Internet retailers are notorious price cutters, and manufacturers are getting fed up. I have been watching with interest the war between internet retailers and manufacturers for years, but there are signs that the battle is getting hotter.
Let me give you a brief history of this issue from my perspective. When I first started an internet retail company, I was a price cutter. That strategy worked; at least it worked for me. We did not own a brand at the time but instead specialized on obtaining in-demand products at lower than normal wholesale prices and dumping them on the market. It was (and still is) a legitimate business model that can generate a ton of profit, but will not make you many friends.
Our online competitors complained bitterly about us but my offline competitors went ballistic. The manufacturers started feeling the pressure and either tried to keep us from getting product, sued us, or tried to force us into advertising at mandated minimum prices. My feeling at the time was that mandating minimum prices was immoral and illegal, and we fought that practice bitterly both in and out of court.
Eventually, we went over to the other side and started our own brands and I have a whole new perspective. We no longer attempt to compete on price, and we do our best to “encourage” retailers selling our brands to keep their prices appropriate.
At the end of June, a Supreme Court Decision granted authority to manufacturers to control the price that their products are sold at. Not surprisingly, manufacturers are using that decision to their advantage. Several manufacturers that we deal with are now actively enforcing a minimum advertised price.
I am now seeing a number of manufacturers trying to ban online retail for their products entirely. Trying to do this is like trying to empty Lake Michigan with a coffee can, but manufacturers are signaling that they are not sure that internet retail is helping them as much as they might have thought in the past.
In many respects, I concur with this conclusion. Here are the two reasons why:
1) I know of no example where a brand has been built online except for online-only businesses. In other words, internet retailers tend to piggyback off the efforts of offline advertising. You could make the case that this is unfair. In today’s retail environment, a retailer can spend a fortune on advertising and yet lose a substantial amount of business to piggyback online retailers who can sell much cheaper because they do not have to advertise.
What I am saying in a nutshell is that internet retail does not usually grow a brand’s market share as much as it simply redistributes the existing sales differently.
2) Manufacturers are having to spend a lot of resources trying to pacify the offline retailers who constantly put pressure on them to “do something about the internet retailers.” I have heard of situations where manufacturers have had to hire extra people just to deal with those complaints.
Because manufacturers generally do not really get new business from most internet retailers and have to put up with headaches, it is no surprise that they are starting to rethink their strategy. In some cases, e-tail is not part of their strategy.
If you are price cutter, you are probably engaged in a short term strategy. It may work but only until the manufacturer finds a way to cut you off and shut you down. I would encourage you to bite the bullet and find a different way to differentiate.
Here are some tips for a sustainable long-term strategy for internet retailers.
1) Don’t alienate your manufacturers. Make them your friend. That means obeying their pricing policies.
2) Start working hard (very hard) on a real differentiating factor. Don’t fool yourself–“good customer service” is not a differentiating factor. Neither is throwing up ten “articles” of regurgitated information.
3) If you possibly can, start your own brand. That is the only way you really will ever be in a position to avoid price competition.
4) Innovate, innovate, and innovate some more. I believe that while internet retail is often of little value to manufacturers today, we are in a position to change that especially in the way we deliver information to consumers.
It would be wonderful if at some point in the future, manufacturers start valuing internet retailers as much as they value their offline retailers. We are the only ones that can make that happen.