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eCommerce advice: David, Goliath, and Minimum Advertised Pricing agreements (MAPs)

eCommerce advice: David, Goliath, and Minimum Advertised Pricing agreements (MAPs)

You may have noticed that prices for certain products are consistently the same across different retailers. No matter what website you're on, the prices always seem to be the same. Furthermore, the publicly advertised coupons always seem to top out at around 30% regardless of how many newsletters you sign up for to get better deals. 

Have you ever wondered why?

Well, it could be due to Minimum Advertised Pricing (MAP) requirements.

MAPs are agreements between wholesale suppliers and retailer distributors that set a minimum price at which a product can be advertised. These requirements are prevalent in many industries, but did you know that they are actually illegal in many parts of the world?

Let's dive deeper into what MAPs are, how they are used, and why they can be detrimental to retail businesses.

What are MAPs and how are they used?

MAPs are pricing policies implemented by manufacturers and wholesale suppliers to maintain a certain level of pricing consistency across their distribution channels.

Pricing is a sensitive and very important part of operating a business. 

By setting a minimum advertised price, manufacturers aim to prevent retailers from engaging in price wars and devaluing their products. MAPs are typically enforced through contractual agreements between manufacturers and retailers, and violations can result in penalties or loss of privileges.

Are MAPs the same as price fixing? 

When Minimum Advertised Price (MAP) policies are misused or improperly implemented, they can potentially devolve into price-fixing schemes, which are illegal. MAP policies are intended to set the lowest price at which a product can be advertised, not the price at which it can be sold. This distinction is crucial for maintaining compliance with antitrust laws.

However, if MAP policies are structured or enforced in a way that they effectively dictate the selling price, or if they are used as a tool for coordinating prices among competitors, they can cross the line into price-fixing territory. Price-fixing involves an agreement between competitors to raise, lower, or stabilize prices or competitive terms, and it is considered a serious violation of antitrust laws in many jurisdictions.

For example, if a manufacturer uses a MAP policy not just as a guideline for advertising but also to control the actual selling prices by retailers, it might be considered a form of resale price maintenance, which can be illegal, especially if it harms competition. Similarly, if MAP policies are used as a means for competitors to agree on pricing, they could be seen as horizontal price-fixing, which is typically illegal under antitrust laws.

For what it's worth, these are the signs to consider when trying to assess whether what you're witnessing across an industry is illegal price fixing as opposed to a legally compliant MAP: 

Key characteristics of horizontal price fixing include:

  • Agreement Among Competitors: It involves an agreement, whether formal or informal, explicit or tacit, among competitors to fix, increase, decrease, stabilize, or otherwise manipulate prices.
  • Restriction of Competition: By coordinating prices, the companies involved reduce or eliminate competition in the market. This often leads to higher prices, lower quality, or reduced choice for consumers.
  • Illegality Under Antitrust Laws: Horizontal price fixing is typically illegal under antitrust laws in many jurisdictions, including the United States and the European Union. It's often treated as a per se violation, meaning it's considered illegal without the need for detailed analysis of its effects on the market.
  • Impact on the Market: This practice can harm consumers and the economy by creating artificially high prices, reducing the incentive for businesses to innovate or improve their products, and potentially leading to a market that is less responsive to consumer needs.
  • Enforcement: Antitrust authorities actively investigate and penalize horizontal price fixing. Penalties can include fines, imprisonment of individuals involved, and damages to be paid to affected consumers or businesses.

Shallow dive into why pricing strategy is important in business: 

Pricing is a sensitive and very important part of operating a business. One could argue that if you don't control the prices of your products, you can't control your margins. If that's true, do you really own a business?

Price strategy serves as a critical lever in defining market positioning, influencing customer perception, and driving revenue.

For prospective small business owners, establishing an optimal pricing strategy involves a multifaceted analysis of cost structures, competitive landscape, and customer value perception. Key considerations include assessing direct and indirect costs to ensure sustainable margins, conducting thorough market research to understand competitive pricing models, and aligning price points with the perceived value offered to customers.

Moreover, pricing flexibility and the ability to adapt to market changes can provide a competitive edge, making ongoing market analysis indispensable for long-term success.

How can MAPs hurt retail businesses?

While MAPs may seem like a beneficial strategy for manufacturers and brands, they can have negative consequences for retail businesses. Here are a few ways in which MAPs can hurt the small businesses selling name brand products under these policies:

1. Limited price competition: MAPs restrict retailers from advertising products below a certain price, limiting their ability to offer discounts or promotions. This can make it challenging for retailers to differentiate themselves from competitors solely based on price.

2. Reduced profit margins: MAPs can squeeze the profit margins of retailers, especially smaller businesses. If a retailer is unable to sell a product above the minimum advertised price, they may be forced to accept lower profits or even operate at a loss.

3. Stifled innovation: MAPs discourage retailers from experimenting with pricing strategies or offering unique deals to attract customers. This can hinder innovation within the retail industry and limit consumer choices.

4. Customer perception risks: Customers often seek the best value for their money. If a small business cannot offer competitive pricing due to MAP restrictions, it risks losing customers to competitors who are not bound by similar constraints or who offer substitute products at lower prices.

5. Inventory management challenges: Compliance with MAP can lead to overstocking, as businesses might find it difficult to move products quickly without the freedom to reduce prices. This can result in increased inventory holding costs and potential cash flow issues. (And for customers, this can manifest as very long and competitive backorder wait lists.) 

