Agency Model Should Be Familiar

Apple is in hot water over what appears to be price fixing with major book publishers, in an effort to harm Amazon. Steve Jobs apparently suggested following the agency model, which is more a business model than an actual pricing model.

In the agency model and in regular retail practice, the reseller is a kind of conduit to customers.   By way of distributors, products appear on shelves. Resellers buy, based on a percentage of the suggested retail price. The reseller is entirely free to set their own prices (with certain exceptions) and compete with other resellers in the market. Resellers also generate additional revenue off of selling advertisements within their circulars, charging for end cap or point of purchase promotions or other in-store experiences. The agency model works quite differently.Under the agency model, the manufacturer controls the retail price. Now this might not seem so strange to folks in Apple Land, since Apple has long used MAP (Minimum Advertised Pricing) to ensure the level of pricing in retail. But even MAP allows for some variation, and some resellers have gotten around that. For example, some venues like Amazon might not show a price for a product until you put it into your cart. A well known USA East Coast reseller used to automate pricing display on their website in order to trick Japanese manufacturers who would check on site prices during the daytime in Japan (that didn’t last long – people in Japan tend to work late).

Broad pricing competition means something different now that the focus on retail is online.  Manufacturers have developed their own direct to consumer sales strategies, which means they compete with their own distribution channels.  A manufacturer’s direct advertising price is effectively the same as the suggested retail price, meaning resellers may be able to use that base price as the point upon which they base their own margins. That is why you also find many electronics stores allow price matching if you find the same product sold through another venue at a lower price – they have a means to fight back.

MAP and the agency model are price control strategies. If prices are effectively the same, then people will buy from a specific venue based on other factors than price – convenience, trust, delivery benefits or the like.  Apple is the master of this. Invariably, anyone who invests and loves Apple’s products will choose first to buy through Apple itself, if they can – provided that the price they pay is not significantly more.

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