Rafi Mohammed

Minimum Price Laws...Good for Consumers

Posted on July 12th, 2007 (2 Comments)

The U.S. Supreme Court recently overturned a 96 year old law preventing manufacturers from setting minimum prices. As a result, manufacturers can now dictate to retailers what minimum price they can charge for their products. Many have criticized this decision as being bad for consumers. After all, how could mandating a minimum price (that presumably is higher than what some retailers would price at) be good for consumers? Let me share with you why I think this legal decision is a “non-issue” for most products and for the small percentage of products where prices will rise, consumers will in fact benefit.

Because of competition, most products will not be affected by this decision. Care to venture a guess what would happen if a company like Colgate tried to dictate a minimum price to Wal-Mart…yowls of laughter and a curt “don’t let the door hit you on the way out” response. Plenty of other toothpaste manufacturers will be happy to let Wal-Mart set whatever retail price it thinks is best.

Similarly, once a manufacturer sells products to a retailer – it’s in their interest for retailers to sell as much merchandise as possible. This involves encouraging low, not high, retail prices.

That said, there will be select cases (say 5%) when retail prices will increase because of this court ruling. In these cases, I believe consumers will actually benefit for the following reasons:

  1. “Cream skimming” is prevented. Some manufacturers may decide their products need to be sold by service-intensive retailers. High-end electronics, for example, may benefit by being sold by well-trained sales people who take time to explain the value of and how to use the product. If consumers cream skim - learn from these high-end retailers and then purchase from lower-priced discounters - everyone loses in the long run. Manufacturers will lose the support of the knowledgeable sales force they feel are integral to selling their product and consumers will lose the opportunity to buy these types of products in the future.
  1. Support retail partners for long run sales. Some manufacturers, like high-end shoe manufacturer Jimmy Choo, may feel they need to sell their products through exclusive boutiques located in swank retail districts to support/enhance their brand and maximize sales. Similar to the cream skimming scenario, these boutiques cannot compete with discounters who jump in to sell today’s hot product and then scream “sayonara” when sales cool down. Again, both consumers and manufacturers lose in the long run.

So…what do you think? I’d love to hear your thoughts! By the way, I’ll be discussing pricing on Mat Schaffer’s radio show this Sunday at 8 AM. Please tune in to WBCN (104.1) in Boston or listen via the Internet.

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Readers' Comments on This Blog Entry

From Jake on July 18th, 2007
Obviously, commodity goods aren't going to be affected by this, but high end electronics manufacturers have been getting around this for years with authorized reseller programs. Basically, retailers who want to be authorized resellers must accept minimum pricing, and the manufacturer only honors warranty claims on products purchased from authorized resellers. The minimum price is 20-30% higher than what you'd find from non-authorized resellers, which is a lot to pay for a warranty. High end electronics are being commodified, knowledge and information is available for free on the internet, so retailers just aren't able to justify their margins. Minimum pricing and extended warranties are effectively capitalizing on consumer ignorance, and in the age of the internet, this is not a long term business model. Retailers have to either provide more value or lower their prices. I don't think minimum pricing should necessarily be illegal, but to me it's a sign that the company is in denial about the way the market is moving.
From Bryan on October 8th, 2010
Well as a manufacturer I have to disagree with the new law. In my industry of high performance aftermarket there is a lot of skin creaming. Consumers will go to retail locations to be educated and then jump on the internet and purchase it from the lowest possible price. When we set Minimum Advertised Price (MAP) we are trying to provide our authorized dealers a margin for their efforts. They have overhead to cover and salaries to pay. Someone sitting in their parents' basement with no over head should be very content with making 1 or 2% profit on a part they never have to touch, a customer they never greet, just in their efforts to setup a yahoo shopping cart and tie it to a bank account. As a manufacturer, you have to make a profit, and there is discussing to itself about what is fair and what is not. The retailer needs to make a profit. And that is what MAP is for, to protect the retailer from non-brick and mortar entities from killing the marketplace. Again my retailers play the role of consultants to the customer, helping the genuinely and honestly helping the customer plan and achieve the high performance goals. Name any other consultant that is supposed to work for free???