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Exploring the Ideal Pricing Model

April 30, 2013

I'm excited - there are clear signs our industry is finally starting to move forward and implement change where it's been long-needed. Better late than never, right?

But these changes are moving toward a problem that the industry of home d├ęcor has never really been able to get a handle on: pricing or more formally know as purchasing price parity which includes product cost, taxes, delivery, and consumer risk).

In the past, manufacturers have been all over the board with Manufacturer's Recommended Price (MRP) policies, Minimal Advertised Price (MAP) policies, and more. In fact, there isn't really consistency with what MRP or MAP means, until you spell the acronym out. MAP requires a lot of control and regulation, and MRP can become troublesome in the legal arena, with tendencies toward illegal price-fixing and so on.

Is there an ideal pricing model out there?

I think there is, and if we take the lead of other industries, it appears that a MAP policy is ideal for both manufacturers and retailers. I'll explain why, but first I want to list some basic tenants of a successful pricing policy for a changing industry like ours:
1. Industry-Standard: The policy has to be recognized and generally implemented by all - or at least the majority of - manufacturers in their retail (online and brick-and-mortar) partnerships.
2. Parity and Balance: To eliminate showrooming, price slashing and other insidious practices, there has to be transparency and parity in pricing across all retail channels.
3. Strict Enforcement: Any pricing policy will fall apart if it is inadequately enforced or maintained. Manufacturers must enact disciplined administration of their pricing policies for long-term viability and trust within their industry.

So, why MAP? A Minimal Advertised Price policy sets a minimal price for a given product, and no retail channel (online or brick-and-mortar) is allowed to advertise a lower price for a given item. Of course at checkout, the retailer is able to charge or give a discount as they see fit. However, it's the advertised price that - when manipulated without authorization - leads to the greatest channel disruption and therefore must be rigorously enforced by all.

Many manufacturers are uneasy with the idea of a MAP policy because it seems too difficult to enforce unless you control the distribution of your products. I agree, but nobody said that managing your brand was going to be easy. It's critical that brands control the distribution of their products to an appropriate number of high-integrity dealers - ones that fulfill the brand's standard and business principles. But that's a topic for another day.

MAP allows for a system of pricing parity, which is fundamental for the success of brick-and-mortar retailers alongside their online counterparts (who have much lower overhead costs, but a much higher risk premium to the consumer). Therefore, because the price is uniformly disclosed via advertisement across all retail channels, the transaction balances on the customer's choice of channel and the level of risk she is willing to undertake. This allows brick-and-mortar retail stores a fair chance a winning the sale, since they offer more personal service, purchase assistance, and confidence to the buyer when she is buying locally.

However, MAP policies are not without their weak points. In order for a MAP policy to function, manufacturers must be disciplined about addressing violations of their pricing policies. If you're looking for some examples, Samsung charges dealers penalty fees if retailers advertise below MAP. Other manufacturers will decline to fill all outstanding and future orders from retailers that violate MAP.

Obviously, I'm a strong supporter of the model for a Minimal Advertised Price policy. I believe that - without MAP or something very similar - our industry will cause long-term harm to the consumer experience. We'll return to the methods of the past decade, where we wallowed without direction while the Internet and e-commerce grew exponentially by the minute. Conversely, with a MAP policy in place as an industry standard for pricing models, manufacturers and retailers can - together - look to our future growth and success.