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Wednesday, March 29, 2006

Price Protection Defined

What is Price Protection? Price Protection is the mechanism by which a vendor provides compensation to a customer/buyer following the reduction in sales price of an offered item. Vendors performing a price reduction on offered products will compensate or credit their customers who purchased the same product or continue to hold the same product in inventory within a certain time period prior to a price reduction. A consumer analogy would occur if a consumer purchased an MP3 player from a local electronics retailer on a Friday. Woke up Saturday morning and read that the same unit had gone on sale at the same retailer for 30% less. Many retailers will provide a credit of 30% to the consumer if they bring the receipt in to the store. Why do they do this? The consumer could return the unit to the store, get a full refund for 100%, and drive down the street to a competitor and purchase the same unit for the discounted price. Retailers often honor these types of reductions within a 30 day period of a sale. Similarly, Vendors often honor the same time of program to their customers the distributors or retailers that purchase from the vendor. If their customer is still holding the unit in inventory, a shipment is in transit, or PO just received and not shipped, a vendor will honor the new price by providing a price protection credit or discount. The retailer could return their inventory for a full refund and not purchase again or purchase form a competitor. The market forces that create the need for a price reduction, often incent the vendor to incent their customers at a retail level to lower prices and sell units at a faster velocity. Pitfalls to avoid can include situations where a distributor or retailer purchasing from a vendor do not pass the price protection discount on to the channel or the end customer, ultimately 'pocketing' the discount. There are many mechanisms and controls that are typically instituted to run sound price protection policies. Price Protection policies are typically run very closely with stock balancing and returns policies. This phenomenon will be discussed in more detail in Price Protection versus Returns in a future article. For further analysis or information on this topic, please contact Softduit Partners.