MAP Pricing Policies in the Amazon Era

 

Let’s start this exploration by examining a relatively new phenomenon called MAP pricing.

 

What is “map pricing?”  MAP – Minimum Advertised Price.  This is a policy that is established by a manufacturer with their distributors.  The manufacturer says:  “If you are going to advertise our items for sale, this is the lowest prices you can advertise for this item.  And if we see you violating this policy, we may terminate you as a distributor.”

 

Why would a manufacturer establish a MAP policy?  And why are distributors seeing more MAP policies now than in the past?  The main reason is the entry of Amazon.com into the market.  When you login to Amazon.com, you expect to find low prices.  How does Amazon get suppliers to lower their prices?  The do this by pitting suppliers against each other in what amounts to a bidding war.  Amazon displays the lowest priced seller to the new vendor and encourages them to match or beat the lowest advertised price for that item.  If you do, the original seller is then notified that he is no longer the lowest price.  The cycle continues until profit margins are razor thin.

 

This sounds like it should be a win for the consumer.  You get the lowest price possible and the manufactures sell more of their products because the price to the consumer is rock bottom.  Why should it matter to them?  What lead up to this?

 

The lab world before Amazon/Google

 


 

Before Amazon and Google matured, the lab market was dominated by two giants – Fisher and VWR in what was termed a “duopoly.”  The 8,500 or so domestic lab suppliers had the rules set by these two giants.  Since the mega mergers of 1995 and the subsequent numerous acquisitions of many major manufacturers, they had the sandbox pretty much to themselves.  The rules were clear:

[1] Manufacturers don’t set the retail price (also known as MSRP or list) prices.

[2] If you want to get to market, you must do so using our platform and our rules.

[3] If you want to have attention brought to your products, you will need to pay us big bucks to focus attention on your products.
 


 

The big manufacturers (e.g., BD, Mettler, Beckman Coulter and Corning) still had clout.  In fact, Corning, who at the time represented 6% of VWR’s sales, “fired” VWR back in 2004[1] and for several years would not sell to them.  This “mutually assured destruction” (MAD) was at the core a fight for who has control of the consumer.  To my knowledge the only vendor selling through distributors who have retained control of the list prices of their products is the Swiss giant, Mettler-Toledo.

Why did the big distributors fight so hard for control?  Better yet, what was it they wanted control of?  The answer is that they had to have control over YOUR perception of the final price.  When you saw a price of $100 on an item, would you think this is a fair price?

 


 

 

HOW DO PEOPLE DETERMINE THAT A PRICE IS "FAIR?"

 

In order to decide if a price is acceptable it must be evaluated using one or more of the following criteria according to a Loyola University[2] paper:1

[1] Price Competition – when two or more acceptable offers are received and the lowest price is selected, the price of the lowest offered can be concluded to be fair and reasonable.  (This assumes free and open competition which, with a Fisher-VWR duopoly in the lab supplies market, it rarely was with the possible exception of large capital equipment or new lab startups.)

[2] Comparable to Price Sold to Federal Government – In other words, the GSA price of an item.  Many laboratory items, especially equipment are not on GSA contracts.  Since the early days, GSA pricing of lab items has never been all that good compared to “street” prices. Vendors have become very skilled at gaming the GSA system.

[3] Catalog or Established Price List - Where only one offer is received and the seller has a published or established price list or catalog, available to the general public, which sets forth the price of a commercial item, this fact can be used to find the price fair and reasonable.  Fisher and VWR have for many years quoted big discounts from highly inflated list prices – what’s known as the “jewelry store discount” practice which continues to fool highly intelligent people.

[4] Market Prices - Where an item has an established market price, verification of an equal or lower price also establishes the price to be fair and reasonable. Example: the purchase of metals such as lead, gold, silver, or commodities such as grains.  Prior to Amazon, the only established market price consumers had to compare to was what they themselves paid for the item in the past.

[5] Price Based on Prior Competition - It may be that only one Seller will make an offer. If this is the case and the item was previously purchased based on competition, this may be acceptable. In such cases, cite the price of prior purchase and note if it was competitive or based on catalog price or other. An increase in price, with no current catalog or competition, should be about the current rate of inflation between the time of the last competition and the commitment of the current order.

[6] Comparison to a Substantially Similar Item - Often an item is very similar to a commercial one, but has added features that are required. If the Seller can provide the price of the base item, by a catalog, and then state the costs of the additional features, the buyer can then find the price reasonable based on these two factors. Differences should be detailed and priced. The reasonableness of the extra cost can be a) checked against other purchases that had the extras, or some of them, or, b) based on an evaluation of the extra cost by technical personnel.

[7] Sales of the Same Item to Other Purchasers - If the Seller has no catalog but has sold the same item to others in the recent past, the price can be determined to be fair and reasonable by verifying with those other purchasers what price they paid.  Since 1936, the Robinson-Patman Act[3] has prohibited two different purchasers from sharing information of the price paid.

