Profit margins are being squeezed harder than ever.Amazon sells products with little concern for making a profit. Walmart and the many discount retailers are fighting to stay price competitive. There are retailers selling your products at prices barely above what you sold them to distributors and retailers. Your other retailers may wonder why they should feature, or even carry a product, that does not produce a profit.
Did your brand start its own direct-to-consumer ecommerce store to deliver better profit margins? If so, how does your brand convert buyers who can check your prices on Google and find retailers who are selling your products at much lower prices? You are in a bind because your D2C store must be price competitive without undercutting your retailers. That is no easy task.
There is a solution to put some controls into your product pricing and to maintain better profit margins for your retailers and for your D2C store.
How do you prevent price cutting that kills profits?
Your MSRP (Manufacturers Suggested Retail Price) largely determines what your distributors and retailers will pay you. The price cutting comes after that because retailers can charge whatever they want. If one of your resellers is pricing your products below what should be a reasonable profit, then all your retailers will pay the price of lower sales and/or lower profits.
You can protect profits by implementing a MAP (Minimum Advertised Price) policy that is designed to prevent resellers from advertising a product below a minimum price. This will take some work and legal advice. But the end result is better profit margins for your authorized retailers and your ecommerce store.
MAP will help your brand’s D2C store be more price competitive. If you structure a tight gap between your MSRP and your MAP, your ecommerce store will be more successful.
Your brand’s store has a competitive advantage no one else can have. Consumers will give your brand first dibs to a sale because consumers prefer to buy directly from the brand. You win those buyers by offering the best product information, customer service and support, ease and timeliness of ordering, delivery and returns. In other words, the best buying experience. However they won’t purchase from your store if they can buy your product for 30% less somewhere else. MAP will help close that gap. You will boost your price competitiveness online, and thus make it more inviting for consumers to buy directly from your brand’s store.
Don’t be short-sighted
Some brand managers and marketers may not care if their retailers suffer from negligible profits selling their products. After all, distributors and retailers already paid their wholesale price. Why should they care if the cutthroat competition eats up their retailers’ profits? The cheaper the products are, then the more they will sell.
That is short-sighted on several levels. First, the lower prices mean consumers will have a diminished perception of the product’s value. If your brand has established quality value, that devaluation should concern you. Second, MAP will help you keep and attract more retailers because MAP agreements protect their profits, resulting in more retailers carrying your products. MAP is especially attractive to brick and mortar stores who find their inventory is there for “showrooming,” with the purchase completed online with another retailer. By closing the gap of advertised prices, the consumer is more likely to take the product home right there from the brick and mortar store.
MAP requires expert legal advice
You should use a lawyer who is expert on anti-trust law and MAP agreements. Cookie-cutter MAP agreements can be trouble. Your MAP agreement must be structured based on your relationships with your retailers, your brand’s market demand, your customers, and more. The right lawyer will help you establish MAP agreements with all your retailers.
You should give something in return for a retailer accepting a MAP agreement. Coop advertising dollars or better wholesale prices are common. You could grant exclusives such as special products.
After establishing a MAP policy, you have to enforce it evenly across the board. Google makes it easier for you. Search your products and Google Shopping will give you a list of who is selling them and at what price, just like that savvy consumer who is price shopping. You must enforce MAP across all your sellers or you will undermine your MAP program. You will suffer loss of trust with your retailers as well as possible legal vulnerability.
You have to look for retailers beyond whom Google finds. Those are the ones who are more likely to violate your MAP. They are under the radar for some reason. They may be buying from gray market distributors whom you need to identify and cut off. Or worse, they are selling counterfeit copies that you better stop before your brand’s reputation takes a hit.
Then there is Amazon.
Amazon is the Wild West of retail. You should expect to do the policing yourself. You better do it aggressively and consistently. Amazon might end up helping you. However you should expect to do all the heavy lifting.
Find those retailers who are violating your MAP. Contact them and ask them where they are getting your products. Tell the violator that they are not authorized to sell your products on Amazon. A cease and desist letter from your attorney is appropriate.
If they will not identify where they bought your products, then you have grounds to go to Amazon and complain that the retailer is selling counterfeit products, seconds or knock-offs. You need to stay on Amazon because they can be slow to act in these situations.
You can void warranties for products not bought from authorized sellers. Amazon condition guidelines demand that “New” include “Original manufacturer's warranty, if any, still applies, with warranty details included in the listing comments.“ Brands can make the claim to Amazon that an unauthorized seller cannot list your products as “New” because they did not buy from you, and thus do not have warranty coverage.
There is a payoff from all this hard work
Online selling has too many players who could care less about the rules. Nonetheless you cannot ignore the increasingly rapid growth of online retail. You have to adapt to the new ways of doing business and evolve your practices to thrive within the online environment. The economic incentives of online retail are outstanding.
And to protect your brand, your retailers and your D2C store, you should implement MAP and do it well.