BrainTrust Query: Should manufacturer-dictated pricing be allowed in the internet age?
By Bill Bittner, President, BWH Consulting
On Monday, the U.S. Supreme Court was scheduled to hear oral arguments on the appeal of a historical precedent set in 1911 that automatically outlawed manufacturer-dictated pricing. Manufacturer-dictated pricing has been considered a violation of Sherman Antitrust Laws because it does nothing else but inhibit competition. The hearing was based on a petition by Leegin Creative Leather Products, Inc. They argued that manufacturer-dictated pricing should be evaluated on a case-by-case basis, instead of automatically declared illegal.
Leegin built a successful family business and introduced the Brighton brand of women’s belts. The strategy for the Brighton brand has been to focus on specialty stores offering high customer service. Leegin felt it was important to avoid disappointing customers who may have found the brand deeply discounted and regret an earlier purchase, so they introduced the “Brighton Retail Pricing and Promotion Policy.” It ensures retailers that Leegin would only do business with those who agreed to follow the pricing policy. Leegin felt that by assuring the retailer a “fair return” on all Brighton products, retailers would promote them and provide the full service that luxury brand consumers expect. This approach seems to have worked because the brand has been very successful.
This particular case rose out of a dispute with PSKS, which operated Kay’s Kloset in Lewisville, Texas. Leegin learned that PSKS was selling all of their products below suggested pricing, which was in direct violation of their pricing policy. Leegin suspended all shipments to PSKS, which, in turn, filed suit alleging the pricing policy violated the Sherman Act. Lower courts have found for PSKS, so Leegin has now appealed to the Supreme Court.
After hearing the arguments, the Supreme Court will take several weeks to make their decision. Presenters in the case included the current administration speaking on behalf of PSKS against the use of manufacturer-dictated pricing.
Discussion
Questions: What is your opinion on manufacturer-dictated pricing? Should manufacturers
have the right to maintain control over pricing? What relevance does this hold
for internet vs. brick and mortar pricing?
When I saw this case mentioned, I
thought it had a lot of relevance for today’s shift from brick and mortar
to online retailing. It’s probably too much to say it would be the end of the
internet if manufacturer-dictated pricing were allowed. But you can see where
I am coming from, if you think of brick and mortar stores as the ultimate in customer
service, providing an informed sales force with locally stocked inventory
to immediately satisfy customer needs. This as opposed to the anonymous purchase
over the internet that requires package exchanges over several days to affect
the sale and any returns. Online retailers can offer discounted prices because
of their lower operating costs resulting in lower margin requirements.
But what if retail prices were dictated by the manufacturer and there was
no price discount on the internet? Would customers still shop online or would
they prefer to pick up products for the same price at their local store?
I don’t think it’s time to derail the entire mercantile system, despite the power of the Internet. Retailers should have the right to set their own prices. Manufacturers can always decide to do an end-run around their distribution channel by setting up consumer-direct sites.
Although I respect Leegin’s desires to protect their brand and to upgrade their retail channel, their approach is heavy-handed and outside the law. Get a grip, Leegin. If you care that deeply about how retailers price your product, you should open up a retail division and find out how difficult it really is out there. It probably would be cheaper than the legal costs to bring this issue all the way to the Supreme Court.
Great article and great discussion. Since I have a lifelong personal friend in a senior position with the manufacturer/retailer seeking remedy, I contain my comments to the question–rather, what I perceive as the question. That is whether or not there are distinct advantages from a pricing and margin point of view via internet rather than bricks and mortar. In addition, is there a service advantage in the areas of customer support and service from a product knowledge and customer service point of view.
As a retailer one must first recognize that the two types of shoppers are different–yet may have the same expectations and yet may be the same consumer. That is to say, as a customer myself, I shop both ways. Yet, my expectations are not altogether different regardless of the experience–online or inside the bricks & mortar. The difference is in the expectations in relationship to time. Online, going in, you understand that it’s not possible to have the instant gratification of receiving the product the same day, though it could be as early as the next day.
Online retailing is advancing quickly and has been to create the type of interactive experiences that provide product knowledge and customer services. The experiences were different than bricks & mortar, but they have to be. However, to date they have all been good. None came at a price any greater than I would have paid to purchase the product without assistance, although the price has not always been the lowest. In many cases, if not most cases for me, it has not been the better price over in the bricks & mortar. And, if there was such a cost advantage to the online retailer due to lower overhead, many would have not gone out of business or would have been kept out of it. In fact, retailers have found, in many cases, the cost of online retailing has prohibited their entry.
There will always be (at least as far as can be seen) both online and ‘in the brick’ retailing. The differentiation points between the two have been and are being leveled by the real winners in online retailing. Likewise, even the same consumer will likely continue to experience both types of retailing. Their expectations for both are being leveled out to where their is likely not to be any disadvantage between the two from the experience view other than time. Time also has a price. Thus, that’s also another indirect cost disadvantage to online retailing.
