Idea in Brief
Lured by rock-bottom online prices, customers often end up dealing with unauthorized resellers that do not provide the services intended for the product, eroding brand equity and the viability of resellers desired by the brand. Unauthorized resellers may mistreat customers by making false claims and selling recalled, out-of-date, or counterfeit products.
But brands have a potent defense: minimum resale price and minimum advertised price policies that discourage anyone from selling or promoting a firm’s products at an unauthorized discount.
This article lays out the four steps essential to designing and enforcing policies with teeth that stay on the right side of antitrust law.
When customers seek out online deals, it seems like a win for everybody: Brands, retailers, dealers, and distributors sell more goods, and buyers get a bargain. What’s not to like?
Here’s the problem: In the struggle to compete against rock-bottom online prices, brick-and-mortar stores are often forced to cut the services and inventory that customers expect. They may drop low-margin products and dispense with the in-store displays and staff training that have historically helped differentiate the brands they sell. They may even raise prices on certain brands and other goods that are less available online or begin charging for services that were once free. Customers lured by deep discounts may end up dealing with unauthorized, or “gray market” digital resellers that make false product claims or sell inferior or counterfeit products. They may also find that warranties on products purchased from gray-market resellers are invalid. All of this can erode brand equity, harm customers, and undermine authorized sellers.
For brands selling in the United States and Canada, there is a potent countermeasure: crafting and enforcing policies that discourage anyone from advertising or selling a firm’s products at an unauthorized discount. Brands that do this well—among them Apple, Bose, Samsung, Olympus, and Viking—retain their shine in part because their offers and sale prices, within narrow ranges, don’t vary. You can scour the web for a discounted iPhone 11, but you’ll almost certainly come up empty-handed. The scarcity of deals on certain products may frustrate consumers, but smart policies ultimately protect them as much as they benefit brands.
Drawing on Ayelet’s decade of pricing-policy research and Gene’s experience creating policies for hundreds of B2B and B2C brands, we’ll describe how best-in-class companies design and enforce policies with teeth. And we’ll discuss how to stay on the right side of antitrust law, a critical point when the line between enforcing a legitimate policy and price-fixing is easy to unwittingly cross.
Where to Focus
Because of price-fixing concerns, many countries, including Australia and those in the European Union, have banned efforts to set or influence resale prices. In the U.S. and Canada, however, companies can legally implement pricing programs in two ways: by agreement (in which a brand and a reseller agree on minimum selling or promotional prices) and unilateral policy (in which the brand independently determines prices). The latter is a much more flexible approach from a business perspective, allowing brands to adopt and change policies at any time without having to get resellers’ consent. In addition, unilateral policies, if done properly, carry little risk of running afoul of U.S. antitrust law at the federal and state levels. Under Canadian law, the distinction between agreements and unilateral policies is unimportant; however, the flexibility of unilateral policies encourages their use there too. Because unilateral policies are the best choice for pricing programs in both countries, we’ll focus on them in this article.
Pricing policies come in two broad types. Minimum resale (or retail) price (MRP) policies allow a manufacturer to set the lowest price at which a product can be advertised and sold. Minimum advertised price (MAP) policies constrain advertised offers only. Either type can apply to all resellers (digital and brick-and-mortar retailers, distributors, and dealers) or to digital resellers only.
If adopted and enforced unilaterally, MRP and MAP policies have been lawful in the United States for more than a century. (MRP agreements generally have been lawful for a decade or so, while MAP agreements have had this status since at least 1987.) Canada has generally allowed policies and agreements since 2009.
It should be noted, however, that pricing policies can still raise price-fixing flags and draw antitrust scrutiny in the United States if they are determined to in fact be agreements between a brand and a reseller on the selling price.