When it was just Fisher and VWR, and they had a firm grip on list prices, your options were to bid (1 & 5), look at your percentage discount from list price (3), or to compare to similar items within their own portfolio (6).  In short, if you lacked the time, expertise, or most importantly volume of business to conduct a formal bid, you really had no idea if the price you were paying was reasonable.  It was a golden era for the big distributors.

 


 

The Lab World in the Amazon/Google era

 

The balance of power has dramatically shifted from the distributor to manufacturer.  Had the Corning – VWR split occurred today, the consequences for Corning would have been greatly lessened.  While there will always be a need for big bricks-and-mortar companies with millions of dollars of inventory sitting on a shelf waiting to ship, the reality is that this inventory could be sitting in a mammoth Amazon fulfillment center.  In most cases, if Amazon has an item on the shelf, it will arrive at your facility just as fast – if not faster and probably with a lower freight charge – than if it is shipped from VWR or Fisher.

 


 

During the days when Fisher and VWR had firm control over the manufacturers, the key to profitability was to only have items on the shelf that sold quickly.  Approximately 5000 SKU’s out of a portfolio well over 1,000,000 comprise 95% of the transactions.  So by turning these items 13 times per year or more, the inventory was “free” because it sold before payment was due if the terms were Net 30 or Net 60[4].

 

As the number of SKU’s continued to grow, manufacturers were increasingly being forced to stock and drop-ship products.  If your item wasn’t in the top-5000 list and you wanted people to continue buying your product, you were responsible for keeping the supply chain full.  The more the distributors bled the manufacturers for money[5] and to drop-ship more and more of the products they sell quickly and with no drop ship or minimum order fees.

 

With Amazon and the Google search engine and a web site, manufacturers had, for the first time, a way to get their products known by enough labs that they could sell through smaller distributors or, in some cases, directly to end users on the Amazon platform.  Trying to sell direct to end users on Amazon AND selling through distributors is risky business because you are in competition with your sales channel!  However some manufacturers can’t resist the lure of Amazon’s market reach.  Manufacturers are today trying to adapt to this newfound freedom as are Fisher and VWR.  This brings us back to the topic we started out on, MAP pricing.

 

MAP Pricing Policies in the Amazon Era

 

As a manufacturer, why would you dictate to your distributors the minimum price that they can advertise your products?

 
[1] The reason most often given – If distributors deep discount our products, this degrades the value of the brand in the market.  So if you can buy a pipettor for $50 but MAP pricing keeps the price at $250 the purchaser will perceive the quality of the pipettor as being better[6].

[2] The most probable reason never stated – If all distributors are forced to price the item at MAP levels, this leaves the manufacturer great latitude to go onto Amazon.com with great margins should they choose to do so and effectively deal directly with end users.

[3] Another likely reason not stated – Manufacturers have an already established group of distributors and they want to add more, but they don’t want the new guys taking business away from their established distributors.

 

So who benefits from a MAP pricing policy?  It’s definitely not consumers.  It doesn’t really benefit the manufacturer unless protecting the business of your current distributors’ matters more to you than the business expansion you were trying to achieve by adding distributors.

 

The thing about MAP pricing is that doesn’t apply to quoted prices – only advertised prices.  This means if you are still dealing with a representative with the authority to quote prices on behalf of his company, the MAP policy can be ignored.  Today customers are resorting ONLY to online prices and only negotiate with sales representatives on high ticket capital items.  If you don’t have an established relationship with a representative, you may never even be aware that a MAP policy has just extracted more cash than necessary from your bank account.

 

Summary

 

We live in the brave new Post Amazon world of lab supplies where anyone with a computer and a web browser can purchase lab supplies.  For smaller customers who had their sales reps taken away by the big distributors and given over to telesales, smaller distributors emerged to fill the vacuum.  And then Amazon.com decided to become a major player in the lab supplies market. 

LPS helps its clients navigate this new landscape. We help our clients determine not just the best price, but the best overall value regardless of the supplier.  We provide the systems and the e-business platforms to help our clients do more lab work and less administrative work – we lower the cost of acquiring lab supplies.  We help our clients make sense of the new, post Amazon marketplace.



[1] The reason for this disaster was that two CEO’s with highly inflated egos would rather see their companies struggle and their stock tank than let the other guy get his way.  It was truly, a clash of industry titans.

[2] http://www.luc.edu/purchasing/price_reasonableness.shtml

[3] https://en.wikipedia.org/wiki/Robinson%E2%80%93Patman_Act

[4] Both Fisher and VWR are very insistent that vendors sell to them on Net 60 terms.

[5] The price for a 10x10’ booth at a Fisher or VWR national meeting now exceeds $40,000 each year plus expenses.

[6] The problem here is that so many items are being imported from China and the manufacturers in China are now selling direct – often by Amazon – to end users and are not at all encumbered by MAP policy of a U.S. distributor.