Apr 28, 2009

Low Price - Low Equity?

No surprise, but department stores and other medium- to upscale emporiums are throwing their big name labels overboard in an attempt to keep their own ships afloat. The Times has given its story today an amusing, or terrifying depending on which end of the chain you sit, title: “Never Mind What It Costs. Can I Get It 70% Off?” 

For manufacturers, one big implication is pretty depressing: Never mind creating ‘manufacturer’s recommended prices’ at retail. All it’s good for is as a denominator for the store’s bid for more floor traffic and clearance sales.

A store can, I suppose, be excused for thinking that price cuts are the only game in town these days. But they’re not. Products and services can still sell; on trust, quality and long-term payback. And manufacturer/retailer distribution systems can still outdraw rival channel systems by offering superior customer experiences. Even in a very down market, may the best value win.

Best value isn’t the same as lowest cost. Jim Anderson, my colleague at Northwestern’s Kellogg School, underlines that Value = Benefit – Cost. Benefits – the good stuff, what people actually want – are half the equation. Heck, they’re at least half the equation, aren’t they?

Manufacturers are potentially giving retailers too much room to destroy their equity with consumers. They don’t have to. They should insist on a “no lower than” for their goods – not necessarily their initially recommended price but something that doesn’t debase the brand either. In 2007 the Supreme Court gave manufacturers new latitude to write contracts specifying resale price minimums. The litmus test of RPR legality? Genuine benefit to end customers must be demonstrable (get legal advice!).

I would only add, no manufacturer wants to alienate its downstream partners by strong-arming them or depriving them of room to maneuver against their competitors. The spirit of partnership has to be there. I think it can be. Resale price maintenance agreements” can be an instrument to promote rather than destroy that spirit.


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