- January 11, 2023
- Posted by: lmwalsh
- Category: Regulatory Compliance
ANALYSIS: Regulators resurfacing the fair pricing regulation could cause significant headaches for channel program managers that must ensure equity in their partner relationship structures and practices.
By Larry Walsh
Most channel programs segregate partners into different classes based on their qualifications and revenue performance. That’s the foundation of tier systems in which partners earn status. And status equates to benefits, such as product discounts, incentives, and access to support and resources.
That description should sound familiar to anyone with even a passing experience in the IT channel. And yet, most people don’t know that tier and point systems are based on the 1936 Robinson-Patman Act, which codified fair practices that prevent suppliers from charging different prices to different buyers. In other words, vendors can’t give one company a better price at the expense of another.
The law, abandoned for more than two decades by the Federal Trade Commission, is finding new life in the Biden administration. The FTC is investigating Coca-Cola and PepsiCo (producer of Pepsi cola) for giving preferential prices to large retailers but not offering equal pricing to other reseller partners. Legal observers see this as a test case for reviving the statute to investigate and prosecute brands and manufacturers across all sectors — especially technology — for anticompetitive business practices.
The resurrection of Robinson-Patman could result in significant challenges for the channel, which wrestles with issues of segmentation and equity in channel structures and practices.
From Regulation to Practice
The Robinson-Patman act was born during the Great Depression to protect small businesses from price discrimination, preventing larger competitors from using their market power to negotiate unfair price advantages. By protecting small businesses, the law ensures that consumers have access to fairly and equally priced products.
The law was enforced frequently over the decades until the late 1980s, when the Reagan and Bush (41) administrations advocated deregulation. The FTC and other regulatory bodies shifted enforcement away from unfair trade practices between businesses to focus more on antitrust activities that raise consumer prices.
The latest Robinson-Patman case was brought by the FTC in 2000, against McCormick & Company. The world’s largest spice manufacturer was accused of charging one reseller less for the same products than it did a competing retailer. A settlement prevented McCormick from setting prices inequitably for similar retailers. We should note, however, that McCormick wasn’t required to charge all customers the same price. It’s an important detail for the channel.
The lack of Robinson-Patman enforcement didn’t stop the law from being a foundational guide to channel programs’ structural design and development. The act allows vendors to create “classes” of partners or buyers. Vendors may treat partners and buyers unequally if they’re in different classes. Partners and buyers within the same class must receive the same prices, incentives, and benefits. This is the origin of channel program tiers.
If vendors set equal conditions for inclusion in a tier, track, or some other point-based program — such as minimum revenue generation, competencies and certifications, and other performance-based activities — they can legally set different pricing and benefits.
Vendors can’t give a large partner special discounts, incentives, resources, or other competitive advantages without extending the same considerations to similar resellers. Robinson-Patman deems such carve-outs as anticompetitive.
The Exception Problem
In channel program practices, Robinson-Patman evokes George Orwell’s Animal Farm edict: “All [partners] are equal, but some [partners] are more equal than others.” The workaround to equal yet unequal treatment of partners is classes. As long as vendors group partners into classes with similar attributes, they can create different price and reward structures. Partners are equal within a given class, unequal between classes.
Channel programs basically set rules by which vendors and partners operate together. Vendors can slot partners into different groups based on defined attributes by establishing parameters — roles and responsibilities, participation requirements, and performance expectations. When clearly written and articulated, program policies should leave no ambiguity or room for interpretation. A partner either qualifies for program benefits, or it doesn’t.
But vendors have a problem: exceptions.
In practice, following the rules is hard, especially when it puts revenue and sales compensation at risk. Sales and channel management, particularly in the field, can always find reasons why a partner needs or deserves special consideration or dispensation from the rules. Justifications for exceptions run the gamut. A partner has a relationship with an important customer. A partner has the potential to become a big contributor. A partner came close enough to qualifying. A partner will qualify in the future, but it needs the status and benefits today.
Vendors grant policy exceptions to satisfy operational imperatives, keep partners happy, or quell dissent in the channel ranks. Some vendors are quite disciplined about exceptions, drafting detailed guidelines for adjudicating requests and granting deviations. Some vendors play fast and loose with exceptions, giving channel and field teams latitude to grant special treatment to select partners. And exceptions are largely the result of nearly 35 years of lax Robinson-Patman enforcement. (The last case before McCormick was in 1988.)
Vendors are addicted to exceptions. They’re the get-out-of-jail-free card of channel programs. They allow vendors to skirt the rules they created, establish special conditions for select partners, and reap the benefits of their largesse. Every vendor has a patchwork of exceptions that make up a potential minefield of Robinson-Patman compliance issues.
Both sides of the political aisle in Washington have eyed the technology industry for some time for antitrust investigations and enforcement. Microsoft is looking at potential action over its integration of the Teams collaboration app with the Office productivity suite. Google operates under the Sherman Act cloud for its dominance in the search segment. And Amazon and Apple have similar problems with their marketplace and apps store.
The revival of the Robinson-Patman act signals something different. For years, regulators erred on the side of consumer benefit; as long as the buyer got the best price, the competitive practices between businesses didn’t matter. The cola cases show that the FTC is getting interested in how businesses conduct themselves when dealing with intermediaries, such as resellers and retailers. The impact could put IT vendors, or any companies with a channel, in jeopardy of stiff penalties and restructuring of channel programs — both costly propositions.
Channelnomics recommends that vendors take preemptive steps to review their channel program structure to ensure equity in classes and policies. They also should take a second look at their processes for granting program exceptions to partners, and at the number and validity of those exceptions. For more information about Robinson-Patman compliance and compliance support, contact Channelnomics for a consultation.
Robinson-Patman has been the sleeping regulatory giant of the channel. The Biden administration dusting off this old statute could cause cascading consequences across the channel if vendors and channel management don’t take the enforcement threat seriously.
Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert in the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide. Follow him on Twitter at @lmwalsh_CN.