The idea behind minimum advertised pricing is that producers can protect their brand image and avoid brand erosion. If product A is sold at $1000 in 9 stores and $700 in one all the time everyone understands that the nine will start lowering prices and erode the price image of that brand. Thus MAP strategies are enforced by brand owners and producers. Minimum Advertised Pricing is the lowest price that retailers can advertise the products. It is important to remember here that it’s not the lowest price that they can sell at but in fact the lowest price they can advertise.
Logic behind minimum advertised price
MAP is about protecting the value of a product or a service. Manufacturers don’t want their products to be undersold in the market.
Consider the example of laptops, if it was being advertised as $299 while its price was $499, the company behind it would be seeing its product being undervalued and its consumers will see it as a manufacturer with cheap goods.
Now this will hurt the brand and the company but also those retailers that are actually following the MAP price (since customers will opt for a retailer that is advertising a lower price compared to others that advertising higher price).
Leveling the competition
With minimum advertised price, manufacturers are able to level the playing field and ensure everyone makes a profit at the same level.
MAP helps in avoiding a “race to the bottom” phenomenon for retailers that may want to increase their sales by reducing the prices. For retailers that are in the eCommerce, cutting prices is one of few ways through which they try to increase sales, since with each passing day, competition is increasing online.
Isn’t it illegal?
Bear in mind that MAP isn’t restricting sellers from selling at whatever price they want – it’s restricting them from advertising a price that can harm a product or service. If the MAP price is $499, a seller can sell it at $399 if they want, they just can’t promote the price as $399. A manufacturer will be breaking the law if they restrict sellers from charging prices that they want – they can however tell them not to advertise it below a certain price.
Before we go further, I advice you to also read our article of MSRP since it’s closely related to MAP.
Why do retailers follow minimum advertised price?
Retailers might not like to listen to manufacturers but in retrospect, they can really benefit from MAP policies.
Stopping price wars
Implementing MAP uniformly results in everybody being on the same price floor. This helps in stopping price wars and provides protection to smaller retailers. It’s an agreement between sellers and manufacturers that creates a partnership and trust between the two parties.
Every seller knows that they can find a sweet spot between a price they want to sell and the MAP, meaning they can earn a profit and maintain a good rapport with the manufacturers.
Your competitors might stumble
Another benefit of following the MAP policies is that you can enjoy greater market share. Products can be taken off of your competitors shelf, if the manufacturer catches them violating the MAP.
Where does this leave you? You will feel like the best way to go is to lower your prices as well, but don’t do it as it will only trigger a price war, causing you not only to take losses but also lose your manufacturer.
Minimum advertised price and manufacturers
For both the retailers and the manufacturers, following the MAP is a win – win situation. Retailers can possible form partnerships, when the manufacturers brand is left unscathed. Best part about minimum advertised price is that it creates a price floor for retailers – a boundary that separates between price wars and selling safe.
Why manufacturers follow MAP
There is a misconception that by following MAP, a retailer is actually benefiting the manufacturer.
But this is not the case. While you can choose not to follow the MAP since sellers have the freedom to choose the price they want to promote and sell at, it can hurt the manufacturers and others that are in the same market as you. Manufacturers tend to penalize by terminating contracts and relationships with retailers, meaning your competitors will have the product and you won’t.
Protecting brick and mortar
Distribution channels can be protected using MAP policies. Using MAP greatly reduces risk of “show rooming”. Show rooming is when consumers visit brick and mortar stores to see a product but later on order it online due to discounts and offers. So by having a restriction on what price retailers can advertise, they help vulnerable sellers and level the playing field.