A unilateral policy is simply an announcement by the brand and must not be part of any agreement or negotiation between the parties. The brand is not “fixing” minimum advertised or selling prices; rather, it is “suggesting” or “recommending” them. Resellers are free to price as they wish, but if they price below a brand’s minimum, they can be punished by the loss of discounts, allowances, rebates, and even access to the brand. The minimum price may be just a suggestion, but the cost of ignoring it can be high. This may sound like legal hairsplitting, but it helps keep all involved out of trouble, as even a whiff of collusion on price can spark an investigation.
Of course, brands really have leverage only with their authorized resellers—those with whom they have a contract that spells out the terms of the relationship or to whom they otherwise sell directly. Unauthorized resellers that buy branded products from third-party sources and dump them on the market tend to be unconcerned about pricing policies, because losing financial incentives or product access is an empty threat. After all, they don’t receive such incentives anyway and shouldn’t be selling the brand in the first place. Being cut off is likewise not a concern, since they already have back-channel access to the brand. (Not surprisingly, a key part of effective pricing-enforcement strategy involves choking off supplies to gray-market resellers and applying other legal remedies, such as pursuing them for trademark infringement or deceptive advertising.)
Unilateral pricing policies can be effective weapons if they’re done right—but often they aren’t, with the results you’d expect. A recent study one of us (Ayelet) did of eight manufacturers that use MAP policies found that unauthorized resellers violated policies about half the time; even authorized resellers had a 20% violation rate.
Here we lay out the four key steps—planning, drafting, implementing, and monitoring and enforcing—essential to a successful pricing-policy program. The process may seem daunting, but the first three phases, if done well, are undertaken only once and have a relatively long shelf life. As a result, companies should not require long-term specialized legal and business help in those areas. In contrast, monitoring and enforcement are ongoing endeavors, and brands often use outside services that alert them of violations and otherwise assist with enforcement.
Let’s look now at best practices in each phase, with the understanding that brands should tailor MRP and MAP policies to their particular circumstances.
Generally, the more desirable a brand is, the more inclined resellers will be to discount it to attract customers (what retailer wouldn’t want to promote that it has Coach handbags or Goodyear tires for less?). Thus the more valuable a brand is perceived to be, the more important it is to have a strong policy. Of course, if resellers don’t value the brand enough to fear the ultimate sanction—having their supply cut off—then having a policy will make little difference. When Birkenstock, a relatively small brand, challenged Amazon about its lax approach to unauthorized resellers and then stopped direct sales to Amazon and forbade its authorized resellers from selling there, Amazon seemed to just shrug. Numerous unauthorized resellers of Birkenstock products still appear on the platform.
After determining that a policy makes sense, brands must ensure that key internal stakeholders embrace the long-term goals of preserving brand equity and maintaining a diverse group of resellers, even at a cost. Those objectives may clash head-on with short-term revenue and profit goals, as well as volume-based sales-force compensation structures, particularly when enforcing the policy means cutting off violators that are important to the brand. From senior management down, everyone with skin in the game, including marketing, sales, and finance, must be committed.
Finally, brands must make sure that those responsible for communicating the policy to resellers and enforcing it have the tools, budget, and resolve to do so. If, as is all too common, resellers are unaware of a brand’s policy or think it won’t be enforced, it might as well not exist.
Because creating a solid policy generally benefits from specialized legal or business expertise, most brands get some outside help at this stage. Our review of hundreds of MRP and MAP policies has revealed more variation than consistency. Some are as short as a single page, but the better ones are more comprehensive, providing clear guidance to resellers about what the brand permits (such as free shipping) and forbids (such as product bundling). Policies may be flexible or rigid, specific or vague, friendly and colloquial or more threatening and legalistic.
At a minimum, a policy should be written, not oral. Don’t laugh. Some companies treat their policies like folklore shared around a campfire and communicate them as such to resellers. This raises legal and business risks, including the suggestion that the brand isn’t serious about violations. A policy also must be clear about to whom it applies (wholesalers, ultimate resellers such as retailers or dealers, or all of these), where it applies, the specific products it covers, what activities constitute violations, what conduct is acceptable, and the consequences of stepping over the line.
