Ever wonder why you can’t get an iPhone for cheaper at Verizon than AT&T? The practice in certain industries is for manufacturers to establish a Minimum Advertised Price in their contracts that set a floor that retailers and distributors cannot price (or at least visibly price) below. It’s common in Apparel, Beauty, Phones and Technology, Software, and Toys.
While the legality of the contract is still in some debate, the more interesting discussion is whether it’s a good business decision. At first, it can seem like a great idea- especially where you have a strong and differentiated brand. The last thing you want to see is your product discounted and put on offer to the point where people start devaluing your brand. So the knee-jerk reaction is to simply forbid it, and use a threat of cutting off the relationship to enforce it.
But in the long term the market forces are stacked against MAP- so unless your products are strong enough to effectively create a monopoly (see Apple), you won’t pull it off.
1) Enforcement costs. The explosion of web-commerce systems make it easy for anyone to set up shop online and ship out of their garage or from a distributor. Costs of enforcement can add up, especially because the upside for violating MAP are high. Being the one person selling below MAP will drive huge demand. (The issue may soon be moot, as the “see price in cart” functionality popular at Amazon abides by the letter of the law, but effectively evades the spirit.)
2) MAP hurts your biggest retailers. Large retailers gain cost advantage through scale, and will want to use that cost advantage by reducing price to keep out smaller players. In a MAP environment, they can’t use it, and will see their market share suffer. This means the largest of your customers will be the least happy- presenting significant risk to your channel.
3) It encourages competitors. Maintaining fat margins through MAP makes it more attractive for others to enter the category. And one of your unhappy retailers may be the first to do so, creating a private label product that can undercut MAP products on price.
So rather than spend time and energy on MAP, it’s a better idea to put your firm’s resources to maintaining that strong brand and innovating. You can be pretty certain that someone else is doing so as you read this. For a pretty compelling argument on the topic, I recommend Richard D’Aveni’s terrifying Hypercompetition. It’ll keep you up at night.