Can manufacturers hold the price line?
The feud had been building for a long time. The large mail-order specialty parts retailers and some Internet sellers with little or no overhead were price-cutting name-brand merchandise. At first, it was only the big retailers buying at deep discounts and selling products at low prices. Then along came the mail-order companies, and finally the Internet, with companies that had little or no overhead and were able to sell at ultra-low prices. No one complained about the basic price structure; companies that buy large quantities of product should be able to get that product at a lower per-unit price.
The problem, according to the smaller retailers, was the deep buyers passed on their big discounts to the retail buyers, which hurt their business. The smaller retailers claimed the large retailers were selling the same products at lower retail prices. Sometimes the prices were so low that the retail customer was paying less for the part than the smaller retailer was paying for it at a supposed wholesale price.
THE ISSUES WITH MAP
In an effort to reduce this friction between the manufacturers and Internet and mail-order sellers, some auto-parts manufacturers created Minimum Advertised Pricing (MAP). With MAP, the idea was to require the retailers (no matter how cheap they got their products) to keep their advertised prices at the manufacturer-recommended level (Manufacturer Suggested Retail Price). In theory, it all worked fine—except that consumers got used to ultra-low prices. And some retailers, especially Internet retailers, were determined to keep those price-conscious customers happy with low prices.
Some retailers also found loopholes in the MAP agreements. One of the most common ways to circumvent the MAP rule was to not post a price. By adding a line in their ads saying, "call for prices," the retailer could avoid violating the program. One Web site we checked out described MAP as "pricing controls put in place by some manufacturers in order to protect the value of their products." The disclaimer went on to say, "If we as licensed dealers for these manufacturers do not comply with requests or licensing agreements, our dealerships from these manufacturers can be pulled. When we say 'call for prices,' we are doing so because our price is too low to advertise."
This practice is not limited to the automotive aftermarket. It also happens in many other markets, including aviation. MAP was created to keep prices in line so the general public would not think manufacturers were building cheap products. Proponents claimed that MAP helped company image by maintaining prices.
MAP was also a method to ensure dealers made a fair profit margin so the dealer would be around (in business) to service the product in the future.
MAP was designed to keep the playing field level so the larger shops (businesses) didn't get all the business due to ultra-low prices. The MAP was the same for all retail customers, regardless of whether they purchased the part from a mail-order company, an Internet company, or a local brick-and-mortar business.
Some Internet retailers found a way around MAP by changing the price in their "shopping cart." They would post the MAP, but when customers went to the "check-out" page, they found (usually to their delight) the price was discounted. This also met the legal requirement that the "check-out" price was equal to the actual price the customer paid for the item.
Manufacturers soon became aware of this procedure and changed MAP to require that the shopping-cart price also reflect the MAP. Faced with litigation charging price fixing, many manufacturers dropped the requirement that MAP be listed in the shopping cart.
At the same time, some Internet sellers adjusted their "check-out" page to automatically change the price when the buyer hit the "buy" button, since the law required that the buyer be informed of the actual price for each item.
Cynics reported the manufacturers themselves often helped the low-price retailers by creating different brands without MAP and selling them, often directly, to the low-price retailers. That way, the manufacturer could play both ends by keeping their high-end brand image clean with MAP, while still making money selling volume products with a different name at a lower price.
"When I was at K&N, we had MAP and we were about as successful as anyone with it," said Nate Sheldon, chairman of B&M Racing and former chairman of K&N and SEMA. "I am a believer, but you have to be able to code and trace the products to make the system work. You need to be able to find out where the low-price products are coming from."
MVP—A NEW APPROACH
Since there were so many ways around MAP, MSD Performance created MVP (Maximum Value Program), which went into effect in April of this year. MVP reflects the actual selling price of the part and is a unilateral pricing policy similar to what Bose has done in the audio business. MVP sets the minimum resale price for an item.
Why is this not price-fixing? Because it's voluntary. "If buyers choose not to comply with MVP, we can choose not to do business with them," said Karen Sussman Horgan of Sussco, a marketing consulting firm that has worked with MDS since last summer in creating the MVP.
Is this legal? "It is legal," she said. "U.S. antitrust law states that it is lawful for manufacturers to adopt a policy regarding resale prices and to deal only with resellers who independently choose to follow the policy. Many companies in other industries have already implemented similar programs."
Examples of companies using the MVP concept include Hartman (luggage), Ping (golf equipment), Coach (leather goods), Bose (audio equipment), Michelin (tires), and Maytag (home appliances).
"The way MVP works is that a wholesaler or retailer signs up to be an authorized dealer," said Horgan. "They do not sign our pricing policy. This is a unilateral pricing policy, which means we announce it and they passively choose to accept it or not. We are dealing with products, not commodities. We think MVP helps improve the consumer experience so they have a more positive experience. Now everyone, not only the big guys, can now compete on service and quality, not only price," she added.