Regardless of the type of policy, failing to follow its pricing constraints is always a violation, but many other behaviors related to price or advertising, such as couponing, free shipping, or bundling, may be permissible and thus should be addressed. Policies may also address nonprice issues such as how the brand is marketed (for example, use of approved images and trademarks in advertising), which reseller sites the brand may appear on, and whether exporting is permitted. It’s important to be explicit in these matters—especially with regard to the penalties for violations.
One study found that unauthorized resellers violated policies about half the time.
Simple enough, it would seem. But many policies fall short on even these basics. Ayelet’s study of nearly 500 MAP policies, for example, found that just 41% of them were clear about the consequences of violations. Lack of clarity, particularly when it relates to enforcement, can make companies seem timid or indecisive, inviting resellers to see what they can get away with.
The goal is to get compliance without having to actually enforce the policy. The brand should be explicit about what it will do if a reseller breaks the rules, not what it “may” do or “reserves the right” to do. Consequences should be automatic and sufficiently painful that resellers won’t be tempted to play games. A common policy mistake is to suggest that violations will be met with only a wrist slap, by alluding to unidentified “sanctions” or “rebukes.”
Garmin uses appropriately strong language in its MRP policy. After declaring that it will cancel all orders from first-time violators for a period of six months, it states that “a second occurrence will result [emphasis added] in the indefinite discontinuation of any further sales…to the dealer or distributor.”
The most effective policies make it clear that violators risk being cut loose. While some policies threaten to cut off rule breakers for a first violation, the more common approach involves escalating penalties with each infraction. For example, a reseller might get a takedown notice for the first violation, a 60-day loss of access to some or all of a brand’s products for the second, and so on. Many companies use a three- or four-strikes-and-you’re-out penalty structure, with the ultimate violation resulting in a complete cutoff. Ayelet’s research shows that compared with policies whose consequences for violations are vague, those with specific, escalating threats substantially reduce rule breaking. However, permitting too many “strikes” (typically, more than four) can backfire by implying that the brand isn’t serious about enforcement.
Regardless of the number of violations allowed, brands should send an unambiguous message that it is watching by pouncing on the first infraction and any that follow. Some brands periodically forgive violations across the board, wiping the slate clean for all rule breakers and even stating in their policies that they’ll do so at specified intervals. (For example, the MAP policy of one plumbing-fixture manufacturer states that violations are forgiven every 18 months.) While granting a surprise amnesty may be reasonable on occasion, the better approach is to stay silent on this topic, as publicizing a schedule for forgiveness invites violations, particularly just before they will be absolved.
Finally, while a policy must be clear, it shouldn’t be so rigid that it ties the brand’s hands or so onerous that the brand is reluctant to enforce it. The better policies incorporate some flexibility, such as providing for the temporary relaxation of provisions on an account-specific or across-the-board basis to allow for seasonal or other promotions as well as coupons or rebates provided by the supplier.
As noted, companies should use unilateral policies. It’s easy to inadvertently create an agreement that appears to fix prices. Sloppiness on this point can get a brand into trouble. For example, if a brand states without qualification in its contract with authorized resellers that the latter must follow “all” the brand’s policies, that blanket statement would by definition include the brand’s pricing policy and so constitutes an agreement on price. To avoid allegations of price-fixing, brands should explicitly exclude pricing policies from those its resellers must abide by.
Likewise, asking for or accepting pledges of compliance from a reseller or seeming to negotiate on price in any way is a no-no. For example, in 2015, Costco accused Johnson & Johnson of turning a unilateral MRP policy for disposable contact lenses into an agreement by allowing resellers to negotiate various changes to it, triggering protracted litigation involving much of the contact lens industry. In the same year, Utah outlawed all MRP and MAP policies and agreements for contact lenses.
