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What Is Price Erosion and How Do I Stop It?

A proper product pricing strategy is essential to maintaining a healthy supply chain. Whether it’s a factory providing the cost of goods, the manufacturer setting the wholesale cost and suggested retail price, or the retailer selling the goods, everyone is affected. In order for a product to succeed in retail, each link in the chain needs to set fair and attractive profit margins for itself that also align with customer demand.

From the brand perspective, the right retail price conveys the value of its products to the consumer. For instance, you wouldn’t expect to buy a Volkswagen for the same prices as a BMW because of this. Consumers understand this and make purchases with the perceived value in mind.

Retailers will discount prices for many reasons, most of which are special sales that are planned based on seasonality and inventory turns. These are generally short-term sales, and the retail prices get raised after a period of time. However, in the world of eCommerce, many retailers battling for consumer dollars and market share deploy heavy discounts to drive sales. In this cutthroat world, many use automated repricing technology to keep their prices in line with the competition, when in actuality, all it does is fuel the race to the bottom. One retailer drops its prices, its competitors adjust prices to keep up, and all of a sudden, we’re free falling.



What is price erosion?

 

Price erosion happens when online retailers, discounters and unauthorized sellers drive down the prices of a brand’s products. Over time, this can destroy the brand’s real and perceived value.

Brands, retailers and consumers all suffer the consequences of price erosion. For the retailer, they lose expected margins on products they’ve purchased, marketed and projected anticipated revenue. For consumers, there may be short-term benefits to getting high-quality goods at dirt-cheap prices. However, if price erosion continues unabated, those great products will eventually stop being produced. For the brands, it can be catastrophic!

Price erosion changes the perception of value. Discounted products convey cheapness or ordinariness, even if the quality is very high.

Price erosion disincentivizes retailers to sell products. And unless the brand is willing to lower its wholesale price and participate in a sort of price war, retailers cannot make the promised margins.

Price erosion hurts a brand’s top-line revenue. Many retailers require markdowns when they cannot get the required margins. That means either refunding cash or offering credits on future orders.

Price erosion loses customers. Ultimately, when retailers can’t make enough money, they turn to competitors that have more effective price control policies in place. This is true, even if the retailer causes the problem with price-bots in the first place!

Although retail price erosion is mostly in the hands of retailers, there are several strategies brands can adopt to avoid and/or repair the damage. Most of these are strategic business practices and begin with the distribution.

How to stop retail price erosion

 

1. Review your distribution strategies

The days of selling products to every retailer that wants to write a purchase order are over. Brands need to do a much better job of vetting companies and deciding if they’re the type of retailer they will work with. Do they have a physical store or are they online only? Do you have good seller ratings? Are they honest and transparent in who they are and where they sell? These are just a few of the questions that should be considered.

Additionally, the volume and mix of products a brand sells to any individual online seller should be reviewed. Sometimes it’s better to create specific product styles for different market segments based on revenue management forecasts and customer segmentation. This helps to offset intense competition and avoids the “too many eggs in one basket” scenario. The last thing you want is for a company that discounts to have a ton of inventory because prices will stay low until they sell it all.

2. Adopt MAP and other protective policies

While some of these measures aren’t new, those that have existed have been updated to deal with price erosion in eCommerce. For instance, agreements with wholesale distributors now address issues like drop-shipping, direct-to-consumer sales, do-not-ship lists, etc. Terms and conditions of sale have been updated to include brand approval of intellectual property and oversight of where their products can be sold. Some brands will even make it a condition of sale that an account cannot sell their products on Amazon.

adopt map and other protective policies

The newer strategies include unilateral pricing policies, the most prevalent being a “minimum advertised pricing policy,” or MAP as it’s commonly known. This strategy is a direct attempt to reduce price erosion as it establishes the lowest price that a product may be “advertised” for. It does not dictate the ultimate selling price, but since the repricing bots look at the advertised price, that’s not as essential.

As a deterrent to discounting, brands establish penalties for sellers that violate MAP. These range from temporary suspension to immediate termination. It can be a graduated process that removes privileges as well. No matter what they decide, a MAP must have teeth that will make the retailer comply. And it needs to be more than a threat. Consequences must actually happen.

3. Evaluate the interaction between MSRP and MAP

If the brand is already experiencing some price erosion, it’s a good idea to review the prices to see if they still make sense. Has competition created a more cluttered market and therefore caused a need for some adjustments and/or price changes? And if the brand is to adopt a MAP policy, then it needs to make sure that it sets a realistic price through price optimization. Too high and it will fail. Too low and they leave money on the table. Generally, having MAP be slightly lower than MSRP is a good way to go.

MSRP vs MAP


4. Implement online product monitoring

Since there are literally millions of online sellers and thousands of marketplaces, all competing for a share of the same market, it is impossible for a brand to watch its products manually. But it’s essential they do so in order to react quickly and avoid price erosion before it happens. MAPP Trap’s automated product monitoring software watches a company’s products in eCommerce and reports daily pricing, inventory levels, policy violations and more. It also helps the brands to enforce their policies.

In addition to finding price violators, MAPP Trap finds and identifies unauthorized sellers. Since these retailers don’t care about MAP, the company assists in getting them to stop listing the products. Unauthorized sellers present a large challenge as they cause unwanted competition and hurt a brand’s authorized sellers.

With the incredible amount of time, money and effort that goes into developing and bringing great products to market, it’s important to take additional steps to keep them successful. These steps establish a price that provides good margins as well as perceived value at two of those. But brands must not overlook the additional steps necessary to protect their products from price erosion and a loss of brand equity.

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Guides & Tips

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