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Price Erosion: What Is It, and How Do You Stop It?

 
 
 
 

Price erosion occurs when you are forced to lower your price—and thereby, the perceived value of your product—to compete with unauthorized sellers or sellers who have violated your pricing policy. It’s the consistent loss of product pricing over time.

If your brand is battling price erosion, it’s a good indicator that somewhere down the line, there’s a problem with your retail partners. All it takes is one serious offender to trigger “race-to-the-bottom pricing” where all your retail partners violate your pricing policy to compete with the initial offender, and over time, your price drops so low that retailers have to sell at-cost to compete.

Some brands don’t deal with price erosion. Take Apple for example. Wherever you buy their products, the price is the price. It’s the same across the board. That’s no accident. Brands like Apple work hard to establish the value of their products—and they work hard to enforce that value, too.

Here’s what you can do to combat price erosion.

Choose your retail partners carefully

You don’t want just anyone to sell your products. You might think that the more places sell your products, the more sales you’ll make, and the more revenue you’ll have. But as the saying goes, a few bad apples spoil the bunch.

If some (or even just one) of those retailers diminish the value of your products to get ahead of the competition, it drags down your margins across all online sales, because even your good retail partners will follow suit—to remain competitive. And as retailers lower their prices across the board, the rogue ones will continue undercutting the “new” price.

With a solid pricing policy and good enforcement, you can fight price erosion as it’s happening. But the best defense is to prevent it from starting in the first place. And the way to do that is by choosing retail partners carefully.

You want to work with retailers who will uphold the integrity of your brand and work within your mutual best interests. How do you do that? Create an approval process, and have retailers enter “reseller agreements” before they can legally sell your products.

This raises the barrier to entry and gives you an opportunity to vet sellers before taking the risk of working with them. Make sure they have:

  • Good seller ratings
  • A return policy you’re comfortable with
  • A strong online presence
  • The infrastructure they need to move your product
  • Training and expertise to explain your product and answer questions from customers

Vetting sellers in advance lets you make sure you have the right people “on the front lines” of your online sales. And your reseller agreement lets you establish minimum orders, so you can decide how serious a seller has to be to work with you.

Establish a pricing policy

Without a pricing policy, you have no official price. Your current price basically amounts to a suggestion. And your retail partners aren’t legally bound to follow that suggestion. So they won’t.

Establishing a formal pricing policy, such as a minimum advertised pricing (MAP) policy—which your retailers have to agree to before they can sell your products—ensures that you have something concrete to hold your sellers accountable to.

Coupled with a reseller agreement, this leaves you with a curated group of retailers who have agreed to keep your price above a specified value, which protects the integrity of your price, protects your partners’ margins, and protects your customers from falling victim to fraudulent sellers.

Create a process to remove harmful sellers

Your pricing policy can only protect your price if you enforce it. When there are no consequences for breaking the rules, some will ignore them altogether. And as we’ve discussed, once one retailer violates your pricing policy, others feel compelled to do the same in order to compete.

That’s why your MAP policy should also establish the consequences for breaching your agreement. These consequences should include legal action and penalties that impact a reseller’s ability to sell your product, such as temporarily being placed on a no-sell list, or not being allowed to purchase your product. If a seller continues to violate your policy, your policy should also provide guidelines for terminating the relationship.

By formally laying out how you’ll penalize and/or terminate sellers, you ensure that your MAP admin can consistently enforce your policy, and you won’t have to put up with damaging relationships for long—so your products can maintain their value for as long as possible.

Take pricing enforcement seriously

It’s fairly common for brands to hand off MAP policy enforcement to entry-level employees—or even interns. 

This is a mistake.

If you want your retail partners to take your pricing policy seriously, you need to take it seriously, too. This is not a responsibility for an entry-level employee. You need someone who understands the impact your pricing has on your brand integrity, the consumer’s ability to spot fraudulent sellers, and your retail partners’ margins. 

And there’s a lot at stake if you don’t enforce your policy consistently. You need to treat the sales clerk at a small mom and pop shop the same as you treat the CEO of a major chain, or you’re vulnerable to lawsuits. That’s a big weight to put on an entry-level employee’s shoulders.

Protect your price

Your pricing policy is one of the biggest tools you have to protect your brand’s integrity. But if you have a large product catalogue and numerous retail partners, it’s hard to keep track of every SKU, everywhere they appear. And even with good resellers, you’re bound to have more violations in a single day than you can possibly follow-up on.

That’s why we developed MAP Guard. Using our unique “spidering” technology, MAP Guard crawls every product page where your SKUs are sold and retrieves pricing information for you to evaluate, automatically flagging any page that violates your pricing policy. It’s one of the best ways to combat price erosion.

Want to see it in action?

Schedule a demo.

Category: Blog
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