A good way to reduce the risk of stumbling into an inadvertent agreement is to appoint a single, well-informed policy administrator to whom all reseller queries and comments are directed. This person, typically a channel or sales support employee, either is granted a great deal of autonomy or acts as a trusted spokesperson for communications between an internal policy committee and resellers. This model helps ensure consistent communication, interpretation, and enforcement, while heading off risky one-on-one discussions about prices between, say, a sales rep and a favored buyer in which the rep may find it hard to resist offering the buyer a deal—in the process, coming to a potentially troublesome agreement on price. Keeping sales personnel and resellers apart on resale pricing is particularly important, as sales force incentives (the greater the sales, the bigger the paycheck) and policy requirements (cutting off violators) can conflict. Salespeople are there to sell, not to be the policy police.
Monitoring and enforcing.
Enforcing rules is important in getting compliance. This is as true with MRP and MAP policies as it is with speed limits. Research by Ayelet shows that sending a notice to resellers when they’re discovered violating a policy results in improved compliance, and as might be expected, compliance falls when violation notices are discontinued. One brand implemented a new policy using notification emails that led to the termination of two violating resellers. The brand saw a 40% to 80% reduction in violation rates by authorized resellers within a few months.
Clearly, getting resellers to abide by a pricing policy requires credible threats backed by a demonstrated willingness to act. That, of course, necessitates catching rule breakers in the first place. That’s not easy. A brand with hundreds or thousands of authorized resellers may find that many are advertising not only on their own websites but also on one or more third-party sites such as Amazon. In addition, the brand’s products may be on thousands of brick-and-mortar shelves, with price promotions appearing on television, in circulars, in stores, and elsewhere.
It’s impossible for brands to constantly track all this activity, so many rely on outside companies with specialized expertise—such as TrackStreet and PriceSpider/ORIS Intelligence (for online offers) and Numerator and the Advertising Checking Bureau (for online and brick-and-mortar offers). Between us we’ve worked with all of these and more. Brands also use mystery shoppers to spot-check actual selling prices. Some supplement their efforts with what one company calls the “snitch network”—resellers who rat out violators. (That’s lawful, as long as there is no agreement with the complaining reseller on price.) At least one automotive aftermarket brand we know with a respected MRP policy regularly conducts random reseller audits and enjoys a high compliance rate in part because of it.
If a reseller is caught, brands should swiftly send clearly worded violation notices that carefully reference the violation (including proof of it, such as a screenshot, where possible). The brand should outline what it expects of the reseller in response (such as removing the offending offer within 24 hours) and state the penalty to be imposed if it fails to comply.
Above all, brands must enforce their policies uniformly. Failure to do so will undermine their credibility and jeopardize efforts to prevent resale price erosion. Moreover, differences in treatment can create a “rebuttable presumption” (something assumed to be true unless shown otherwise) that a brand cut agreements with those given a break. This means that for any given offense a brand must be prepared to levy the same punishment on its biggest or best customer as it would on others. Again, this requires that senior management and all internal stakeholders be on board with the policy. Birkenstock made sure to do this before pulling its products from Amazon as a penalty for its allowing unauthorized resellers to peddle discounted Birkenstock merchandise there.
Of course, a brand can still announce an across-the-board policy reset at any time, if it wishes. Alternatively, after cutoff, the brand may resume selling to those that it believes have learned their lesson, while continuing to deny other resellers access to its products. Such selective reinstatement is permissible because a brand generally can choose its customers and has no obligation to sell to everyone that wants its products.
Getting the Balance Right
Ultimately, pricing policies are about maintaining and improving brand equity, and decisions about them must be consistent with company values. Determining the “right” minimum prices is an art form that takes into account brand positioning and goals, resellers’ margin needs, and the competitive environment. Prices set too high will discourage sales, while those that are too low leave money on the table and can harm a brand’s valued resellers by allowing unhealthy discounts.
There’s no question that online commerce will continue to grow. It also seems likely that a small number of powerful digital resellers will increasingly dominate the relationship between brands and their ultimate users, potentially disrupting the historic and mutually beneficial affiliations between brands and their favored authorized resellers. Well-crafted, well-enforced pricing policies can be instrumental in helping to regain and maintain this balance.