Is there a downside to MVP? One possibility is that consumers will purchase fewer products and therefore wholesalers will place fewer orders. There is a formula the marketing types use to calculate how many sales are lost for each dollar a product price increases. We'll have to wait and see if it applies in this case. Another possible complication is tracking.
Electronic products, such as those sold by MSD Performance Group, have serial numbers and can easily be traced through the aftermarket sales system. If someone is selling below MVP, the folks at MSD can track down the violator. The question is, can other automotive aftermarket companies that don't yet have serial numbers on their products single out and track down an MVP violator?
Who doesn't like MVP? Some Internet discounters. MVP takes away their price advantage, since all they can offer the customer is a low price without providing much service.
"It's had a huge impact on the business already," said Horgan. "JEGS and Summit, the big mail-order retailers, are complying. We've had to cut off sales to some violators, but so far, MVP is going smoother than we've anticipated. Some manufacturers are taking a wait-and-see attitude. It will play out over the next six to 12 months. Each program is unique and you don't know how it will work until you actually do it," she added.
"So far, the big WDs are onboard with MVP pricing. They like the idea of finally making a fair profit. MVP pricing also shows the products have value," said Scott Britton, channel account manager at Superchips.
"The Internet was killing the jobbers. I think using MVP is doing the right thing. We stick to MAP and MVP pricing. We are one of the big guys and we need to set an example," said Patrick Saunders, director, Western region, for Keystone Automotive Operations.
"I like the idea of the new MVP because the jobbers have to agree to participate. My only question is, will it (MVP) add to the price?" asked Nate Sheldon, chairman of B&M Racing and former chairman of SEMA and K&N.
"MVP is a name we came up with for a unilateral sales policy," said Rick Rollins, vice president of sales at Superchips and a long-time proponent of the sales policy. "I used to look at Rolex, iPod, Michelin tires, and other products; no matter where you purchased the product, the price was always the same. We started working on this three years ago, back when Superchips was a stand-alone company, before we became part of the MSD Performance Group. In April of this year, we finally launched MVP. As Karen said, the program is moving more smoothly than we envisioned and so far we have signed up more than 50-percent more authorized dealers than we forecast. We find that MVP is similar to what we have seen in the new-car and new-truck sales business. We have seen the ads get away from 'we have the cheapest price' to the no-haggle policy. It's essentially the same," Rollins added.
"In the automotive aftermarket, 'mail order' used to be the cuss word. Then about two years ago, 'Internet' became the cuss word. While the guy selling parts over the Internet in his spare time is happy to make $20 on a $400 sale; a businessman with a facility with overhead and employees needs to make $100 on a $400 sale. It wasn't working," Rollins said.
"As recently as two years ago, I would go to a PWA meeting and people would say, 'you guys have the highest profit margins in the business.' That was starting to go away; the margins began to sink as jobbers and other wholesalers were trying to match the ultra-low prices available on the Internet. It was hurting them," he noted.
"At the end of the day, I said it was 'like eating soup with a fork.' They had done a lot of work, but didn't have any profits to show for it. Some people in the business were thrilled to make one or two points on a product. You can't stay in business with those margins. I figured after 30 years in this business, there had to be a way. Some people needed to be 'hit upside the head with a 2x6' to get their attention, but for the most part, the industry embraced MVP or unilateral sales policy. We will keep our smart jobbers and we will lose others, but they were probably going to go away in any case," Rollins continued.
"Other manufacturers do ask us how it's going early on; they say they will stand behind us. 'We'll let you guys take the first bullet. If you drop to one knee, we'll be with you, but if you go down hard, we will start running the other way as fast as we can.' So far, they are still with us. The major WDs have embraced it. And there are others still at the sidelines watching—they want to see what the impact will be," Rollins said.
"As to the question of tracking sales, we have talked with other manufacturers who are considering serializing and bar coding their products for warranty purposes anyway. There are some very effective systems available that will allow manufacturers of all types of auto aftermarket/specialty parts to track their parts," Rollins said. "I have been a proponent of unilateral sales policy for a long time. It's good to see it taking off."
PROVISIONS OF THE MSD MAXIMUM VALUE PROGRAM
MSD Performance Group, with the assistance of Karen Sussman Horgan and her company, created the Maximum Value Program (MVP), which went into effect in April 2007. MVP is a unilateral pricing plan that uses an authorized dealer program and establishes minimum resale prices for MSD Performance (MSDP) products (MSD Ignition, Superchips, Edge Products, Racepack, and MSD Fuel Injection).
- This authorized dealer program and new pricing policy are designed to maintain the long-term strength of its brands to ensure only top-quality dealers carry the products and margins are sufficient for valuable dealers to continue to support MSD Ignition, Superchips, Edge Products, Racepak, and MSD Fuel Injection products.
- There is one dealer agreement for all MSDP companies.
- Even if your company sells only a few MSDP products each year, it makes sense to sign up. This way, you are ready when the time comes.
