Strategies for Overcoming Price Erosion
Authorized distributors violating minimum advertised price (MAP) policies, unauthorized sellers, counterfeit sellers, and traffic diversion schemes can all contribute to price erosion.
Price erosion, as seen in the infographic below, can significantly damage manufacturers and their brands. Therefore, it is important that manufacturers and brand owners work to prevent price erosion.
It is no secret that e-commerce has been, and continues to be, on the rise. And an increasing number of shoppers are beginning their online searches directly on third-party marketplaces.
Today, consumers can order and receive products quicker than ever before online. This can involve just a few “clicks” via their smartphones or tablets, and then same-day delivery or one-day shipping on some websites. Moreover, there is obviously a lower barrier of entry for sellers. Virtually anyone with Internet access who can get a hold of a manufacturer’s products can sell them online; they do not need their own website/selling platform.
Because the price is typically the determining factor in who gets a sale, unauthorized sellers selling products for cheap are causing problems for manufacturers.
More sellers in the same space create more competition, ultimately accelerating price pressure. When unauthorized sellers sell for cheap, this can result in the following scenarios:
- Authorized distributors continue to play by the rules, but struggle to sell the now higher-priced product;
- Authorized distributors drop their prices to compete with the unauthorized sellers, demand the manufacturers offer better pricing; or
- Authorized distributors just stop selling the product.
This, of course, results in causing disinterest among prospective authorized distributors (in addition to the upset authorized distributors); lowering profit margins, and tarnishing their brands and reputations. Plus, consumers will become more comfortable with the lower-priced products.
Ultimately, if a manufacturer has no plan in place for stopping unauthorized sellers, any efforts to control pricing will be futile.
Overcoming pricing problems, stopping unauthorized sales
In a perfect world, manufacturers would generate a ton of sales; have high MAP policy compliance; have no counterfeits or other unauthorized sales, and maintain a perfect reputation.
This is obviously not realistic. Yet it is necessary for manufacturers to work to protect their brands and reputations. In other words, it is critical that they have a comprehensive strategy for stopping unauthorized sales and preventing price erosion.
One part of this strategy can involve establishing selective distribution on online marketplaces. The idea is to limit marketplace sales to exclusive approved sellers. This should help manufacturers better control their MAPs and stop intra-brand competition.
Some manufacturers have success picking one or two experienced, highly motivated and MAP-abiding authorized distributors to sell via the online marketplaces, and then prohibiting other authorized sellers from jumping into the marketplaces.
Alternatively, in an effort to enforce MAP policies, manufacturers might also require sellers to provide all screen names and websites on which they are selling to help ensure compliance.
Second, manufacturers should make certain revisions to their policies and agreements in order to be able to enforce them against unauthorized sellers – among other things to overcome the First Sale Doctrine defense.
Online resellers are generally immune from liability for selling genuine trademarked products, under the First Sale Doctrine. Thus, it becomes critical for manufacturers to create a foundation for legal claims to overcome this defense.
Manufacturers can achieve this by creating “material differences” (between genuine and non-genuine products) and implementing and enforcing certain quality controls, as explained more in-depth in our recent post about overcoming the First Sale Doctrine.
Being proactive and taking important up-front measures is half the battle; enforcement is critical and cannot be overlooked. Clearly, a major aspect of all of this is ensuring compliance among authorized distributors. But cracking down on unauthorized sellers is an absolute must.
In short, and as demonstrated by the infographic, it is critical to recognize the pricing problems that can occur; have a plan of attack in the event of potential violations; monitor for non-compliance; and then take the appropriate action to enforce their policies against authorized distributors and potential legal claims against unauthorized sellers.
Vorys, Sater, Seymour and Pease LLP is one of the 200 largest law firms in the United States, per American Lawyer magazine.
Quad Analytix is a California-based company that gathers, analyzes and visualizes eCommerce data to deliver competitive intelligence to clients. It acquired Wiser, a pricing intelligence automation company, in 2016.