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Interesting Consumer Pricing Links: Suggested retail price: From Wikipedia
The comments below are from "Where's the Price?" forum posted on Amazon
Posted on Nov 12, 2009 2:26:03 AM PST
Andrew Mowery says:
I have a different perspective on this topic, and there is much to say. But, since epic posts seldom get read all the way through, I appeal to your patience to consider all I am saying. I'll take my lumps for standing up for MAP pricing, but before commenting, please consider the entire context.
Here are the main themes:
1. MAP pricing, most often, is a REACTION by Manufacturers to retailers like Amazon (Wal-Mart, Costco, etc) who intentionally offer products at or below the wholesale cost.
2. MAP pricing does not force any retailer to SELL at a higher price. Retailers are allowed to use freebies, free shipping, coupons, and many other marketing tactics to give the buyer discounts and valued items.
3. It is a fact that on Amazon and most Comparison Shopping Engines, listings from various retailers are sorted by either price, or price+shipping. Because retailers must compete for exposure, having the lowest price is desirable. However, when competition heats up, and due to AUTOMATIC pricing software, a retail price is often driven to at or below wholesale costs by this type of marketplace.
4. When a manufacturer sells to Internet retailers, it is often only a fraction of their overall sales. There are exceptions, but it is not uncommon for established brands to do 90% of their volume in brick and mortar stores, and 10% online. Buyers from brick and mortar stores (particularly big chains) use Internet pricing as a benchmark - and Amazon is the #1 Internet benchmark used. When a buyer sees that a product is going on Amazon for the Manufacturer's wholesale cost, the Manufacturer risks losing that business. Therefore, it is necessary in some cases for the manufacturer to make sure that Internet retailers do not deflate the retail value - as it threatens the rest of their business.
5. Amazon has built their online business outside of media (books, music, video) by courting thousands and thousands of "Third Party Retailers". 3P Retailers currently make up fully 30% of Amazon's total Gross Sales Volume.
The beauty of Amazon's business model is that by courting 3P Retailers, they get something for free: Data Entry. The 3P Retailers gladly enter product information on millions of products for the chance to get a share of Amazon's massive customer base spending.
What most people don't realize is that after a few months, once Amazon gauges the sales of the 3P Retailers, they then go directly to the Manufacturers to get a direct supply, and then compete against those 3P Retailers (often to their surprise).
6. Once Amazon has a direct supply, they compete for the "buy box", which is the term used for having the #1 position in price+shipping search. The difference for Amazon is that they always have "free shipping", so any 3P Retailer who dares to compete and collect a reasonable shipping fee is always at a disadvantage. The 3P retailer has to lower their price in order to be at the top of the list.
7. Amazon reacts to the price drop by the 3P Retailer by lowering their price with free shipping to the level of the 3P Retailers price-only (without consideration of S&H). The back and forth only takes a few days, and suddenly the item is on Amazon for the wholesale price (or very near it).
8. The 3P Retailer often complains to the Manufacturer that Amazon has lowered their price beyond the point where they can make a profit.
A. Because Amazon charges 3P Retailers A FIFTEEN PERCENT FEE (15% of your dollars spend on a 3P Retailer go straight to Amazon's coffers!), Amazon has a 15% advantage over every 3P Retailer.
B. Because Amazon has economies of scale, they have rates with UPS and FedEx that cannot be matched by any 3P retailer. Therefore, if a 3P Retailer offers "free shipping", they are absorbing a greater cost.
9. The manufacturer usually reacts by calling the Amazon corporate buyer to find out what is going on. Amazon blames the 3P retailer for driving down the price. Some manufacturer's buy into this, others don't. Most walk away with a promise from Amazon to make some general improvement that does not materialize.
