Minimum Advertised Price (MAP) violations are a common problem for brands in the retail industry, with the most obvious implication being that your brand’s products are being offered at different prices day-to-day and channel-to-channel.
Brands take great care in maintaining a consistent image and reputation in the market, and ensuring stable pricing is part of that effort. However, the implications of MAP violations go much deeper than branding.
As a retailer with over a decade of experience in the sports and outdoor category, I have seen firsthand how a lack of proper MAP enforcement can lead to significant issues for both retailers and brands.
In this article, I want to share with you my experiences and the methods retailers resort to when MAP policies are not enforced. Specifically,
Inventory returns to the brand
Gray market selling to unauthorized sellers
It All Starts with Retailer Forecasting
Retailers use their historical sell through and online marketplace data to determine how much of your product they’ll order. Importantly, this is based on the assumption that the brand has a stable pricing landscape so, as a retailer, they can focus on competing to sell your brand’s products using their reach, marketing, and reputation.
When other retailers violate MAP by selling at a lower price, it leads to a decrease in sales for your retailer holding prices at MAP. This is especially problematic on marketplaces, such as Amazon, where price is the number one criteria for winning the Buy Box (ie. getting the sale).
So why do you care as a sales leader for the brand?
Well, your retailer now has a pretty big problem on their hands - they forecasted for a certain level, and now are sitting on a mountain of unsold inventory. In a low margin (and highly capital intensive) business like retail, they aren’t going to eat the cost due to you not enforcing your MAP policy consistently. So what are their options?
Number 1: Become a MAP Breaker
If everyone else is breaking, why not break yourself? In order to compete with other retailers selling at a lower price, your retailer can start undercutting and creating a race to the bottom. This further aggravates the problem for brands, as it leads to even more retailers violating their MAP policy.
If your retailer values the brand relationship, they probably won’t want to take this route because it shows the brand (in a very public fashion) that you don’t support their reputation and policies. That’s usually a one way ticket to getting yourself cut off from the brand.
Number 2: Return Product to the Brand
This is where we start getting into the big hidden cost for brands when it comes to MAP policy enforcement. When market conditions and small inaccuracies in forecasting are at play, it’s not uncommon for brands to work with their retailers to return or exchange unsold products. When that number is a 5% return rate, it’s reasonable; however, when brands are not taking care of their MAP landscape, these violations can result in retailers having upwards of 60% of their inventory being unsold (I’ve been there!).
Let’s take a look at an example that I experienced with a brand in the snow sports category:
We purchased $100k worth of winter season inventory to supply our Amazon channel. By the end of the winter season we still had $60k in inventory (all the result of holding MAP, while other retailers sold for discounts between 10-30%). When our Net 90 Invoice came due, we were unable to pay because of the severe underperformance of the brand, so we had to work with them to return the unsold product (with a 15% restock fee).
At the end of this ordeal, the brand ended up with a $1,000 loss instead of the $50,000 profit they were expecting. That’s $49,000 of missed profit for the brand!
This is a lose-lose for everyone involved - and this doesn’t even take into account the time and shipping involved to process those returns.
Due to the losses experienced here for both sales targets and profit, brands typically limit the amount that can be returned. Good thing there’s another trick out there if you’re a retailer.
Gray Markets: Liquidation Sites and Unauthorized Selling
There just isn’t room for a retailer to write off significant amounts of inventory, especially when it’s
the result of something out of their control, like inadequate MAP enforcement from the brand.
This is when retailers turn to gray markets - which refer to products that are sold outside of the brand's agreement with the retailer. The goal of this is to sell through inventory at a sharply discounted price to recoup as much as possible.
Some commonly used gray market options are:
Creating secondary marketplace accounts under different business names, so they are not tied back to the retailer
Selling inventory to local sellers or pawn shops that have Amazon/Ebay accounts
Using liquidation sites that auction off inventory by the pallet: liquidation.com, liquidatenow.com, bstock.com, and more.
These buyers then end up on sites like Amazon, where they can sell your products at wholesale cost and still make a profit. This is how you end up with a complicated network of unauthorized sellers wreaking havoc on your online presence, creating further issues with MAP. And the cycle continues…
Conclusion
I have seen firsthand the detrimental impact of inconsistent enforcement of MAP policies on retailers and the resulting inventory and supply chain losses it causes for brands. To prevent these issues, it’s essential for brands to not only establish a MAP policy, but also implement a robust monitoring and enforcement system. Using a software like Prism Commerce that tracks MAP violations and provides a streamlined process for communicating with retailers is an effective way to achieve this.
By working together, brands and retailers can protect the interests of both parties by improving forecasting conditions for retailers and reducing inventory returns and unauthorized sellers for the brand.