When they set out to develop a MAP or other resale pricing policy, most manufacturers are thinking about what the policy will mean in terms of their retail partners and how it will help them control their products’ retail prices.
But what if the manufacturer or brand sells through intermediaries — distributors or wholesalers who then sell to retailers? How do those distributors or wholesalers fit into the resale policy scenario?
This is an important question to ask, because those intermediaries can play an important role in helping a manufacturer protect its retail partners’ margins, reduce the instances of resale price erosion, and safeguard the company’s brand value and reputation. Or, if the manufacturer fails to develop the right role for them, these intermediaries can actually help create these very problems.
Unfortunately, many manufacturers completely overlook their distributors and wholesalers when they roll out a MAP or other pricing policy. And this can lead to resale pricing chaos. Let’s review a few of the most common mistakes, and then discuss how manufacturers can make their distributors or wholesalers productive partners in protecting their resale pricing.
Note: From this point forward, we’ll be using the term “distributor” to refer to either distributors or wholesalers.
3 Pricing Policy Mistakes Manufacturers Make with Their Distributors
1. Expecting their distributors to enforce their MAP or MRP policy. (Some even insist on it.)
Perhaps the most common misstep manufacturers make here is to demand their distributors actively enforce the company’s resale pricing policy.
Many of these manufacturers reason that because the policy is meant to control retail pricing, its distributors—the companies actually selling to the retailers — should be responsible for making sure those retailers abide by the manufacturer’s pricing policy.
Unfortunately, however, this approach doesn’t work. Distributors have their own business operations to focus on, and they won’t devote the resources to effectively police your company’s retail channel to make sure everyone is advertising or selling your products at the prices you’d like.
It may not even be feasible to expect your distributors to disseminate your policy itself to the retailers they sell to. Some distributors will, others won’t. There will always be holes in that process.
2. Asking their distributors to draft their own MAP or MRP policies for the brand’s products and enforce those policies with retailers.
A more dangerous mistake is when a manufacturer actually demands its distributor develop its own MAP or MRP policy based on the manufacturer’s products, and then enforce that policy with the retail businesses the distributor sells to.
The problem here is that by having a third party in your supply chain develop a pricing policy for your company, and then allowing that party to enforce the policy, you might have stepped over the legal line and unknowingly created a resale price agreement.
When it comes to drafting and enforcing a minimum advertised price (MAP) policy, this could put your company in legal jeopardy with antitrust regulators. If the policy you’ve agreed to let your distributor enforce is a minimum resale price (MRP) policy — controlling not just advertisements but the actual selling price — then you’ve almost certainly violated antitrust law. And you will find that claiming ignorance of “where that legal line was” will not gain much traction in court.
3. The manufacturers fail to limit the network of distributors who can buy the brand’s products and the network of retailers whom those distributors may sell to.
Finally, another common strategic error many manufacturers make is selling their inventory to distributors and then failing to place any restrictions on the retailers those distributors may sell to.
This is how many of the gray market problems begin — because rogue retailers will use all sorts of ruses to buy inventory from your distributors with no intention of adhering to your pricing policy or any of your brand’s other reseller rules and guidelines.
The 2-Step Solution
So, how can you enlist your distributors to help you protect your retail partners and prevent resale price erosion — the very reasons you went to all that trouble to develop a MAP policy in the first place? Here’s a two-step solution.
Step 1: Create an Authorized Dealer Program, and Restrict Your Distributors’ Sales to Those Companies
If you want to make sure your distributors aren’t selling to the wrong retailers — which can undermine your resale pricing policy, because those rogue sellers don’t care about it — you need to give those distributors clear rules about the companies that they can sell to, and those they can’t.
Our advice: Set up an authorized dealer program, an opt-in program where you restrict the retail businesses allowed to represent your brand and sell your products to those you specifically add to your authorized list.
You’ll need to develop some screening criteria for this program, an application process, and a set of guidelines and consequences for violations (similar to your MAP policy). If you’re interested, we’ve written about authorized dealer programs.
Once you have your list of authorized dealers, you’ll give it to your distributors and let them know they are allowed to sell only to retailers on that list.
Step 2: Start Monitoring and Enforcing Your Resale Pricing Policy
Okay, you’ve taken steps to limit the “leaks” in your supply chain that could cause your products to end up online on a rogue retailer’s sloppily-written sales page for a price that violates your MAP pricing.
Your next step is to set up a system to effectively monitor and enforce your pricing policy — because now you know you can’t lean on your distributors to do that for you.
Our advice: Don’t try to do this in-house. Monitoring your products all across the web, at all times, is simply an impossibly large task to effectively handle without help — ideally automated help, from software designed specifically for price monitoring and enforcement.
