This content relates to : MARKETING INNOVATION
HIGHLIGHTS
Customer “showrooming” is an increasing concern for manufacturers, i.e., customers learning about a product at a brick-and-mortar retailer but then buying it at a lower price online.
Unilateral Minimum Retail Price Policy (UMRP) is a valuable strategy to address this concern and ensure adequate manufacturer profit and brick-and-mortar retailer profit for services they provide which are critical for launching new products.
UMRP can be used at the early stage of the product’s life cycle to follow a skimming pricing strategy or throughout the life cycle to establish a high-quality image.
K. Sivakumar
Lehigh University
It is not an understatement to claim that technology has influenced all aspects of marketing. Pricing is no exception. The rapid growth of e-commerce and online-only retailers has enabled wider distribution; however, this increase has been accompanied by increased price competition across channels and poses a challenge for manufacturers and, of course, brick-and-mortar retailers. This challenge is especially true for companies that wish to maintain a robust price to make continued R&D investments for new product development or introduce high-end products that require customer service at the retail store.
There are several ways in which companies exercise some price control. Manufacturer-suggested retail price (MSRP) is one such mechanism that is a weak method of price enforcement. The next option many companies follow is the “Minimum Advertised Price (MAP).” MAP focuses on the price publicly advertised by the retailer, not on the actual sale price. Because there is no restriction on the final retail price, many companies use MAP. The implementation of MAP has undergone drastic changes in the Internet era. In brick-and-mortar stores, customers must visit or contact the store to get the actual sales price (if the price is lower than the MAP).
Conversely, for online retailers, the advertised price is the price that appears when the customer visits the website, and the actual sales price (which could be lower than the MAP) is shown when the customer places the item in the “shopping cart.” Thus, the incremental effort required to determine the actual price is not much more than when the customer searches for the “advertised” price. As a result, MAP has virtually become ineffective as a pricing tool in online retailing.
Another legitimate concern has been the nature of competition between brick-and-mortar retailers and online retailers. There have been complaints that online retailers undercut brick-and-mortar retailers and offer deep discounts for certain products. This price-cutting becomes problematic for brick and mortar retailers selling products that need a demonstration – customers need to observe the product to understand the utility of the product fully. Customers typically visit the brick and mortar stores, learn everything about the product, and then go to an online store and buy it at a lower price. This phenomenon, called “showrooming,” has also been an impetus for some companies to institute some form of price control. Manufacturers consider these price controls to adequately compensate the brick-and-mortar retailers for the additional service and personnel in their showrooms and to preserve the margins for the manufacturer so that the considerable R&D investment in high-end products can be supported.
A pricing policy that can be part of companies’ toolkit is the Unilateral Minimum Retail Price Policy (UMRP). A UMRP involves a manufacturer unilaterally deciding the minimum retail price for all retailers selling its product. This policy has been in existence for many years (e.g., Apple, Bose) – that is why the price of the iPhone is the same irrespective of where one buys the phone. However, this policy has emerged as a viable strategic pricing option since the Supreme Court’s 2007 decision in Leegin. The decision essentially enables companies to set a minimum price for all retail outlets as long as it is done uniformly for all retailers and there is no prior price agreement between the manufacturers and retailers. Although this price setting was always permitted, until this court decision, demonstrating that the manufacturer and retailer collaborated before establishing the price was enough to result in sanctions. The Supreme Court decision essentially added another layer of proof (in terms of adverse effect on competition) before a plaintiff can sue a manufacturer. Since it is challenging to prove anticompetitive effects in most product categories, the UMRP has become a viable strategy for most companies.
Raj, Rhee, and Sivakumar (2020) develop an analytical model to help manufacturers decide whether to adopt UMRP and, if so, what is the optimal price point. The decision depends upon several factors, including price sensitivity and service sensitivity of customers and the manufacturer’s strategic objectives (profit maximization, channel sustainability, etc.). For example, the researchers show that profit motive is not always the driving factor in a manufacturer adopting UMRP. To sustain channel relationships, manufacturers can arrive at a price level that removes the online retailer’s freeriding and encourages the offline retailer to maintain a service level that is beneficial to the customer also in the long run. Thus, the UMRP need not be a zero-sum game in which the manufacturer maximizes profit. It is possible to arrive at a win-win-win situation for the manufacturer, the retailer, and the customer. The key here is for the manufacturer to decide on the strategic objective clearly and accurately determine customer price sensitivity and customer service sensitivity. The paper shows that there are occasions in which a firm adopts UMRP only for the new model of a product but relaxes it for older models.
However, although some companies such as Apple and Samsung follow UMRP, the researchers believe that the UMRP strategy is not widely known, understood, and practiced. They think this pricing option should be in the toolkit for other companies, especially if they are marketing high-tech products at the higher end of the quality spectrum. Note that setting a minimum price can be done for the early stages of a product’s introduction. The policy can be relaxed later so retailers can sell older versions for additional discounts. Thus, this strategy can help companies follow a skimming pricing strategy if they choose to follow it only early in the product’s life cycle (e.g., Samsung) or establish a high-quality image (e.g., Apple) if they follow the strategy as a routine. Most importantly, it provides an adequate margin for manufacturers to sustain their R&D investments.
Author:
K. Sivakumar, ’92 Ph.D.
Professor, The Arthur C. Tauck, Jr. Chair in International Marketing and Logistics, Lehigh University
https://business.lehigh.edu/directory/k-sivakumar
To learn more, read:
Leegin Creative Leather Products, Inc. v. PSKS, Inc., DBA Kay’s Kloset (2007), 551 U.S. 877.
Raj, S.P., Byong-Duk Rhee, and K. Sivakumar (2020), “Manufacturer Adoption of a Unilateral Pricing Policy in a Multi-Channel Setting to Combat Customer Showrooming,” Journal of Business Research, 110 (March), 104-118.
Raj, S. P., Byong-Duk Rhee, and Sivakumar, K. (2014), Unilateral Pricing Policy in Multichannel Setting: An Analytical Approach (July 10, 2014). Available at SSRN: https://ssrn.com/abstract=2490399
Raj, S. P., Byong-Duk Rhee, and Sivakumar, K. (2015), “Modeling Pricing Decisions Under Unilateral Pricing Policy,” American Marketing Association Summer Educators’ Conference.