Is giving a price directly to a consumer while selling through retail price fixing?

[cowboymike]

What is the name of your state (only U.S. law)? CA

I work for a software manufacturer. We sell both direct to end users and through distribution and a network of resellers, a very typical model. In the case where a reseller finds an opportunity, it is legal for us to tell the price to the end user, thereby fixing the price and amount of profit the reseller will make on the deal, or am I legally obliged to set the reseller purchase price and let him set his on sale price to the end user. Apologize if I am not being clear, but in the past, companies I have worked for have demanded we not quote price to an end user if the purchase was going to be made through a reseller because it was restraint of trade, price fixing, or other legal concern.

BTW, this is about harm to the reseller. I do not think any harm comes to the end user, but it certainly harms the reseller's ability to run their business.

 

[LdiJ]

What is the name of your state (only U.S. law)? CA

I work for a software manufacturer. We sell both direct to end users and through distribution and a network of resellers, a very typical model. In the case where a reseller finds an opportunity, it is legal for us to tell the price to the end user, thereby fixing the price and amount of profit the reseller will make on the deal, or am I legally obliged to set the reseller purchase price and let him set his on sale price to the end user. Apologize if I am not being clear, but in the past, companies I have worked for have demanded we not quote price to an end user if the purchase was going to be made through a reseller because it was restraint of trade, price fixing, or other legal concern.

Why would you want to quote a price to someone else's customer? Why would you want to interfere in YOUR customer's (the resellers) business? I am uncertain if its legal or not, but it would certainly be a poor business practice.

 

[cowboymike]

Oh, I agree!

Why would you want to quote a price to someone else's customer? Why would you want to interfere in YOUR customer's (the resellers) business? I am uncertain if its legal or not, but it would certainly be a poor business practice.

Oh, I agree it is bad behavior, but desperate sales reps give the implied complicitness (sp?) of management will do what they can to increase their revenue. I know this is bad behavior, what I need to pin down is is it illegal as I have been told in the past, and if it is, or even questionably illegal, what law is it breaking. My legal team is useless on this, so I am hoping a broader audience can point me int he right direction.

 

[Zigner]

Oh, I agree it is bad behavior, but desperate sales reps give the implied complicitness (sp?) of management will do what they can to increase their revenue. I know this is bad behavior, what I need to pin down is is it illegal as I have been told in the past, and if it is, or even questionably illegal, what law is it breaking. My legal team is useless on this, so I am hoping a broader audience can point me int he right direction.

If your company is such that you have a "legal team" then THEY need to be researching this...or, perhaps, they need to be looking for new employment.

 

[LdiJ]

Oh, I agree it is bad behavior, but desperate sales reps give the implied complicitness (sp?) of management will do what they can to increase their revenue. I know this is bad behavior, what I need to pin down is is it illegal as I have been told in the past, and if it is, or even questionably illegal, what law is it breaking. My legal team is useless on this, so I am hoping a broader audience can point me int he right direction.

Management needs to put a stop to the practice because its going to result in losing the resellers as customers. They will find someone else's software to sell and will directly compete with your company. When I say bad business practices, I am not just talking about bad behavior. I am talking about behavior that can potentially put the company out of business.

 

[quincy]

What is the name of your state (only U.S. law)? CA

I work for a software manufacturer. We sell both direct to end users and through distribution and a network of resellers, a very typical model. In the case where a reseller finds an opportunity, it is legal for us to tell the price to the end user, thereby fixing the price and amount of profit the reseller will make on the deal, or am I legally obliged to set the reseller purchase price and let him set his on sale price to the end user. Apologize if I am not being clear, but in the past, companies I have worked for have demanded we not quote price to an end user if the purchase was going to be made through a reseller because it was restraint of trade, price fixing, or other legal concern.

BTW, this is about harm to the reseller. I do not think any harm comes to the end user, but it certainly harms the reseller's ability to run their business.

cowboymike, following is a link to a thread posted to the forum in January 2016. Although the thread's main theme is about a manufacturer that thought goods were being stolen, the thread addresses some of your concerns here. It any rate explains the relationship between retailers/distributors (the resellers) and the manufacturers of goods.

It might be helpful for you to read the last post in the thread (Post #30). Then again, it might not be helpful. But it apparently can't be any less helpful than your legal team, at least.

Here is the link: https://forum.freeadvice.com/online-purchases-sales-87/where-go-here-manufacturer-thinks-my-goods-stolen-620798.html

As a note: When you see a manufacturer's packaging that says "Manufacturer's Suggested Retail Price," that is the manufacturer telling the consumer at what amount the manufacturer thinks the retailer/distributor should sell the product.

