Amazon is disrupting high street or brick & mortar retail, but that may just be the beginning. Ever since eCommerce became a game-changing shopping channel, brands have struggled to maintain their brand equity and pricing.
Early on, many traditional retailers complained about eCommerce sites with low overhead undercutting prices and providing no service. This issue forced the traditional retailers to try to match pricing, but customers still expected the same full service from a brick & mortar retailer.
Obviously, that concept that does not work in the long term. So brands chose to implement more price protection schemes to help their traditional retailers maintain margins.
In the U.S., there are two acceptable and legal methods to do this:
- Unilateral Minimum Retail Price Policy (UMRP or often known as “Colgate Policy”)
- Minimum Advertised Price (MAP) Policy
The bottom line, either pricing enforcement policy is designed to maintain brand equity and force different types of retailers to compete on service vs. price.
Initially, Amazon was considered one of the largest violators of these policies. Much of it caused by their internal price matching algorithms that often ended up with prices falling below manufacturer set pricing guidelines.
However, Amazon is mostly in-line with price policies as they do benefit the bottom line. It also helps that many consumers are now looking at Amazon as a premium brand and are more likely to pay a few extra Dollars for faster delivery and better customer service (returns and refunds).
AMAZON MARKETPLACE THE GROWING CULPRIT
Marketplace sellers on Amazon can still undercut pricing policies and increasingly are doing this to combat the Amazon Buy Box advantage.
ORIS Intelligence, a brand protection agency, released a study on pricing by Amazon third party marketplaces sellers that revealed price erosion is as much as 13% in the marketplace.
During Prime Day, Amazon marketplace sellers may even violate this further to capture the increase in traffic this day creates on the platform.
But the scale of Amazon has put this problem back on the front burner. Some brands even include channel restrictions in their distribution agreements that specifically prohibit using Amazon as a sales channel to try to combat this issue.
The reality is that in any industry that predominantly sells through distribution networks, it is often difficult to find and stop violators.
Even brands with Do Not Sell lists for distributors find that serial violators of pricing policies use different names to hide their true identity. And that makes enforcement difficult.
MORE BRANDS GOING DIRECT TO RETAILER OR CONSUMER
A solution some brands take to avoid the problem is to go directly to the retailer or consumer and eliminate the distribution channel. Nike recently made a deal with Amazon to sell directly on the platform to combat price erosion and fake products.
By selling direct to a retailer, the brand has more leverage to keep retailers in line with pricing policies. Along with going directly to retailers, they also hire brand protection agencies to find violators.
The same way a brand can control Amazon’s pricing this way, it can also better control other smaller eCommerce sellers.
However, this strategy hurts traditional smaller retailers and shops that rely on distribution channels. They often can no longer find the products they need from a local distributor and lose sales.
The most aggressive method to combat the brand and pricing erosion problem is that some brands just start competing with retailers by selling directly from their website. Once a shunned concept, it is becoming more prevalent today.
Of course, this solution is poison for small businesses and distributors as both are eliminated from the sales channel.
Whatever solution a brand implements, it will change how products are distributed and sold. If you are selling brand name products, it may be time to rethink your future.
Can you develop and produce your own products? This solution may be the best path forward to remove your dependence on brand name products.
THE AMAZON BRAND EFFECT
With Amazon becoming a household name, it is also starting to encroach on brand value. The same way private label products at grocery stores are more popular today; Amazon is creating brands and products to cover profitable niches.
If Amazon can offer the same quality as brand name products do, what is the value of a brand? This problem is the next major threat that brands see and they are already bracing for it.
Many have reduced marketing expenditures or product development to remove these costs from their products. In turn, this should keep them more price competitive. But for how long?
BRACE FOR MORE DISRUPTION
Just this week Amazon announced a new service that competes with Best Buy’s Geek Squad. It is a trial, but again it shows that Amazon is not stopping at just selling goods.
They are thinking value added to boost profitability and as a smaller business, you need to do the same.
In conclusion, Amazon continues to disrupt shopping and retail. They moving quickly and as a small business you need to look at your options.
The more control you have over your destiny, the better your future will be. Brands are anticipating more brand value erosion due to Amazon, Walmart, and others.
If your business is dependent on brands, Amazon will continue to do things that will impact you. Don’t get caught without a plan, otherwise, your business may not survive.