I’ve heard a number of manufacturers say that online sales are “a race to the bottom.” That’s a bit like hearing a dinosaur tell you that being warm blooded is overrated. While online sales certainly aren’t right for all types of products, e-commerce often provides a superior experience for purchasers – usually because it’s easier and faster. Research from Forrester has shown that 49% of B2B buyers have intended to buy a specific product then purchased another product because it was easier to buy online. 88% of executives purchase products online. $1.1 trillion of B2B sales are projected to move online by 2020. This will likely only accelerate with generational change, as younger purchasers are far more likely to make B2B purchases online.
There is, however, a legitimate concern that e-commerce, with its much more public pricing, causes downwards pressure on prices. This is strongly exacerbated when selling through distribution – particularly if you have multiple distributors in the same country or who sell in the same currency. Especially in the United States, there is an endemic of discount, online retailers who add little to no value while encouraging price competition and therefore decreasing margins and disincentivizing other distributors from spending on marketing or support. They are effectively leeching off other distributors and, if domestic, off the supplier itself. This creates a situation where pricing is no longer based on value (which has been proven to capture more value) but rather based on cost, with distributors selling at the lowest margins they are willing to accept regardless of the magnitude of the discount the supplier provides. Low margins erode your distributors’ ability to spend on marketing and provide quality support.
Fortunately there is one simple solution to all of these issues; One that prevents the “race to the bottom,” disadvantages distributors who cannot add value to the sale, and potentially allows suppliers to recoup value for themselves. That solution is a strong and enforced minimum advertised price policy. We strongly encourage minimum advertised prices any time where there is competition between sellers of the same product, be it distributor-distributor or supplier-distributor.
MAPs: Encouraging Good Competition
A minimum advertised price (MAP) policy is either a contractual or informal agreement not to advertise products below a specified price. (We strongly recommend that MAP policies be written into distribution agreements to increase their ability to be enforced.) The MAPs may be individually specified for each product or they may be a fixed percentage of all product prices. Distributors who are found to violate the policy are usually given notice and have a specified amount of time (set in the agreement) in order to bring their advertised prices in line with the MAPs. Those who do not may be subject to a range of penalties, varying from reduced discounts to immediate suspension of the distribution agreement.
An enforced MAP policy protects distributor margins, enabling spending on marketing and support, which help drive demand and improve customer experience. It disadvantages distributors who are not adding value to the sale, since by eliminating price competition it forces distributors to compete based on customer experience. These improved customer experiences are positive not only for the customer but also for the brand, since an improved experience will lead to increased overall satisfaction with the brand.
If your distributors are giving deep discounts in the absence of an MAP policy, that probably means you’re discounting more than necessary to begin with, and therefore throwing away value. If you are confident that your pricing is competitive, there should be no need to discount. By discounting, your distributors are affirming that they have more margin than they need. You can therefore reduce distributor discounts and retain more value, or institute a higher MAP and give more value to the distributor, thereby encouraging sales. As most suppliers advertise their own list prices by default, any distributor discounts in areas where you sell direct potentially allow your distributors to undercut you. (We’re big proponents of setting competitive list prices then having MAP set to the list prices.)
Competition based solely on price is detrimental to the distributors, the supplier, and the supplier’s brand. By establishing and enforcing a minimum advertised price policy, you’ll largely eliminate bad competition and replace it with good competition that elevates the brand by requiring competition be on the basis of enhanced customer experiences. You’ll reward your best distributors, discourage the discounting “leeches” who don’t add value, and potentially be able to claim more value for your own company as well.