I would have re-worked the information in the thread to better answer your specific questions but there are some severe storms rolling through my area of Michigan right now and internet service has been a bit iffy.

 

[LdiJ]

cowboymike, following is a link to a thread posted to the forum in January 2016. Although the thread's main theme is about a manufacturer that thought goods were being stolen, the thread addresses some of your concerns here. It any rate explains the relationship between retailers/distributors (the resellers) and the manufacturers of goods.

It might be helpful for you to read the last post in the thread (Post #30). Then again, it might not be helpful. But it apparently can't be any less helpful than your legal team, at least.

Here is the link: https://forum.freeadvice.com/online-purchases-sales-87/where-go-here-manufacturer-thinks-my-goods-stolen-620798.html

As a note: When you see a manufacturer's packaging that says "Manufacturer's Suggested Retail Price," that is the manufacturer telling the consumer at what amount the manufacturer thinks the retailer/distributor should sell the product.

I would have re-worked the information in the thread to better answer your specific questions but there are some severe storms rolling through my area of Michigan right now and internet service has been a bit iffy.

I agree in general that manufacturers have suggested retail prices. However, those suggested retail prices are generally set unrealistically high, so that retailers can discount from those prices.

That does not appear to be the case here however. What appears to be happening here is that the sales reps are quoting prices lower than the resellers can afford to sell at. Apparently to cut the reseller out.

 

[quincy]

I agree in general that manufacturers have suggested retail prices. However, those suggested retail prices are generally set unrealistically high, so that retailers can discount from those prices.

That does not appear to be the case here however. What appears to be happening here is that the sales reps are quoting prices lower than the resellers can afford to sell at. Apparently to cut the reseller out.

I am not sure where you get the idea that the manufacturer's suggested retail prices are set "unrealistically high." I am also not coming to the same conclusion you have drawn from the question asked. I do not see where the reseller is being "cut out."

The question asked again was: "In the case where a reseller finds an opportunity, it is [is it] legal for us to tell the price to the end user, thereby fixing the price and amount of profit the reseller will make on the deal ..."

The answer to that question as worded is "yes, it is legal."

A manufacturer can control (to an extent) the amount of profit a reseller can make, through its contract with the reseller (distributor, retailer) and through the manufacturer's suggested retail price. The contract a manufacturer has with its resellers will often include a "low price limit" so a reseller does not dilute the value of the goods/services. The manufacturer will advise consumers of the manufacturer's suggested retail price (generally through product packaging) so that a reseller does not inflate the price and limit to the manufacturer's detriment the consumer market for the goods/services.

Price fixing is different. Price fixing is setting price levels or range with cooperation of competitors. In price fixing, competitors will agree that all goods/services being offered will be priced no lower than X, eliminating natural market forces that drive prices. These types of agreements between competitors (which work to raise, depress, fix, peg or stabilize a price) violate the Sherman Antitrust Act.

Restraint of trade will be contracts or agreements which are designed to stifle competition, interfering unreasonably with free competitive pricing. These agreements control the market to the detriment of consumers.

Perhaps the concerns of cowboymike need to be clarified a bit? The reseller finding "an opportunity," for example, needs better definition. This lack of clarification might be what is causing mike's "legal team" to scratch their heads.

 

[LdiJ]

I am not sure where you get the idea that the manufacturer's suggested retail prices are set "unrealistically high."

From having been a CFO for a small manufacturing/distributing company for 15 years and all of my contacts in that particular industry for all of those 15 years. Manufacturer's suggested retail pricing is designed to give a structure to pricing the product on the different levels of marketing. As an example a manufacturer might sell a product at a 70% discount from MSRP to a wholesalers who might then sell it for 50% of MSRP to a retailer who might then sell it for 20% of MSRP to the end user. Its fairly rare for any retailer to sell a product at actual MSRP.

I am also not coming to the same conclusion you have drawn from the question asked. I do not see where the reseller is being "cut out."

It was this:

Oh, I agree it is bad behavior, but desperate sales reps give the implied complicitness (sp?) of management will do what they can to increase their revenue

Its a little indirect but it implies taking sales away from resellers.

The question asked again was: "In the case where a reseller finds an opportunity, it is [is it] legal for us to tell the price to the end user, thereby fixing the price and amount of profit the reseller will make on the deal ..."

The answer to that question as worded is "yes, it is legal."

Yes, its legal but it may be in violation of their contract with their reseller, and its a very poor business practice.

