October 30, 2008, 12:00 AM

How the Supreme Court Fractured Online Pricing

(Page 2 of 3)

In another lawsuit, e-retailers BabyAge.com and BabyCatalog.com are suing the Babies ‘R’ Us subsidiary of retail chain Toys ‘R’ Us Inc. and six manufacturers of baby products alleging that the retailer forced the manufacturers to impose minimum prices to prevent price-cutting by online retailers. Before Leegin, about a dozen baby products suppliers had minimum pricing rules; now it’s around 100, says Jacob Weiss, president of BabyAge.com. Those price-setting rules have cost BabyAge.com tens of millions of dollars in sales, says Jack Kiefer, CEO.

Their suit is in federal court and has been combined with a consumer suit against minimum pricing policies. A trial could occur late in 2009. Toys ‘R’ Us and the manufacturers have denied wrongdoing in legal filings.

Higher profit margins

Other web retailers, however, say MAP policies have little if any impact on sales. “If a consumer wants a product, they’re going to buy from somebody,” says Randy Kremer, president of online-only retailer Rugs Direct. Meanwhile, profit margins go up. MAP policies, which cover about 75% of the sales at Rugs Direct, have improved the retailer’s profit margins by 10% to 15%, says David Craig, CEO

“What happens on the Internet when there’s not a MAP policy in place, it takes retail prices down to unacceptable margins,” Craig says.

That makes MAP beneficial to online retailers, even if sales are lower, says Donal Michael Gleeson, managing director of AOIFE Co. LLC, operator of KitchenSource.com. “Sales decrease, but profits increase,” he says.

And it’s not just the biggest players who benefit. Price controls can help small retailers compete against e-commerce heavyweights, says Jeff Bradshaw, president of Totalvac.com. When there is no price floor, Bradshaw says, a big online retailer like Amazon.com might price a vacuum cleaner that wholesales for $150 at $159, while Bradshaw must sell it at $189 or more to make a profit.

But why should consumers buy online when they can get the same price in a store? Convenience and selection, says Bradshaw, echoing other retailers who defend MAP programs. “Why drive 50 miles to get a Miele vacuum if you can get it online at the same price?” he asks.

MAP pricing just means e-retailers must differentiate themselves in other ways besides price, Craig says.

He says Rugs Direct competes by offering 75,000 SKUs, far more than a typical rug store can stock. The company also provides free shipping on most orders, matches competitors’ prices and lets consumers try out a rug at home for 30 days at no charge. Other e-retailers note there’s no sales tax on most online purchases, giving the consumer an automatic price break. (While shoppers are supposed to pay sales tax on their own, few do.)

Oops, sorry!

And price competition is far from dead. Even when manufacturers mandate minimum prices, some retailers ignore those rules, relying on competing merchants to blow the whistle. “We spend a huge amount of time watching what our competitors are doing and going to the manufacturers telling them when competitors are off MAP pricing,” says Wagner of Touchboards.com.

Wagner says some competitors abide by MAP prices most of the time, but then drop prices at crucial times, such as when schools or government agencies get budget allotments. He says competitor CDW Corp. posted sub-MAP prices on many audio-visual products used by schools in June, just as school districts were planning how to spend the new funds they receive July 1. Given the timing, and the fact that CDW dropped prices on products from several manufacturers, Wagner is convinced it was intentional.

Wagner notified the suppliers, but saw little action, likely because CDW is a big retailer, he believes. “So when they weren’t reacting quickly enough I just matched all of CDW’s prices,” Wagner says. “And when they told me to raise my prices, I said just as soon as CDW raises its prices, and not a second before.”

“CDW supports its business partners and understands the purpose of their Minimum Advertised Price guidelines,” Matt Troka, vice president of product and partner management at CDW, said in an e-mail response to Wagner’s comments. “It is our policy at CDW to take into consideration these guidelines when making our own independent pricing decisions.”

Getting creative

Other retailers are offering discounts in various guises, and waiting to see if manufacturers slap their wrists.

An increasingly common practice is to post a price along with a link saying customers can get a lower price by adding the item to their shopping cart. Retailers argue that this is equivalent to a store marking down a price on a shelf, without advertising it.

Some retailers say such offers generate good results. But Bradshaw of Totalvac.com says it was a lot of work because he had to make sure those product pages did not show up in site search results and were not sent to comparison shopping engines-lest manufacturers complain he was advertising a below-MAP price. He discontinued the practice.

Wagner of Touchboards.com also stopped making such offers after a manufacturer complained. Now Wagner places on his sites banners encouraging visitors to click for a quote, and even has a pop-up figure appear on certain pages to explain that, while manufacturers prevent the retailer from advertising lower prices, visitors can get a better price by clicking on the “Send me a quote” link. About 50% of customers who click provide the requested e-mail address, allowing him to offer a lower price.

On some products, instead of listing a price he displays a “click here for price” link next to a product; when the visitor clicks, he sees a below-MAP price. Visitors also can click on a “why isn’t the sale price shown?” link that explains why the site can’t display prices below those set by manufacturers.

Discount coupons

EHobbies sends customers a 20% off coupon good for their next purchase, even on items that are covered by minimum price rules. Manufacturers have not objected, says Brian Carlevato, senior buyer.

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