Now if some college student comes up with a thesis on how to have coast to coast same-day delivery–the experience could really be leveled. But then again the guy that thought of FedEx got a failing grade. Hmmm…could it happen?
In the 60s, while in college at KU, a couple of buddies and I decided to publish a coupon book each semester that was distributed free of charge to students through the Student Union Bookstore. One of our best-used coupons was one from a local clothing store for Levi’s jeans. After a couple of semesters, I was contacted by Levi-Strauss and threatened with a lawsuit if I continued to discount their products. A lowly undergrad barely getting by financially had attracted their attention by violating their pricing policy. (By the way, the coupon book we started is still published today–always by an undergrad in the William Allen White School Of Journalism according to our stipulations when we graduated.)
Today I sell a unique product via the internet and have several resellers around the globe. I require that they do not undercut the retail prices published on our website. So far, this has not been a problem since they tend to grossly overcharge their customers due to my exorbitantly-high wholesale pricing (that’ll keep ’em honest!). I can’t decide if this is the best of all worlds or the Disneyland version, “the best of small worlds.” Not being a total control-freak, I also award bonuses for certain sales levels.
And so, by combining rock-solid, high, wholesale pricing with a unique product and bonuses, I can control pricing in a way that discourages discounting. So far, so good. (Full disclosure: I use “unique” as it was meant to be used, meaning “one-of-a-kind.” This eliminates meaningless terms such as “very unique,” “extremely unique,” “extraordinarily unique,” “pretty unique,” et al, because there are no degrees of uniqueness, just as there are no degrees of “one-of-a-kind.”)
Mark Lilien, I’m a huge Zappos customer because of their free shipping. However, I sometimes find what I want elsewhere at a cheaper price with free shipping, too. (I am the Imelda Marcos of water shoes and high performance running sandals.) The larger online shoe retailers, such as Shop.com, fogdog, Altrec, REI, Shoes On The Web, Shoe Annex, Shoe Mall, Shoe Buy, Shoes.com, etc., tend to attract the most attention from MANUFACTURERS WITH RULES, but still play fast and loose with pricing. If they believe they can win a sale while working with the wholesale price set by the manufacturer, they’ll do anything they can. As internet retailers, their overhead is very low, and they can go for volume over profit margin. Often, they don’t even stock the products they’re selling–yet another cost eliminator.
Manufacturers can control cost, but they can’t control margins. They can also control retailers by refusing orders, but what manufacturer in their right mind would do that?
Cases like this are often a delight because the results often don’t follow the usual 5-4 or 6-3 splits (the numbers may be the same, but the players are different.)
That having been said, this case seems like somewhat of a mountain-out-of-a-molehill: it’s my understanding that manufacturers enjoy a great leeway in selecting their distribution channels–indeed, it is the core of every “exclusive” line…Leegin’s sin seems to have been it was too explicit in making pricing a criteria for doing business; and the question is raised, was the plaintiff offering good service? If so, why would Leegin care what the price is (?) if not, then wouldn’t that be enough reason to sever the relationship?
The comment about Apple stores was interesting….
While not very familiar with the situation in the U.S. I know this: The price of an iMac is the same everywhere in Canada, online or bricks and mortar, FutureShop or Apple store, at the Apple online store or the CompuSmart online store (or Futureshop online store). The price is the same barring perhaps a $5 spread. For the most part, different retailers ‘compete’ by throwing in freebies–printers, RAM, etc. But that base price, obviously set by Apple, is the same everywhere. It’s the same for all models, all iPods, etc, etc. etc…an iPod Shuffle is $89 CDN…everywhere. Wal-Mart might have it for $87–not enough of a difference to pick Wal-Mart.
Seems to me that this case is effective evidence that the existing law is sound. Manufacturers don’t get to control the margin structures of their retailers once goods change possession. Retailers must have this freedom in order to formulate and pursue their competitive strategies.
But manufacturers may try to avoid doing business with retailers whose practices harm their brand equity. As the ruling suggests, both parties retain some ability to pursue and protect their interests under the current law.
Free enterprise entails choice. The retailer should have the choice as to what price they wish to sell products. A new marketplace such as the Internet should change laws regarding price fixing. For years manufacturers have found ways around the laws by refusing advertising dollars, market development funds or by limiting supply. So in effect they have had some control over pricing. But how does a manufacturer prevent a retailer from selling a loss leader? Wasn’t the purpose of the law to protect the consumer and allow for price variations?
