One Entrepreneur's Brush With Price-Fixing—And Ideas On How To Stop It

How Tower Paddle Boards CEO Stephen Aarstol went against the current, and battled industry forces with innovation.

A couple years ago, I found myself in Thailand, trying to visit Cobra International, the mammoth factory that supplied stand up paddle boards (think kayaks you stand on) to all the major players in the industry. Collectively, their partner companies controlled the lion’s share of the emerging stand up paddle board market. A year earlier, Cobra had conveyed interested in working with us, but they mysteriously stopped replying to my emails.

Buoyed by a recent investment from Mark Cuban on ABC’s Shark Tank, I informed my contact that I would be at the factory on a certain day. We met in the lobby, where we had our meeting right out in the open.

She quickly realized I wouldn’t leave without knowing why the company wouldn’t work with me. She gave me few answers, but I concluded that no one in the business liked that I would be selling boards at a lower price; if Cobra produced for me, it might upset the bigger brands it provided the manufacturing for.

The Wrong Kind of Secret Sauce

Price-fixing happens when competitors agree to set similar prices on products or services. When a major company does this, it establishes a virtual monopoly, keeping prices high and the market closed to newcomers.

Customers ultimately foot the bill for price-fixing. It’s one thing to have a healthy market in which people are willing to pay $600 for an iPhone when there’s a $100 alternative. It’s another thing when companies act anti-competitively to maintain a price that doesn’t reflect true supply and demand.

It’s unethical and illegal, but some companies see plenty of benefits to the risk. They can shore up their status as “industry giants” and make newcomers less threatening. They can control their profit margins, flooding the market with undifferentiated products and centralized pricing decisions.

Tech and Potato Farmer Cartels

Of course, you know price-fixing happens in other arenas besides the stand up paddle board market.

Between 1996 and 2006, several big-name tech brands worked together to control the supply of TVs and color monitors for desktops. It was the most overt kind of price-fixing, even including “burn after reading” memos. When the EU anti-trust regulator found out, the brands were slapped with a $1.96 billion fine.

Not all price-fixing deals are this hush-hush. A decade ago, Idaho potato farmers banded together to set prices on their crops that ensured better profits for everyone. Possibly not realizing their strategy was illegal, a formal presentation was given to a farmers’ assembly, receiving a standing ovation. Now, the grocery industry is crying foul and likening them to foreign oil cartels.

More recently, Penguin Books, along with four other major publishers, was accused of fixing prices on e-books in collusion with Apple. All publishers have settled out of court, leading to a total payout of $164 million.

Companies that feel they have to engage in price-fixing should take a good look within. Why would they need that option? What competitive advantages do they need to beef up to avoid taking illegal routes? Price-fixing is essentially conspiring to hurt customers--not the best strategy for long-term loyalty.

Stand Up to Price-Fixing

I walked away from Cobra that day down, but not out. I took Cuban’s money and adapted to the emerging inflatable paddle board market. Cobra didn’t even produce those boards. We innovated, creating a newer design that proved popular. We closed out 2012 with $1.7 million in sales and did so without raising our prices higher than we wanted to.

It’s not easy to be a newcomer in an industry fraught with price-fixing--but it’s possible. Here are some things entrepreneurs can do to compete.

Innovate and compete where others cannot. Some economists believe government intervention isn’t even needed in cases of price-fixing because the system itself is so unstable. In today’s connected world, there is more transparency, and customers won’t stand for price-fixing for long. Eventually, someone will have to break ranks or a disrupter will break through to establish real competition.

Contact the businesses involved. It doesn’t hurt to handle this head-on sometimes. Reason with them and explain what you’ll do if the price-fixing doesn’t stop. The practice isn’t illegal in every country, but the court of public opinion is more brutal, anyway.

Spread the word. Let the public know about price-fixing and how it hurts the system. If competitors are price-fixing, let customers know and call them out by name. American consumers should benefit from truly free and open markets.

Call the cops. The Anti-Trust Division of the U.S. Department of Justice won’t actually step in except in extreme cases, but the threat of legal action is as powerful as legal action itself. Often, price-fixing is forced upon smaller companies along the supply chain by major players. When the scapegoat is government regulation, these companies have more leverage to insist upon doing the right thing.

Price-fixing is a terrible strategy from all angles. Entrepreneurs, customers, and the market itself are all hurt when a few companies work together to set high prices. As we learned at Tower, there are ways around an unjust system for the entrepreneur brave enough to take them.

--Stephan Aarstol is the CEO and founder of Tower Paddle Boards, an online, manufacturer-direct brand in stand up paddle boarding. Follow him on Twitter @StephanAarstol.

[Image: Flickr user Visit St. Pete/Clearwater]

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21 Comments

  • Michael Pilgrim

     Funny that he talked about Cobra, he sells Coreban on his site, guess where they are made... Cobra. So are you financially supporting a manufacturer that supposedly denied you from entering the industry using their factory?

