Posted October 29, 2007 4:01 pm by with 8 comments

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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.

  • I don’t know that it is any good anyone being ‘fed up’ with internet retail. It is an entrenched market reality and as long as it is possible to attract more customers with lower pricing, I don’t see price cutting going away either.

  • Nothing will beat one’s own branding in the long run. Most manufacturers now have either websites that direct visitors to partners for online sales or to off line solutions besides giving serious thought to blogging too. In the end, individual brands and reputation will win on internet retail.

  • Trying to put the geneii in the bottle has never worked before. Those that have attempted to do so have normally perished as the market evolves.

  • Ed G

    If the only thing a company can compete on is price, that company is run by a bunch of losers. They are forgetting some of the things that make e/tailing unique: the convenience of having a product delivered right to a customer’s door; a shopping environment available 24 x 7; the ability to educate customers on products and accessories.

    I welcome competition from e/tailers that fail to capitalize on those unique characteristics. You have my blessing to price cut yourself into oblivion.

  • @Ed, it is not that simple. Price-cutting is not a losing strategy as much as it is a short term strategy. I can assure you that we made tons of cash in our price-cutting days. The problem was that it was not sustainable.

    Also, it is important to understand that for all the talk about other differentiating factors, by far the most important factor to customers is price. Survey after survey shows that to be true.

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  • Tyler

    As an online retailer we have poured hundreds of dollars each day into marketing. I think manufacturers in my industry don’t get that concept. I know plenty of brick and mortars that don’t spend that much. Suppliers think because my employees work from home, that somehow our business is not legitimate. I actually hate price cutting, but we do it to stay competitive, and not have our marketing efforts wasted. Unfortunately, online consumers typically go for the lowest price and only regret that decision IF they have a bad experience. Then they will try another retailer next time that has the lowest price…never learning their lesson. I know in my industry, online retailing has been a blessing for many suppliers. But these suppliers hate to admit it. We e-retailers are like mopeds. The suppliers love the ride, but don’t want their friends to see them doing it.

    At the end of the day they know our money can pay the bills just like everybody elses.

    But even after 7 years in this business I find myself constantly fighting for respect among suppliers who hate to admit that I am one of their biggest customers…if not the largest.

  • Tyler, the question is whether your advertising is expanding their market share. If for example, you sell bird cages and are bidding on terms like “bird cages”, you likely are. However, if you are primarily bidding on the brand names of your suppliers, you are not really helping them but rather just “rearranging” the distribution of orders among the retailers. Suppliers are starting to figure this out and may not give as much love to those advertisers.