling at or lower than they are).

Our advice to clients who are trying to sell direct AND build a reseller business - you have to sell at MSRP or you’ll find it much, much harder to attract and/or keep resellers. Some retailers and/or distributors won’t even bring on manufacturers who sell direct - though that’s more rare today - but it still does exist. So it’ll come down to making a choice - do you want to build your business by selling larger volumes to retailers and distributors - or do you want to sell direct and trade volume for higher profit margins? Both strategies can work and each has pros and cons.

Also remember - it’s the advertised price you need to stick to. That is, your website should always display the MSRP, but that doesn’t preclude you from offering email discounts to existing customers - provided you don’t undercut your resellers. So you could advertise at MSRP and then offer a 10% savings via email or via pop-up or such. You simply shouldn’t advertise a lower price.

Then there’s also the slight gray-approach of selling through either Amazon or eBay or similar online entity that you create and/or control. Where you’re selling your own products as a “reseller” and therefore sell at the lowest MAP pricing allowed. Though this can be tricky to do without aggravating resellers if you do it in the open. So many folks do it “secretly” by setting up another business entity with no connections to themselves and sell via this new business. It incurs a little bit more overhead but it does provide higher margins.

Hope that helps.

William Levins
Sep 21, 2015


I do not understand why, as the producer, I would want to sell at full price, MSRP, while letting my reseller's sell at a discount, MAP. The problem I am runnng in to is that for higher priced items, as in $300. MSRP, I have set this price because when I use a reseller I need to make atleast $150. to cover my costs and some profit and standard marke up is 50%. For both the reseller and myself, selling direct, the $300. is a little high for the product. We are both concerned that it will not move. If I offer lower MAP pricing, say 10% off the MSRP, so $288. in this example. As the producer, why would I need to keep my pricing at the full retail of $300? I do not need that margin myself. I don't understand why I would take myself out of the competition for sales. My understanding is this is what is expected of the maker/producer. Any advice?

Erin
Sep 17, 2015


An issue I'm running into is that my direct import customers buy HUGE amounts at a time, so their cost can be up to 25% less than others. They've been our customer for years. While my online dealers are asking for MAP pricing to be protected from being undercut, my larger ones won't be happy with a new MAP policy as they are the ones doing the undercutting. While I understand that they can still do coupons, or "view in cart" pricing, they like having the advantage that their buying power gets them. How do I get the bigger resellers to comply now after so many years?

Lynne
Jul 23, 2015


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