- The program is free and designed to help the dealer. WDs will receive a list of authorized dealers and violators.
- MVP replaces the previous MAP program.
- If you sell an MVP product below MVP pricing—the actual price a consumer pays for the product—you will violate the policy.
- If you violate the policy, you will no longer be able to purchase that specific brand. For example, if you sell the MSD 6-AL below MVP pricing of $236.80, you can no longer purchase MSD Ignition products. However, you may continue to purchase Superchips, Edge Products, and Racepak if you are an authorized dealer for those brands.
- The penalty for violating the policy is indefinite.
- MVP pricing is the same as MAP pricing.
- MVP pricing policy allows for free installation, shipping, and dynamometer testing. These are not considered discounts. All other discounts that bring the price paid for the product below MVP are violations of the policy.
- Examples of violations include any discount that would bring the net-realized price below the MVP price. Examples include offering 10-percent off the MVP price, a coupon for use on a future purchase, instant or mail-in rebates, a free gas card, and more.
- Visit www.msdpmvp.com to learn more about the program.
- Even if you buy through a WD, you must sign up for the manufacturer's program to be eligible to continue purchasing products.
Definition of MAP – Minimum Advertised Pricing is any pricing program designed to maintain a minimum advertised pricing level with no direct concern for the actual sales price. If a dealer/WD advertises the product below established MAP levels, the manufacturer can withhold the marketing allowance. The key gap is that the product can be sold at any price. MAP is designed to preserve or build the product's brand image, which could be "damaged" if retail customers were to see it advertised at low prices.
Definition of MVP – Maximum Value Program is a recent development introduced by MSD Performance in April 2007. Like MAP, MVP is also designed to maintain brand image, but this new, voluntary program has teeth. MVP is an authorized dealer program and new pricing policy that establishes minimum resale prices for MSD Performance products (MSD Ignition, Superchips, Edge Products, and Racepak). Resellers sign up with MSD to become an authorized dealer. Authorized dealers may be found in violation of the MVP pricing policy if they sell an MVP product below MVP pricing. Resellers who violate the policy can no longer purchase that particular brand. The penalty for violating the policy is indefinite.
We asked members of our Styling & Performance Editorial Advisory Board to comment on the important topic of MAP and MVP pricing. Members Van Woodell and Jon Hedges responded, providing some additional insight into the pricing situation.
From my vantage point as a WD, I have never seen a MAP program work. It was a weak attempt to quiet WD complaints of price erosion, in most cases caused by mail order and later by Internet sales. The problem with MAP was the promise to "take action" against the offenders, but in most cases, the manufacturers would do nothing.
Oftentimes, it was their larger accounts and they could not afford to upset them. WDs have always been their own worst enemy because we all think that if we beat another WD's price, then we will get all the business. I can't think of one example where this has been the case.
The new MVP pricing policy has a fighting chance because now the manufacturer is taking the pricing out of the hands of the WDs and retailers. They are attempting to control their "brands" and not allow us to destroy all their hard work and considerable time and money they have spent to build a product the retail customer recognizes. By using this method of control, everybody is on a level playing field as far as how much the product sells for in the field.
WDs have only one source from which to buy a product brand. Retailers usually have several sources; so consequently, it becomes a question of who is least expensive. WD salespeople spend half their day playing "let's make a deal" only to have their invoice carried to their competitor, where the price gets met or reduced again. It becomes a vicious circle and nobody wins.
Tracking down violators with serial numbers or some form of identification seems virtually impossible to me. Then it becomes a case of finger pointing with no way to substantiate accusations.
Van Woodell
MAP and MVP have good intentions: encourage a brand's widespread availability by allowing retailers to make a large profit margin. But, in the automotive aftermarket, these programs have always been a challenge to manage.
MAP programs are more common in industries such as consumer electronics or power sports. In those markets, MAP programs have been around for decades and are less visible to consumers who are used to seeing uniform pricing. When a consumer sees a lower price in those markets, the perception is they are getting a bargain. In the automotive aftermarket, a new MAP program can sometimes be perceived as a price increase.
MSD Performance, Inc. recently launched a high-profile MVP. In the two months since that launch, according to data supplied by Terapeak, sales of more than 200 MSD 6AL ignition units on eBay have averaged 21-percent under its MVP price. On RacingJunk.com, the largest online racing community Web site, MSD prices have been even lower. To be fair, MSD's program is still new, but it will be difficult to enforce across the entire industry.
If you don't invest in serializing products it will be very difficult to track down a violator, let alone define who the violator is. Years ago, distribution was simple: manufacturers sold to WDs who sold to retailers. Today, retailers buy from WDs and sell to other retailers. Non-profit car clubs and group buys get products from every distribution channel. Retailers and hobbyists compete on eBay and RacingJunk.com under a variety of names, earning high ratings for customer service.
Jon Hedges
