In luxury, getting the right price can make all the difference

Taft Stettinius & Hollister lawyer Gene Zelek explains how luxury goods suppliers can use US and Canadian law to help them find and maintain the right price for their products

Price is a key factor in the size of the luxury value pie docstockmedia

For most luxury goods suppliers, getting and keeping the right price is just as important as making sure their products are sold in the right places. However, many suppliers do not take full advantage of the tools provided by US and Canadian law to help do the job. This is particularly true if the supplier or the supplier’s parent is based in Europe or other places that are less receptive or even hostile to price management.

The value pie

Two types of price matter – the price to the consumer and, assuming that an intermediary is used, the price to the reseller, whether a retailer or dealer. The consumer price reflects the positioning of a product and signals its worth. In addition, price is a key factor in the size of the value pie, which is the average retail price multiplied by retail sales. This calculation can be done for a brand, a product within a brand or a particular reseller.

At the same time, the net price paid by the reseller to the supplier determines the size of the pie that goes to each of them. If the reseller’s acquisition price is too high relative to the retail price, it will cut back on items typically desired by the luxury supplier as part of its go-to-market strategy, such as on-site inventory, knowledgeable salespeople and enhanced customer service. Alternatively, the reseller may drop the product in favour of one where its margin is better. If the acquisition price is too high relative to the value of the services provided by the reseller, the supplier is leaving money on the table by overcompensating the reseller.

Another outcome is where, due to online transparency of retail prices, a reseller gets the initial sale, but not the repeat business it hoped. For example, suppose a consumer gets a makeover at one of the high-end cosmetic counters in a department store and purchases various products at that time. Then, when it comes time for refills, the consumer buys online from another retailer where the prices are better.

Not surprisingly, it behooves the supplier to grow or maintain the size of the pie and make sure that the way it is sliced reflects the contribution of the reseller.

Maintaining or growing the pie

While several steps can be taken to maintain or grow the pie by stopping or reversing downward pressure on resale price, US and Canadian law permits the manufacturer to set a minimum advertised price (MAP) or a minimum retail price (MRP). Sometimes, resellers charge consumers too much, resulting in lost retail sales that reduce the pie or adversely affect brand image. So, the law also permits setting a maximum offer or sales price or a range that provides both a price ceiling and a floor. However, most common is a wish to level the playing field for all resellers by establishing a minimum price.

MAP involves setting a minimum offer price but does not cover the actual selling price. In the online context, this means that the product page and in-the-cart prices can be covered, but not the checkout price. For brick-and-mortar offers, anything outside the store (like conventional and electronic advertising) can be subject to MAP, but nothing in the store (such as price tags and displays). In contrast, since MRP applies to both the offer price and the actual selling price, its scope is not so limited.

The decision to use MAP or MRP depends on the situation, although it seems that product categories tend to embrace similar approaches. Part of this may be explained by the approach used by competitors or the faulty impression that MAP is the only option. For example, premium cosmetics, footwear and electronics seem to gravitate toward MAP, while MRP is preferred by high-end apparel. At the same time, there are no hard-and-fast rules, as the question is what approach is the best fit, all things considered.

MAP or MRP programmes can lawfully apply to anyone selling in the US or Canada, even to resellers located outside these places where pricing programmes are banned. In addition, these programmes are typically done as unilateral policies to take advantage of US law that exempts them from price-fixing scrutiny. Also important, these policies may be modified or discontinued by the supplier anytime. Canadian law subjects each pricing policy or agreement to the supplier-friendly rule of reason.

The penalties for policy violation can be financial (like the withdrawal of trade funds), the loss of product access (temporarily or indefinitely) or both. A successful policy requires supplier commitment both to evenhanded enforcement and controlling distribution.

Slicing the pie

The reseller’s product acquisition price, net of all discounts, allowances, free goods, rebates and the like, determines how the value pie is cut. A good way to derive the correct price (after making sure reseller costs are covered) is to have it reflect the relative contribution of each reseller toward attaining brand goals, something often referred to as “pay for performance”. Since contributions tend to vary, the result is economic discrimination, where some resellers pay more than others.

In the United States, the federal Robinson-Patman Act requires that competing customers be treated alike in pricing or promotional benefits, unless there is a good reason to discriminate. Contrary to common perception, the law never states that all customers must be treated “fairly and equitably”. While rarely enforced over the last several decades, there is renewed interest in this statute. (Canada has a similar statute, but this note will focus on the US version).  

Only those resellers that compete (chase the same consumer) must be treated similarly. But even there, discrimination is permissible if one or more defences can be applied. That is, the discounted price is: (1) reasonably available to these resellers; (2) cost-justified based on serving each reseller; (3) due to changing conditions (like the discounted sale of last season’s styles) or (4) necessary to meet a competitive price.

Price discrimination is associated with the initial reseller price to acquire the product (including things like volume discounts), while promotional discrimination relates to performance after the reseller owns the product (like advertising or display allowances). Under the law of the latter, allowances and services must be functionally available on proportionally equal terms to competing customers, unless a variation is necessary to meet competition.

A powerful way to proportionalise and recognise relative value is for the supplier to place a value tag on certain performance that does not have to be related to its cost. So, for example, a brand could offer a reseller a 5% rebate on all of its purchases of that brand if the reseller provides an ongoing, 200-square-foot showroom for the line. For resellers that don’t have the space or otherwise aren’t interested, the supplier could offer a one-time payment of $50 to hang a framed poster that promotes the supplier’s products.

As a unique lawyer with hands-on experience in brand management, Eugene “Gene” F. Zelek, Jr., senior counsel in the Chicago office of Taft Stettinius & Hollister, focuses on marketing law, with an emphasis on pricing and channel management, including lawful resale price setting, account-specific and other differentiated pricing and distribution and retail relationships for a wide variety of prominent businesses located throughout the world.  He provides sophisticated counselling, documentation and litigation support for marketing, antitrust and distribution matters, such as assistance with revenue growth management, brand protection, information exchanges, licensing, advertising and labelling claims and strategic alliances. He can be reached at [email protected].

For additional detail regarding MAP and MRP, see Ayelet Israeli and Eugene F. Zelek, Jr., Pricing Policies that Protect Your Brand: How to Prevent Unauthorized Discounting, Harv. Bus. Rev. 76 (March-April, 2020), and on pricing in general, Eugene F. Zelek, Jr., “The Legal Framework for Pricing,” in Thomas T. Nagle, Georg Müller and Evert Gruyaert, The Strategies and Tactics of Pricing: A Guide to Growing More Profitably (7th ed. 2023). 

Email your news and story ideas to: [email protected]