Pricing Policy: Part One – What to know when creating a Pricing Policy
An organization without a handle on pricing policy exposes itself to unnecessary risk. Learn the basics of practical pricing policy and get some food for thought about the best policy solutions for your company.
Listen to Gene Zelek, a partner at Taft Chicago and an expert in pricing policy, as he shares some insight into the smart implementation of price protection policy.
What to know when creating a Pricing Policy
MRP vs. MAP
In the world of pricing policy, there are essentially two kinds to choose from MAP or MRP.
Minimum Advertised Price, or MAP, covers only offer price. With MAP, the product page and in-the-cart price for an online seller would be covered, but not the checkout price. For physical retail situations, MAP covers what is outside the store, like mail or newspaper advertising, but not in-store displays or price tags.
Minimum Resale Price, or MRP, however, covers all offers plus the actual selling price—essentially everything MAP covers, plus displays, flyers, price tags, and so on. Of the two, MRP is more comprehensive.
But how do you decide which policy is best for you?
Diagnosis
Companies experiencing loss might want to immediately institute MAP/MRP policy, but there are a few considerations to look at first. Begin by identifying problems facing your organization. Zelek says the most common cause is resale price erosion, occurring when distribution is uncontrolled.
Try first culling discounters from your resellers, which can be done without a formal policy in place. Next, try to restrict distribution. For example, you can selectively raise prices by first charging all resellers the same price, and then offering rebates to certain select partners.
Strong, clear policy—with a sting.
If a policy is determined to be the best option, ensure that the policy is understandable and relevant and that it involves real, enforceable consequences. The goal is to induce a chilling effect, or an immediate psychological impact, which achieves policy compliance among the majority.
Beyond that, commitment becomes key—you must follow through on enforcement. Failure to enforce consequences risks losing not just money, but credibility, by demonstrating that your policy can be disregarded. As Zelek says, if you don’t have the commitment, don’t bother.
Achieve Success by Knowing Your Structure, and Your Limits
Have you identified the level at which the problem is occurring? Is it retail, wholesale, or both? Are all products involved or just a few? Are there possible contract conflicts with suppliers or vendors due to inconsistent terms? How big is your reach and budget for enforcement?
Consider also the means of distribution—is it one- or two-step, through direct sales or through secondary distributors?
Understand that you must pick your battles if there is a lot to regulate—it may be practical to monitor only your most important SKUs. Likewise, monitoring the entire internet is impossible. Using a sampling process is the best method for tackling this issue.
Best Practices for Monitoring and Rollout
Retailers have a vested interest in keeping their competitors in compliance, so avail yourself of the “snitch” or “tattle-tale” network: supplement your monitoring by taking complaints from your partners. A well-designed form on your webpage is all it takes to prevent false reporting here.
Above all, you must maintain flexibility—too rigid a policy becomes unenforceable. Monitor at will, but also consider setting measures like MAP “holidays,” and tiered penalty structures, to help retailers acclimate. Further, policy rollout should be soft and should include a pre-rollout period before real enforcement begins.
Tackling pricing policy can seem complex without prior knowledge, but once you’re versed in the basics of each approach it will become clear which strategy is best suited for your business. Making educated decisions on policy protects your business from unnecessary risk, and ensures those selling your products are following clear guidelines.
For more information about pricing policies contact Gene Zelek a partner at Taft Chicago
Podcast: Play in new window | Download
