Let’s start this exploration by examining a relatively new phenomenon called MAP pricing.
What is “map pricing?” Minimum Advertised Price is a policy established by a manufacturer with their distributors. The manufacturer says: “If you are going to advertise our items for sale, this is the lowest price 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 into the market. When you login to Amazon.com, you expect to find low prices. How does Amazon get suppliers to lower their prices? They do this by pitting suppliers against each other in what amounts to a bidding war. Amazon displays the lowest-price seller to the new vendor and encourages them to match or beat the lowest advertised price for that item. If they do, the original seller is then notified that they no longer provide 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 led up to this situation?
Before Amazon and Google matured, the lab market was dominated by two giants –Fisher and VWR (now Avantor) 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:
We (manufacturers) don’t set the retail price (also known as MSRP or list) prices.
If you want to get to market, you must do so using our platform and our rule
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 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 ( paper:1)
When the only sellers were 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 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 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 brick-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 of 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.
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 growth led to distributors pushing the manufacturers for money and pressuring them to drop-ship a larger share 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 Avantor. This brings us back to the topic we started out on, MAP pricing.
As a manufacturer, why would you dictate to your distributors the minimum price that they can advertise for your products?
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 interesting aspect of MAP pricing is that it 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.
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 have 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 decided to become a major player in the lab supplies market.
LPS helps its clients navigate this new landscape. We show them how to determine not just the best price, but the best overall value regardless of supplier. We provide the systems and the e-business platforms to allow them to do more lab work and less administrative work, thus lowering the total cost of acquiring lab supplies. We help our clients make sense of the new, post Amazon marketplace. Please meet with us to see what we can do for your company!