10. If the price deflation persists, and enough retailers complain to the Manufacturer (or cancel their wholesale accounts, when it gets really serious), the Manufacturer then finds they only have two options:
A. Institute MAP pricing
B. Stop selling to Amazon
It's pretty obvious that in a down economy, any person in business can be seduced by large orders from Amazon. But, when the manufacturer is faced with the fact that other large customers are using Amazon as a retail pricing benchmark, and THEY are threatening to cancel truckload orders, the manufacturer is forced to try to impose order on retailers like Amazon.
11. When the manufacturer imposes MAP, the people at Amazon will refuse to sign the contract that all other retailers are required to sign. The agreement is generally one that says if you don't follow MAP pricing, you are cut off from supply. You can still run sales. You can still offer discount codes. You can still bundle things together (which is why Amazon hates them, as they are UPC-driven marketplace). And, you can still all sorts of creative marketing things. You just can't use the price to get to the top of the list because that harms the rest of the manufacturer's business.
In the past, Amazon would actually say that they would follow the program, but then go and break the agreement in practice. Only in the past month have they become aggressive with this forum, and the wording on the "price masking" feature - their original end-run around MAP agreements. The forum and that wording are in reaction to manufacturer's putting anti-price masking clauses in the contracts.
12. So, while Amazon portrays this as a pro-consumer issue, and badmouths the manufacturers that need "education", the reality is that Amazon is being QUITE HYPOCRITICAL about their own business practices.
Amazon has tiers of 3P Sellers, and their most coveted relationship is to be a Gold Seller. This requires signing a 3-year contract with Amazon. There's lots of details, but one of the most striking is that Amazon requires those 3P retailers to maintain PRICE PARITY on their off-Amazon websites.
Yes, you heard right, Amazon requires by contract that the retailers who are ordained with "Gold Seller" status maintain a higher price on their website than they would if they pursued their own self-interest.
Amazon wants to make sure that retailers don't use Amazon to get attention, and then draw those retailers to their own sites where the total price is lower.
Why? Because then Amazon wouldn't collect their 15 PERCENT FEE.
So, while Amazon is making it sound like they are the consumer's advocate, in reality their purpose is just the same as any other business - they are motivated by maximizing profits, which in turn influence the value of their publicly available stock.
They are being hypocritical in their portrayal to consumers that manufacturer's are out to get more than their fair share by instituting MAP pricing. In reality, Amazon is a primary CAUSE of MAP pricing, and Amazon itself forces consumers to pay a higher price on THOUSANDS OF WEBSITES by trapping 3P Retailers in a long 3-year contract where they no longer are able to give consumers a break on their own websites where their costs of doing business is 15% less than doing businesss on Amazon.
I welcome the forum host from Amazon to constructively address the points made here, and refute any points that are factually untrue. Obviously, there are some opinions of mine mixed in with facts, but they are based upon 10 years of experience with online retailing - including being a 3P Retailer on Amazon.
And, should anyone have any question about my loyalty, I have been publicly quoted in the the media about Amazon in a positive manner for a few years, have contributed to a book that positively portrays Amazon 3P Retailing, and in general hold a positive view of Amazon. In fact, their business model is quite genius. The only problem is that it takes advantage of manufacturer's, 3P retailers, and consumers who are fooled into believing that Amazon is some benevolent entity that looks out for others first. They are excellent capitalists and competitors - and as a result, constraints like MAP pricing have to be imposed on them because they don't compete fairly in the marketplace, and harm many businesses who have literally millions of jobs on the line.
When you consider your right to have an item at a discount, consider the fact that you may want that company to be there in the future to provide warranty service, develop the next model that improves the product, and to provide a healthy living for the employees that work for that company. MAP pricing only prevents aggressive companies like Amazon from destroying the sustainability of the manufacturer.
As for Amazon's threat of not doing business with these manufacturer's, it's a bunch of bluster. If Amazon stops buying, there will be a dozen or more 3P retailers who will still offer the product on Amazon.com. And, Amazon will gladly take the 15% fee from their sales. It's the other way around - more and more manufacturer's are considering cutting off Amazon because of their inability to be cooperative, and their arrogant attitude which is clearly expressed by creating this forum.