A manufacturer can control (to an extent) the amount of profit a reseller can make, through its contract with the reseller (distributor, retailer) and through the manufacturer's suggested retail price. The contract a manufacturer has with its resellers will often include a "low price limit" so a reseller does not dilute the value of the goods/services. The manufacturer will advise consumers of the manufacturer's suggested retail price (generally through product packaging) so that a reseller does not inflate the price and limit to the manufacturer's detriment the consumer market for the goods/services.

I generally agree with this although its rare to see a contract which disallows seriously marking down a product that isn't selling, in order to sell it off. Also, again, the MSRP generally it not used to keep the price of a product down, it has another function previously described.

Price fixing is different. Price fixing is setting price levels or range with cooperation of competitors. In price fixing, competitors will agree that all goods/services being offered will be priced no lower than X, eliminating natural market forces that drive prices. These types of agreements between competitors (which work to raise, depress, fix, peg or stabilize a price) violate the Sherman Antitrust Act.

Restraint of trade will be contracts or agreements which are designed to stifle competition, interfering unreasonably with free competitive pricing. These agreements control the market to the detriment of consumers.

Perhaps the concerns of cowboymike need to be clarified a bit? The reseller finding "an opportunity," for example, needs better definition. This lack of clarification might be what is causing mike's "legal team" to scratch their heads.

Agree with all of that part.

 

[quincy]

From having been a CFO for a small manufacturing/distributing company for 15 years and all of my contacts in that particular industry for all of those 15 years. Manufacturer's suggested retail pricing is designed to give a structure to pricing the product on the different levels of marketing. As an example a manufacturer might sell a product at a 70% discount from MSRP to a wholesalers who might then sell it for 50% of MSRP to a retailer who might then sell it for 20% of MSRP to the end user. Its fairly rare for any retailer to sell a product at actual MSRP.

I disagree with what is bolded.

I generally agree with this although its rare to see a contract which disallows seriously marking down a product that isn't selling, in order to sell it off. Also, again, the MSRP generally it not used to keep the price of a product down, it has another function previously described.

Manufacturers can and often do "buy back" goods that are not sold, so their products do not wind up on a clearance rack. The reseller will be given a credit. This is done to protect the reputation of (the value of) the manufacturer's goods.

Agree with all of that part.

Good. It is nice when we can agree.

 

[LdiJ]

I disagree with what is bolded.

How often have you purchased a product that was actually at MSRP? I do not think that I have done so in at least the last 10 years...and it may be much longer than that. Although I suppose that seriously upscale retailers might sell at MSRP.

Manufacturers can and often do "buy back" goods that are not sold, so their products do not wind up on a clearance rack. The reseller will be given a credit. This is done to protect the reputation of (the value of) the manufacturer's goods.

Some do that, but it is not that common. A manufacturer would have to be exceptionally profitable to afford to make that kind of business decision. Why? Because if they have that policy their customers have no incentive not to over order, because they know that anything that they would have to mark down the manufacturer would buy back. That is also against the whole economies of supply and demand. If you want to keep your value high, you limit the supply...You don't make it overabundant and then buy it back.

Good. It is nice when we can agree.

Yes, it is.

 

[quincy]

Here is a link to 16 CFR 233.3, Advertising retail prices which have been established or suggested by manufacturers (or other nonretail distributors): https://www.law.cornell.edu/cfr/text/16/233.3

And here is a link to the FTC on Manufacturer-imposed Requirements: https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/dealings-supply-chain/manufacturer-imposed

 

[Proserpina]

I realize this is somewhat OT, but the beauty industry is an excellent example of (often massively) inflated MSRPs. One might go as far as saying it's the norm, not the exception.

/end utterly shallow tidbit.

 

[quincy]

I realize this is somewhat OT, but the beauty industry is an excellent example of (often massively) inflated MSRPs. One might go as far as saying it's the norm, not the exception.

/end utterly shallow tidbit.

You can read what the law says about over-inflating MSRPs.

From 16 CFR 233.3: "... if the list price is significantly in excess of the highest price at which substantial sales in the trade area are made, there is a clear and serious danger of the consumer being misled by an advertised reduction from this price ... a manufacturer, distributor or retailer must in every case act honestly and in good faith in advertising a list price ..."

 

[Proserpina]

You can read what the law says about over-inflating MSRPs.

From 16 CFR 233.3: "... if the list price is significantly in excess of the highest price at which substantial sales in the trade area are made, there is a clear and serious danger of the consumer being misled by an advertised reduction from this price ... a manufacturer, distributor or retailer must in every case act honestly and in good faith in advertising a list price ..."

It's pretty awful, actually. Unfortunately it's pervasive and all-too-common.