For manufacturers, keeping their products on the MAP involves more than having a great distribution network.
MAP or minimum advertised price is an agreement between manufacturers and resellers that set the minimum price the reseller can advertise the product. It does NOT set a minimum selling price – that constitutes price fixing and is usually illegal.
Muddying the waters a bit is another well know acronym, MSRP (manufacturer’s suggested retail price).
What is the difference MSRP and MAP, and how can they benefit manufacturers and distributors?
MSRP is used by manufacturers to help determine their selling price to distributors and retailers. Manufacturers sell their products at a wholesale to retailers and distributors.
A primary factor in determining the wholesale rate is the MSRP. For example, if the MSRP for a product is $100, the manufacturer sets their wholesale rate at $55.
Retailers and distributors now have the potential to earn up to $45 in profit depending on where they set their own prices. Leaving out MAP for a moment, in the example given, distributors and retailers can significantly undercut each other resulting in the manufacturer dealing with fallout from frustrated resellers complaining about unfair pricing.
Enter the MAP agreement. In the example given, the manufacturer still sells their product for the wholesale price of $55; however, they also sign an agreement with each reseller that sets the minimum advertised price at $75.
In this scenario, none of the resellers can advertise the product for less than $75 and the manufacturer no longer needs to be concerned about price wars among its distributors.
It’s easy to see the appeal of using a MAP agreement for a manufacturer, but why would a reseller want to enter such an agreement?
Resellers are relatively risk averse. The last thing they want to happen is to take on a product only to find it being advertised by their competition for significantly less than their own intended price. MAP provides them with a level of cost control and profit assurance and generally carries some extra motivator from the manufacturer.
Manufacturers will often offer co-op advertising dollars, exclusivity or territory rights, or better wholesale pricing for those resellers that enter a MAP agreement with them.
Despite all the benefits MAP provides, there is still enough motivation for resellers to try to maximize market share or boost sales volumes that 20% of resellers violate MAP all the time.
Nearly 20% of retailers not only violate MAP all the time, they violate it on every product they sell. Over 60% of resellers violate MAP on some of the products they sell.
These violations are not simply a matter of a few cents here or there. Violators on average priced their products over 14% below MAP.
Violations tend to occur more frequently when:
The product is in broad distribution.
The MAP policy is expiring in the near future, or over weekends.
Unauthorized retailers are involved.
Marketplaces such as Amazon and eBay are involved.
More than 30% of products sold on Amazon and over 40% of products sold on EBay are in violation of MAP. For online stores, slightly less than 30% of products are in violation of MAP agreements.
On marketplaces, a single seller selling a single item below MAP can have a huge domino effect. Given the frequency of repricing, once one seller sets their pricing below MAP, others will inevitably follow suit.
Violators of MAP may be able to boost their own sales in the short term, but in the end, they are driving the price of the product and margins lower. Manufacturers rely on MAP to help maintain retail value so they can continue to sell at wholesale prices.
Reducing the retail value of the product will force manufacturers to raise their wholesale pricing, which hurts everyone, violators included, in the end.
Monitoring MAP is critical to any manufacturer and given the prevalence of violations, it certainly seems that many manufacturers are not doing such a great job. We have outlined a few strategies that will help you stay on MAP with distributors and retailers:
Automate your monitoring. You cannot possibly be a 24/7 watchdog. Aside for the time needed to manually check for violations, with the rapidity of price changes in the market, it is unrealistic for any manual process to be accurate enough to be effective. Use systems and software to keep track and keep you alerted.
Identify the worst offenders. You will NOT be able to catch everyone. Monitor the worst offenders and focus on dealing with them. According to the Pareto Rule, 20% of sellers will violate MAP 80% of the time – focus on that 20%.
Target top sellers. Narrow your focus to the top sellers that are constantly violating and put your efforts to dealing with them. Your efforts will have a much bigger impact on top sellers given the volume of their larger market share.