  • Stephan Aarstol

    Thanks for your comment Michael. You bring up an excellent point, which I'll address below.

    But first I think that everyone is missing the point - Tower is not the victim
    here. This type of collaborative activity actually opens up opportunities for
    upstarts like us. Why do you think we started in the first place? We're going to do $3M-$4M this year, only our 3rd year with a staff of 4. We're fine. Consumers are the ones who get wronged by price fixing, the SUP community that many here seem to be very familiar with. Yet none of you seem outraged. Is this not your peers, your audience, and your customers?

    There are 80+ SUP brands in the industry today, and virtually all of them have nothing to do with this price fixing scheme, so this article isn't about
    indicting the industry. But back in 2007 when things were first getting
    started, a handful of brands and Cobra colluded to act in a non-competitive
    manner to keep prices as high as they could for as long as they could, and
    owning the entire market they were very successful. Two years ago when this happened, they still had dominate market share and were wielding their collective power with this strategy and that's the wall Tower ran into. This is common knowledge inside the industry.

    But Tower being an upstart is flexible and we simply innovated around them, as countless other brands are doing. The rest of the SUP brands are operating in an open, competitive market and that's where the innovation is coming from. Look at it. Yes, if you want Cobra to do some of your manufacturing, you have to play along to a certain degree or get blacklisted, but business is always an imperfect world so you work within the constraints presented.

    What this article is saying is that the SUP landscape (and any business landscape) would be much better for consumers if the companies with dominate market share would not collaborate to act non-competitively, but rather compete with each other on price, innovation, and everything. Price fixing, while profitable short term,is a really dumb long term strategy as they're finding out now 2 years later. It kind of solves itself as you can see if you keep up with recent industry happenings. Regardless, price fixing is unfair to consumers and needs to be called out when it's happening. That's precisely why an anti-trust division of the government was set up in the first place. This is not a small problem.

    On the mention that we sell Coreban boards, we do and highly recommend them every day to our customers. Coreban is a small player in the market and thus they're not capable of driving anything like this. They may have to sort of play along and turn a blind eye in order to get Cobra to make them boards, but that's just operating in the real business world. We identified Coreban as highest quality, most innovative, and best designed high-end brand and decided we'd offer them to our customers that come in wanting the best board money can buy and don't care about price. If price fixing wasn't going on, my guess is Coreban might even be a market share leader.

  • AndrewC

    I think talking about the "soul" of the sport of SUP'ing is really just a bit of sad elitism. Surfing related industries have "sold-out" to commercialism a long time ago. Buying into SUP "soul" means you are buying into a manufactured myth ( thanks Laird!). It's just a fun thing to do , just like any other sport. If Tower SUP's can provide a "good-enough' product at a great price, then I am all for it. COBRA do have a dominant market position and I have no problem believing they can abuse that position to protect their profits.

  • Rosana

    I think if you can't see the "soul" of SUP surfing.... then you don't understand the term it has nothing to do with the commercialism of the sport, it's connecting with the earth, the ocean and finding  your balance. If you don't feel that then you have missed the connection on the water all together.

  • Tim Porter

    The first two lines of this article tells me all I need to know.  SUP is not stand-kayaking.  As a business consultant, operations director and MBA student, I am appalled that FC published this.  Obviously FC doesn't know the industry and neither does the author.  The author may understand the sport, but Lebron James doesn't manufacture basketballs.

  • Jeffrey

    Great article.  Price fixing is very common and this is a clear case.  I love how some of the commenters use terms like "SEO manipulation"...and that Tower is destroying retailers.  It's actually the average consumer that hurts retailers.  Over the past few years there has been a significant shift in the retail world. Consumers demand a quality product at the best price possible.  Companies in all industries have had to shift to selling directly to consumers.  It is an exciting time for new players in the market.  Companies who have once dominated the retail supply chains and held monopolies in the industry are now facing heavy competition.  Congrats Tower for seeing opportunity and taking action.  People love to sit back and complain about different companies that are  going against the grain.  Good on you.  

  • Byron

     I think the key hear is quality. And Tower is anything but, so I understand why they have to go direct to consumers. This entire article is just one big piece of self supporting garbage.

    The good news is companies like Tower do bring in people to the sport, and with such terrible designs they upgrade fast!

  • Stephan Aarstol

    Clearly, we are still going against the current and battling
    industry forces ;)

    My favorite, John Beausang, is the headline on your SUP blog... "Fast
    Company suckered into believing price fixing reason Tower paddleboards can't
    produce SUPs at Cobra http://t.co/Pi1dusfCK1".  I assume your blog is sponsored by some "industry
    forces".  