6. Market adaptability issues: In fast-moving markets, the ability to react swiftly to changes is crucial. MAP policies can hinder a small business's ability to adapt its pricing in response to market trends, economic shifts, or consumer demand changes.

7. Brand development limitations: Being tied to a supplier's MAP can also limit the small business’s ability to create it's own branding to differentiate itself in the market, especially if competing businesses offer the same products under the same pricing constraints with the same images and product copy.

Time for a relevant anecdote about name brand wig MAPs:

When I was a seller of name brand wigs, I hit every single one of the limitations in the section above.

As you might imagine, these pain points (above) become even worse when the supplier refuses to place caps on how many new online store accounts they decide to open in a given year or geographical territory. In that scenario -- one which I lived with for years -- the competition online and demands from suppliers making it harder to compete increased dramatically. This ultimately culminated in the suppliers either buying or launching their own direct to consumer (DTC) sales operations (online wig stores) to compete with my store (CysterWigs) and myriad other online distributors of their products.

The problem? It's a David and Goliath story hiding in plain sight.

The vast majority of online wig retailers are very small female-owned businesses with exceptionally tight margins, while the wholesale supplier entities are, in many cases, extremely large multinational corporations with predominantly male boards. (At least one is so large that it's publicly traded on the New York Stock Exchange.)

In my opinion, this is a kind of trap for new small wig store owners with hopes and dreams of making a living selling name brand hair goods. 

Very large suppliers set the prices (MAPs), and therefore exert nearly total control over the health, sustainability, and growth of the small businesses reliant upon them for products to sell. What's worse is that they not only control your supply and your prices, but they often place real constraints on your marketing to prevent you, as the small business, from ever getting big enough that you become a competitive threat by choosing to launch your own B2B wholesale wig brand. (If this doesn't work, they'll limit your ability to contract manufacturing time with a factory, but that's another story for another day.) 

If you're a small wig store owner in this situation, all of this means that there is no possibility of growing your small wig store beyond the limits of how large your suppliers will let you grow. They are competing against you and will use you as an extension of their marketing until you burn out, fade away, and are replaced by a new dreamer. 

And don't even get me started on how those well-funded suppliers deliberately monopolize the conversations about their products on social media, jacking up the price of marketing your store by flooding every channel with paid influencer campaigns that inflate the cost of your marketing while simultaneously limiting the reach.

And definitely don't get me started on how those same suppliers will secretly -- and not-so-secretly -- buy competing wig stores, enact incredibly generous return policies, and ship the items they receive as returns in the online stores they own as "brand new" products in the drop shipped orders of small wig stores they don't own.

And definitely definitely don't get me started on how the promotional material of supplier-owned DTC online wig stores will "accidentally" show up in shipments for the customers of competing stores. Or how they pay influencers to waive all this away as if it isn't happening to dozens of small online wig store owners every single day of the week. (In my case, this took the form of them paying influencers through intermediaries -- online wig stores they privately own. Those stores, which look independent but are owned by the supplier, would pay influencers to call me mean names in public to diminish my credibility. The suppliers used intermediaries to avoid the negative attention that would have been associated with their brand had they done it themselves. This is no small thing when marketing apparel to women, where negativity in any form can be toxic for a brand.) 

Yeah. Definitely don't get me started on those subjects. 😂😩

Seriously, though, the medical wig industry has a horrendous track record of handling B2B2C channel conflict and typically does so with all the grace and empathy of a classically trained narcissistic gaslighting abuser.

I digress. Part of the problem mentioned above is that MAPs kill innovation and competition, all in the name of giving wholesale suppliers more opportunities to capture wallet share with generous margins for themselves and more control over the perceived value of their products. 

Where are MAPs legal and why?

MAPs are legal in Canada and the USA.

Interestingly, MAPs are illegal in many parts of the world, including countries like Germany, France, and Australia. According to recent updates from the European Commission, while there seems to be a greater willingness to accept potential pro-competitive effects of MAPs in limited instances, it is explicitly illegal to sanction a customer for selling below MAP or to prohibit customers from discounting or communicating that a final price may differ from a MAP. 

In places where MAPs are illegal, you are much more likely to see Manufacturer's Suggested Retail Price (MSRP) used instead. The difference is obvious; just like the name implies, MSRP is merely a suggestion

The reasons for MAP illegality varies from country to country, but some common factors include:

1. Anti-competitive practices: Many countries have laws in place to promote fair competition and prevent anti-competitive practices. MAPs can be seen as anti-competitive, as they limit price competition and potentially create a barrier to entry for new businesses.

2. Consumer protection: Some countries prioritize consumer protection and believe that MAPs can lead to higher prices for consumers. By prohibiting MAPs, these countries aim to ensure that consumers have access to competitive pricing and a wide range of choices.

3. Market dynamics: The legal status of MAPs can also be influenced by the specific market dynamics of a country. For example, countries with highly competitive retail markets may be more likely to outlaw MAPs to foster healthy competition and prevent price-fixing.

It's important for both retailers and consumers to be aware of the legal status of MAPs in their respective countries. Understanding the implications of MAPs can help retailers make informed decisions about their pricing strategies, and consumers can make more informed purchasing choices.

In conclusion, MAPs are pricing policies that set a minimum advertised price for products. While they are commonly used in many industries, they are actually illegal in several parts of the world. MAPs can restrict price competition, reduce profit margins for retailers, and stifle innovation. The legal status of MAPs varies from country to country, with factors such as anti-competitive practices, consumer protection, and market dynamics influencing their legality. By staying informed about MAPs, both retailers and consumers can navigate the retail landscape more effectively.

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