Nothing better illustrates the squeeze e-commerce has put on manufacturers than the recent introduction of price protection. UPP is not a defunct cable TV network from the 1990s known for showing mediocre Star Trek spinoffs and teen dramas (that would be UPN). I’m talking about unilateral pricing policy, a draconian pricing initiative instituted by electronics manufacturers such as Sony, Samsung, LG, Panasonic, and Pentax.
In a nutshell, UPP prevents Internet retailers from undercutting their brick-and-mortar (and online) competitors with ridiculously cheap prices. It obliges all sellers to abide by the minimum advertised price set by the vendor. If a retailer like Best Buy or Amazon breaks the agreement, the vendor is free to enact punitive measures by voiding the retailer’s franchise or withholding product supplies.
How Did We Get Here?
I can’t say that I’m surprised by this move. Consumer electronics retailers in particular are facing desperate times. Best Buy recently reported a $1.7-billion loss for its fourth-quarter ending in March 2012, compared with a $651-million profit a year earlier, and announced the closing of 50 superstores with an estimated 400 layoffs in an effort to save $800 million by 2015.
Opined the Los Angeles Times, “The rise of online shopping, a fading market for DVDs and CDs and the popularity of price-comparison apps on smartphones have forced traditional retailers to go nimble and small.”
Sony is expected to lose $2.3 billion this fiscal year in their TV division alone–a division which has now lost money eight years in a row. Not helping the situation are big-box stores like Best Buy that, in their desperation to compete against the likes of Amazon, have no choice but to slash prices on expensive electronics gear to generate sales. These sales are a lose-lose situation for retailer and vendor alike, as both see a significant drop in their profit margins.
No Wiggle Room for Retailers
Since UPP price protection took effect in April, Newegg and Amazon are obliged to sell Sony’s newest HDTVs for virtually the same price as Best Buy (although if recent history is any indicator, Amazon will likely not put up with UPP for long).
True, Internet retailers still have an advantage since they usually don’t have to charge sales tax on purchases. However, brick-and-mortar stores have the ability to fulfill purchases on the spot without shipping costs or hassles. Ultimately, it’s up to the consumer to choose whether to save a little money on an online purchase and wait a week for delivery or pay a little more now at a local store for instant gratification.
If only solving our national debt crisis was this easy.
The Apple Model
The big question for a UPP strategy: Will customers go for it?
Some may point to Apple as a successful example of a UPP price protection in practice. While Apple does enact strict price controls on their products, it’s really in a class by itself since Apple doesn’t license out technology to competitors. If you want a Mac, you can’t get one made by Dell; nor can you get an iPod made by Toshiba. The rest of the consumer electronics world, however, is a little different in that manufacturers like Sony, Panasonic, Sharp, and Pioneer routinely (and quietly) partner up to sell technology to one another, rebadging it as their own. In effect, the exact opposite of the Apple model.
Which brings us to another reason manufacturers are looking to implement a UPP: selling up. As Jim Willcox, electronics editor at Consumer Reports, explained, “Sony and Samsung are bringing in UPP for products where features can be explained on a sales floor and hopefully the customer can be convinced to step up from a basic product that has low margins to a product with more features that offers higher profitability.”
In other words, leave it in the hands of 19-year-old sales drones who earn little more than minimum wage to push premium electronics at retail prices on savvy customers.
So much for solving the national debt crisis.
Bracing for the Backlash
In my opinion, it’s foolhardy to assume that price protection will draw more customers to high-priced electronics. In fact, the very opposite is likely to be true.
If e-commerce has taught us anything in recent years, it’s that consumers are vehement in seeking out competitive prices from a variety of sources. Locking prices on select products won’t force customers into buying them; it’ll just force customers to buy other products from cheaper competitors.
As such, a golden opportunity exists for manufacturers like Toshiba, Sharp, and especially Vizio to swoop in and satisfy the disaffected customers of Sony et al. Companies such as Vizio that have already established a brand identity built on affordability can strengthen their strategic awareness with customers.
Vendors and online retailers also don’t have much to worry about, as consumers will likely turn to other brands they offer. The real losers will be manufacturers participating in UPP, which are losing customers and generating ill-will all around.
As Jim Willcox concluded, “It’s a dynamic that’s going to play out over the next eight to nine months and then companies will say ‘we will continue doing this’ or it’s an experiment that didn’t play out as they hoped.”
Consumers have demonstrated time and time again that they will seek out cheaper alternatives to meet their needs. Unless you’ve got a slam dunk of a product no other competitor can touch, avoid a UPP.