As for the legislation, make sure you actually call Senator Kohl's office (sponsor of S.B. 148) and talk to Seth. He will tell you that they have no intention to make MAP pricing illegal. They simply want to roll back the 2007 Supreme Court decision that made true price-fixing legal. It was a 5-4 decision, and it narrowly redefined what manufacture's may do. MAP pricing was legal before that decision, and will be after S.B. 148 passes.
Andrew Mowery says:
For those who think that massive profits are delivered to the retailer or manufacturer, please consider this example where Amazon is literally doing this FOR A PENNY.
Drinkwell Pet Fountain Cleaning Kit
The product has a Manufacturer's MAP of $8.99. Amazon's price as of 357pm PST on 11/12/09 is $8.98.
If Amazon is so righteous in their crusade to bring buyer's a better value, and they recognize the inconvenience they cause when they go below MAP, and have to use Price Masking to subvert the MAP program they agreed to with the manufacturer in order to have a direct supply of the product, it doesn't make sense that they would do this to literally bring A PENNY of additional "value" to the consumer/buyer. You would really have to be gullible to believe that Amazon is doing this to save you a whole whopping penny.
Take a close look at all the sellers on the listing. All the rest, who depend on that product line's supply OUTSIDE OF AMAZON comply with the manufacturer's program that is there for the intent of keeping Amazon in line. They all have the same price of $8.99 or higher on this item.
The wholesale price of this item from the manufacturer is $4.99. That is the price Amazon is paying, not including the inbound shipping cost. They come in cases of 20, and given how Amazon buys this product, it probably raises their cost to approximately $5.15 per unit. When they sell one, it delivers a whopping $3.84 of profit to them. That is before they ship the item.
For those of you who are in the know, please tell me how an item that weighs 5oz in a bubble mailer or about 1 pound in a box (the way Amazon ships it) can be shipped for $3.84 via any service (USPS, UPS or FedEx) for that amount, including the cost of packaging?
The rate for a 1-pound box via USPS is $4.80, even with the best discount and a free box. I suppose it is possible Amazon has some amazing 1-pound rate with UPS, but do any of you believe it is possible that the box costs less than $.34, and the rate from UPS is $3.50?
Now, in contrast, the other 23 Third Party Sellers on the site have to pay a 15% commission to Amazon when they sell one. That means they collect only $7.64 if they match Amazon at the MAP price of $8.99. Now, most retailers can't touch Amazon's negotiated rates, and find it necessary to ship this in a bubble mailer which has a cost of about $.35. The USPS First Class rate parcels weighing 5 ounces is $1.90. 7.64 - 1.90 - 0.35 = $5.39. Those retailers have the same inbound costs OR GREATER. But, assuming that they buy in Amazon's volume, and the are making perhaps $0.24 (note even a quarter!) selling this item.
In 2008, Amazon did not have a supply of this product, and the going rate for one of these 3-Brush Cleaning Kits was $10.99. Once Amazon got a supply in December 2008, the price rapidly dropped to as low as $3.80. Amazon did the same thing to the entire product line - selling items that were in the $30-50 range for under cost. It created a panic atmosphere, as many retailers realized Amazon was not going to cooperate with the manufacturer on price, and so many unloaded their remaining inventory to cut their losses.
This means that any retailer who had bought product from the manufacturer prior to that date was suddenly stuck with all of the inventory they purchased if they didn't want to participate in the panic. The manufacturer tried for 6 months to get Amazon to stop the predatory practice of selling at or below the wholesale cost, or below the combined costs (shipping, packaging, inbound freight, etc) of an average retailer. The manufacturer had no choice but to enact a MAP policy.
Well, since Amazon was being so aggressive, most independent retailers simply stopped buying the product. This created a trap for the manufacturer - they had to sell to Amazon in order to keep up their production and sales volume. They couldn't say no to the party that was harming their other wholesale sales because their buying audience was diminishing in direct response to Amazon's pricing behavior. Amazon does this intentionally - they drive out a manufacturer's other customers in order to have buying leverage.
