By: Benjamin Ruano
Entrepreneurs with a steadfast vision of introducing into the marketplace a uniquely useful or innovative product — those who skillfully craft its every contour and element of design, scrupulously examine and select its component parts, and exuberantly market the product to consumers and investors — understandably become crestfallen upon seeing their product advertised by retailers for much less than their suggested retail price. This scenario represents more than a mere stab at one’s ego or emotions, it may even adversely impact a nascent business. Entrepreneurs and manufacturers, however, have a potentially useful arrow in their quivers to contend with this dismaying situation: Minimum Advertised Price (“MAP”) agreements.
Of “value” and “price”
Most, if not all, things have no intrinsic value; “value” is a human construction, the argument goes (pardon the philosophical conjecture, but there is a point to this). “Value” in the marketplace, then, may be seen as an edifice of worth erected by consumers, retailers, entrepreneurs, advertisers and manufacturers alike. For instance, a consumer may perceive a product’s value (and the price she is willing to pay) to be much higher than the value or price a retailer ascribes to the same product.
As droves of consumers, retailers, manufacturers, and the like, proceed to weigh-in on their perceived value of a given product, over time the outward-facing sticker-price will begin to approximate and reflect the aggregated view of marketplace actors. This is a manifest oversimplification of how goods and services are priced (lest We forget supply and demand); but it is nevertheless a useful exercise in coming to terms with the fact that the prices of products you put forth into the marketplace are often in discord with how you as entrepreneurs value them. Indeed, in the aftermath of cold appraisal by rational actors—whom are largely disinterested in the viability of your company—you may not always end up with a price with which you are content.
To wit, there is a great tension between the aims of retailers and manufacturers. Retailers are in a highly competitive market and face pressures to advertise and sell at the lowest possible price; entrepreneurs and manufacturers, meanwhile, desire strong sales but also rely on particular price-floors to draw accurate revenue projections and confidently enter into financing agreements—and in some cases, to merely stay afloat.
A primer: “MAP” Agreements
Some market participants, such as large retailers that both advertise and sell products (e.g. Target and Amazon), have a disproportionate impact on where the price-dust settles. If certain products are being advertised (and sold) for far less than cost, it can hurt brand and product value while also hurting other retailers who are selling a product at MSRP (“Manufacturer Suggested Retail Price,” typically the total cost of producing a product plus an embedded profit margin). In a competitive marketplace, this scenario spurs a “race to the bottom” for retailers just looking to make sales by dramatically undercutting on price; this is especially critical for online retailers who more frequently are faced with new competitors.1 In an effort to guard against this “race to the bottom,” Minimum Advertised Price (“MAP”) agreements were conceived and quickly began to sprout about the marketplace. “MAP” is the lowest price a retailer can advertise a manufacturer’s product in online ads or print – note, this does not affect the price at which a certain product can be sold while in-store.
There are many pros linked to “MAP” agreements for manufacturers and retailers: 2
Protects brand equity
Maintains product value
Controls downstream prices
Coordinates channels prices
Protects profit margins
Prevents price cascading
Helps marketing efforts
Drives revenue growth
Since minimum advertised pricing only relates to advertised pricing and does not tell a retailer at which price they can actually sell it in their store, this type of collusion between manufacturers and retailers is perfectly legal under U.S. antitrust statutes. Departing from a 96-year-old precedent, the Supreme Court of the United States in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007) found that such agreements actually promoted competition and were per se “legal” – the only exception lying in situations where the price agreements are abused for illegal anticompetitive purposes, determined on a case-by-case basis and analyzed under the Court’s “rule of reason” standard.3
Two items are relevant to note: First, unauthorized retailers—those with no formal relationship with the manufacturer—are not bound by “MAP” agreements. Second, that online retailers have figured out a way to sell products for prices below “MAP” and skirt such agreements, with the blessing of the Federal Trade Commission (“FTC”) and the courts.4 In short, the FTC says that the price displayed in a secure or encrypted shopping cart is not subject to “MAP” agreements because it is technically not “advertising” once in a private cart. Have you ever seen, while online shopping, text to the effect of “price displayed in shopping cart?” You can thank a savvy lawyer for that.
To “MAP,” or not to “MAP”? An entrepreneur’s soliloquy.
A written, formally-executed “MAP” agreement between a manufacturer and retailer stating minimum pricing not only carries the potential benefits enumerated above, it also bears all the hallmarks of a contract - including legal remedies for noncompliance. This is somewhat comforting, but one taking this route must contemplate the legal costs associated with drafting a bespoke agreement, as well as the possibility that a retailer will eschew doing business with your company entirely, in terse response.
By comparison, in the event that no “MAP” agreement is signed, manufacturers have far less authority, and legal backing, to enforce their regulations or purely internal policies.
There is also the issue of enforcement. Supposing a “MAP” agreement was entered into and a retailer advertised your product below “MAP,” you would be entitled to pull your products from the retailer and restrict them from selling the product again. (Which begs the question: how many entrepreneurs have the constitution and willingness to pull a successful product from a big-box store or online marketplace?) Moreover, if dozens (or hundreds, or more) of these agreements are executed, consistent enforcement can be unruly and costly. Yet, by not consistently enforcing them you may inadvertently suggest to your retailers that they can renege on the agreement with impunity, effectively defeating your original purpose.
Nevertheless, these agreements seem to work. A recent study on this topic, undertaken by researchers at the Kellogg School of Management, revealed that just 15% of authorized retailers do not comply with their “MAP” agreements. As a best practice, the researchers suggested, manufacturers should have “a little flexibility” in “MAP” pricing definitions, which can actually benefit all parties. Manufacturers should understand that retailers are competing for business, and in consideration of this there may be a stipulation, for example, that a retailer is in violation only if it prices a specific product at least $10 lower than the “MAP”. Such flexibility might make it easier for the retailer to agree to enter into the agreement and might help manufacturers direct their limited resources at more egregious “MAP” violations.
Ultimately, affixing your best business judgment to the question of whether or not you should implement a “MAP” agreement is a worthwhile initiative—particularly as regards the “value” of your product. Indeed, by utilizing a “MAP” agreement you can at least afford yourself a more pronounced say as to what “value” (and price) you think your product should be accorded in the marketplace.