Everyone has experienced that infuriating moment when you realize one store charges $3.00 less for a box of granola bars than the store you bought the same box at last week. Who decides the product’s price? Where is that extra money going?

The short answer is that prices are determined by the retailer. The long answer is that a legal agreement is made between retailers and manufacturers to determine the minimum or maximum price for a product. Retailers can determine the price of the product they sell, but only within the guidelines the manufacturer sets.  

This agreement, made between both parties, must meet the expectations of both sides and ensure accountability. Due to the importance of pricing guidelines, many laws exist on the matter, and numerous court cases have dealt with violations.

 

Legal Jargon

For the Lawyer

The most common legal agreement between manufacturers and resellers is the minimum advertised price (MAP). This determines a minimum price at which resellers can sell the manufacturer’s product. If violated by the reseller, then the manufacturer can stop doing business with the reseller or take the reseller to court. The manufacturer’s suggested retail price (MSRP) may also be seen on packaging, but it is merely a suggestion and not binding in any way.

Another type of agreement is the resale price maintenance agreement, which is a binding contract that sets a minimum, maximum, or exact price. Federal antitrust laws recently deemed these agreements legal, but the topic is extremely controversial. State laws can differ from federal laws, and issues that arise with these agreements are situational and complex to address.

As these are only “agreements,” any violation is subject to the court’s interpretation and will be considered lawful until shown to be unreasonably anticompetitive under these antitrust laws.

Many manufacturers have avoided these antitrust laws by using unilateral policies, or Colgate policies. In these policies, a manufacturer sets a minimum selling price and refuses to do business with any retailer that sells under that price. There is no agreement between the parties, and the power is in the hands of the manufacturer. Thus, it is tremendously important for the manufacturer to keep their channels accountable and track their own actions.

 

Why Pricing Laws Exist
For the Retailer

These laws were created to ensure fair market growth in each channel, no matter the expense of the services the channel provides. This is best understood by using an example. Let’s say the product is a pair of shoes. A manufacturer has channels both online and in-store. The in-store experience allows consumers to try on the shoe, feel the quality of its materials, and talk to knowledgeable employees; therefore, it is a more hands-on experience than purchasing the pair of shoes online.

However, these additional in-store benefits come at a cost. The retailer must pay for the space, the employees, and many in-store display features. Therefore, the retailer typically adds these additional expenses onto the price of the products.

Now, if someone wants to buy this pair of shoes, they could purchase them in-store or online. The online price, due to decreased operational costs, is often lower than the price at a brick-and-mortar store. If people decided to solely (pun intended) purchase a much cheaper pair online, then it would put the retailer at a huge disadvantage and potentially take the company out of the competitive landscape.

Ultimately, these laws exist to allow for low-price and low-service retailers, high-price and high-service retailers, and everything in between.

For the Manufacturer

Another potential concern falls to the manufacturer. If the manufacturer produces a popular item, retailers can price it high and undermine sales. Maximum or exact pricing agreements prevent these issues and give manufacturers a fair opportunity to generate sales.

Beware of Violations

It is not uncommon for retailers to break these pricing agreements, potentially causing harm to the brand’s reputation and sales. It is important to monitor pricing in stores at the individual level and to track violations. By frequently monitoring pricing in real time, violations can be caught and price wars prevented.

 

To measure your company’s retail execution and pricing accountability, schedule a demo with Observa to see how our services can track down pesky violators.