Again, if you think about it, and you were working at Amazon, this is only smart. Borderline genius strategy, honestly. Tell me who among you would not do the same if you were empowered by your boss at Amazon to behave in this way. And, as you can see by their stock price, it is obviously reaping huge gains for them - and you know many of the decision makers are motivated by stock options. This isn't a conspiracy theory - just reality in corporate America. This IS a success story - for them.
The problem I have is the disingenuous nature of this "where is the price" forum, which doesn't talk about the underlying competitive strategy Amazon is using to bully smaller retailers out of markets completely. Imagine if a company like Wal-Mart came to your town, and bought up everything, and marked it down so low that all the independent retailers were driven out of business. Oh, wait, that's right, Amazon is simply deploying the online version of the same strategy.
And, obviously, Wal-Mart is the king of distribution. But, if you know anyone who has been a vendor to Wal-Mart, you know people that aren't exactly tickled about having all their eggs in that basket. It isn't the manufacturer who gets all the profit - not by a long shot. Wal-Mart is in business for Wal-Mart. And, while a shopper can't resist a discount, Amazon too is in it for Amazon. Nothing inherently evil about this - this is what success in modern American Capitalism looks like.
The question has always been, for Wal-Mart or Amazon, whether their practices are sustainable, and whether the destructive element (destroying Main St. for the Super-Center) and forcing people to work for low wages and few benefits outweighs the economy that has thriving small businesses. Some would say that what online independent retailers got themselves into was inevitable - they only had to look at brick and mortar trends of the past 30 years to see their future.
But, none of this means, however, that every manufacturer is required to feed Wal-Mart or Amazon. This is why, for many many years, you couldn't get top brands at Wal-Mart. Any manufacturer who wanted to preserve the concept that their products had a VALUE would keep them out of their hands. And, now that they have brought in top brand, notice that they aren't at ridiculous discounts. Consider the iPhone - how come Wal-Mart isn't selling it for $19.99? The answer is that there is a contractual agreement Wal-Mart has willingly entered into with Apple for the priviledge of having the product in their store. Wal-Mart consider the fact that as you walk through the aisle to get an iPhone, you will probably be tempted to spontaneously fill your cart with other stuff you "need". And, most often, they are right.
Again, another success story.
Back to this little 3-brush kit:
If Amazon followed the MAP program and went with $8.99 on this item, then the price wouldn't be hidden and those of you who are bothered by this would not be upset. But, this would also mean that Amazon would have to share the buybox with the other sellers who are also at $8.99.
Instead, Amazon feels it necessary to aggressively drop their price BY A PENNY in order to have 100% of the buybox sessions. This means, instead of sharing sales with retailers who are barely making a quarter, they get 100% of the unit sales - and that leads to Amazon hoping that consumers will do just like a brick and mortar buyer, and will fill their cart with other items. In fact, on this one, they are counting on it. You get free shipping if you are in Prime, but you have to achieve $25 in sales to get Super Saver free shipping. You all know how nuts you all are for free shipping.
So, while you have a claim by Amazon that they are doing something for you, and that manufacturer's have to be "educated", nothing is further from the truth. Amazon is doing this for Amazon, and manufacturer's already are plenty educated. Those that are trapped because of allowing Amazon to drive their retail prices into the ground have a very difficult time making their products profitable again. You see in this forum people complaining about prices going back up - as if the fact that it was temporarily below wholesale is reasonably presumed to be sustainable.
Again, I welcome the moderator to comment about the validity of claims here, or to share their own opinions about whether some of any of this is objectively true. I don't have to convince people who have worked in sales for manufacturers, or have been entrepreneurs - I see them at trade shows, and this is the hot topic of the day. I hope that something posted here has given some more clarity to the position that MAP pricing is in place as a reaction to Amazon, and they are just upset because it keeps their aggressive pricing behavior in check.