In the initial phase when manufacturer and retailer agree to do business based on a shared business philosophy (pricing, etc.) there seem to be no issues. As the relationship grows, the retailer gets to change his philosophy (pricing, etc.) and the manufacturer is now unable to control the effect this can/will have on his product in the marketplace.
If the manufacturer decides to raise prices at the wholesale level (to all) the retailer has the right not to purchase. If the retailer decides to lower prices at the consumer level, the manufacturer does not have the right to choose not to sell to him.
This does not seem right….
Costs and pricing strategies are already “controlled” by the manufacturer, however, not all manufacturers do a good job applying the most effective strategies to get the results that they need. This is not the fault of the law, nor retailers, nor the internet. The right decisions need to be made by the brand management when the business plan is discussed, decided, and put on paper. Manufacturers need to give the issue of brand pricing its due diligence and thoughtful planning before the first item leaves the warehouse.
Manufacturers already have the ability to control pricing based on their decision about their route to market.
If they employ a direct sales force, broker, or consignment, they can charge what they wish. As long as they maintain possession of the goods, they control pricing.
Once they sell the product and forgo possession, they can no longer dictate the resale price. This is a basic fact about going to market via retail.
As the other commentators pointed out, there is ample precedent in favor of the retailer in this case. That’s why vendors use “manufacturer’s suggested retail” as a way around the issue. Leegin may be within its rights to withhold other types of support (advertising co-op, etc.) but must be evenhanded about it. The vast majority of Brighton merchandise is probably sold in Brighton stores where they have control over maintained prices anyway. A vendor who wants to maintain its pricing strategy that closely needs to pick its outlets carefully, whether on the Web or in traditional brick-and-mortar outlets.
Bill’s article seems to assume that manufacturer-set pricing isn’t allowed. But it’s practiced every day. Look at Zappos. They pay the freight to the customer and the return freight, too, because they cannot deep discount the shoes themselves. The brands would cut them off if they did.
Justice Scalia (not someone I’d generally agree with) hit the nail on the head. He pointed out that competition can be based on service, not just price. Categories dominated by manufacturer-set retail pricing and full margins give much better customer service than deep discount categories.
Apple stores give great service because they’re not working on single-digit margins like other name brand computer retailers. Saks, Nordstrom and Bloomingdale’s all have plentiful articulate salespeople because the garments they sell have full margins. When margins fall, prices decline, and “service” disappears. It becomes “self service.”
Consumers are clearly going outside of manufacturer dictated pricing to secure products via outlets like eBay and discount web sites. This case seems like a last ditch attempt to remain in control of consumer behavior and, as history has dictated, where there’s a will there’s a way. Consumers are a crafty lot and even if this mandate got a green light, they will find a way to get to the price point that they want–even if it means going outside of the US.
Neither the brand or the court systems has a place to dictate who can sell for what. After all, it’s up to a retailer to decide what margins they will be securing on every store product. The issue itself seems to go against the grain of commerce as it has evolved today.
Manufacturers should have the right to set prices, provided they understand that consumers have the right not to pay them. In a functional sense, what’s the difference between setting the retail and setting the wholesale price so high that even a discount is expensive? Sure in one case you could sell below cost but on high ticket items why would you? As to the “death of the Internet” theory–some shoppers will always opt for convenience while others (usually people buying over-priced goods) will always go for having their egos stroked.
Protecting the equity and price/value relationship established by a manufacturer is certainly not out of the question of reasonable expectations. However, in the open marketplace in which we live, attempting to enforce pricing laws in the US is extremely difficult at best. The Internet does not know any boundaries and any attempt to establish pricing limitations will only take resources away from more productive activities. Any type of pricing laws will only serve to create false markets; the dairy industry in the US is a classic example of outdated pricing laws and its impact on the consumer. Open and free trade is the only way to create the most efficient marketplace. If a manufacturer wants to control pricing they should do it by controlling their supply-chain and not expect it to be done by any government agency.
I may be very much in the minority, but I believe manufacturers as well as retailers get to control either cost or retail but not both.
Manufacturers can build in an SRP as a function of the cost they reflect and the promotional support they choose. At the same time retailers should and do use all items to build a shopping experience with their customers or targeted customers that makes them the preferred shopping experience. Show me one retailer that does not do zone pricing nationally, regionally and even within localities that are based on maximizing their sales and profits. At the same time, show me one distributor that reflects the same cost of product to each and every customer they have.
Manufacturers have no right to dictate the price that a retailer sells product to consumers. A manufacturer does have a right to determine who can purchase product from them and the price that they charge a retailer for their product. A manufacturer also has the right to ask a retailer to enter into a contractual arrangement in order to represent that manufacturer’s products. It would seem that in this case the manufacturer is paying the price of not having properly defined their relationship with this retailer. We are all big boys and understand that a handshake does not constitute a contract.