    I like your blog John and I'm sure I'd like you if and when
    we meet in person. We actually list your blog and others in the SUP blogs
    section of our site. We also have a retail shop in San Diego that serves the
    local SUP community, and we do weekly free demos. We list 100s of other SUP
    shops around the world on our site as well, and recommend people visit their
    local shop when one is available. Our online sales serve a little different
    market - there is room for everyone. We also have created a growing nationwide
    network of "SUP Crews" - groups of SUP fans that get together, paddle,
    and welcome new members.

    This article is about something much larger than the SUP
    industry, and I'm pretty confident the Fast Company editors clearly understand
    what is and isn't price fixing.

  • Matt Hauser

    Damn, you just got owned by all the commenters here. Proof that there is no room in any industry for cry babies and certainly not for people who like to destroy markets by selling the same product for cheaper, just to make a quick buck. You should have used Cuban's money on an education, idiot.

  • Jeremy Rodgers

    price fixing...illegal in all industries except 1) health insurance carriers can do it to health care providers and 2) major league baseball.

    classic.

  • John Beausang

    I'm not sure why you'd publish this completely unbalanced personal opinion from a company that used SEO manipulation and cheap outsourcing to flood a market with an inferior product. They have no history in surf or paddling. I believe he made poker chips? They came into the industry with a smart plan, but in effect, they cut out every mom and pop shop, every rep and didn't invest in or support this new sport. From the inside of the SUP industry, I can tell you that there is far more to this than an ingenious entrepreneur being the victimized by price fixing. If you read his article, you can see they just didn't want to do business with him because of his business mode and lack of soul. I can't speak for Cobra, but there isn't a single line of this article that proves anything about price fixing or collusion of any sort. It's a guy who is bummed that no one called him back in spite of being backed by Mark Cuban. And Mark Cuban, with all his businesses, still understands what it means to be invested in his sport and his industry. You can see the business he loves and has passion for. Tower Paddleboards is nothing like that. They dominate SEO through keywords and buys and not by legitimate content. It's sad. I expect more from Fast Company. I'm not sure what PR company pitched this to you, but you can do better.

  • Stephan Aarstol

    Thanks for commenting Josh & Jeff.

    I'd say this is textbook price fixing and how it happens a
    lot of time when only a handful of companies control significant share of a
    market.

    "The defining characteristic of price fixing is any agreement regarding price,
    whether expressed or implied." - Wikipedia article on Price Fixing

    "The purpose is to coordinate pricing for mutual benefit of the traders. For example, manufacturers and retailers may conspire to sell at a common "retail"
    price; set a common minimum sales price, where sellers agree not to discount
    the sales price below the agreed-to minimum price" - Wikipedia article on Price Fixing

    What happened to Tower was Cobra agreed to make boards for us and then suddenly changed their mind due to pressure from this collection of market share leading top brands. They ceased communication with us, but I persisted and then ultimately showed up on the doorstep of their factory and insisted we would pay their manufacturing price (I even offered to pay more) and meet their minimums, no problem. They refused. It made no sense, so I insisted the person I was having a meeting with tell me what changed. She leaned in and in a nutshell said her managers saw our pricing on your website. She said it was too low and that the existing brands they produced for wouldn't allow it. We were blacklisted unless we agreed to prop up our pricing to match the group.

    It sounds like both of you have familiarity with the stand up paddle board industry, and you are correct that there are other factories in China and Vietnam that make boards for many of the 80+ brands in the industry (and you can add to that other factories in Thailand and the US). Cobra doesn't make 100% of the boards in the market, but at the time they produced the best quality and they had a dominant market share position as they make boards for all of the top market share brands. Collectively, these brands and Cobra have substantial power, and this is why price fixing is so effective and I'd argue why paddle boards are so expensive. This is the same in many industries and if those powers collude to keep pricing high, either overtly or by implied means, consumers ultimately lose out. This isn't even
    illegal in some countries, but it is in the US, and regardless it always results in consumers losing out.

  • René Bruce

    I don't understand if you have Cubans $$$ why you don't just set up your own manufacturing in TX where you can get Mexican labor to match China labor etc.. Take the $$$ and build your own facility, that's what goes down in surf and skate and bike and on and on..  You have zero evidence they price fixed, they probably looked at your model of doing business and decided they didn't need more market saturation. Nobody on earth is required to sell to you. Nothing illegal about refusing to sell to someone or deciding to not sell. Burton has been doing it for years.. 

  • Josh

    I do have SUP-related experience, admittedly as a retailer, not a distributor/manufacturer.

    With respect, I do not believe what you encountered was illegal price fixing. A new source for you, USLegal (since I have Wiki-related trust issues), "Price fixing is an arrangement in which several competing businesses make a secret agreement  to set prices for their products to prevent real competition. It is a criminal violation of federal antitrust statutes.Price fixing also includes secret setting of favorable prices between suppliers and favored manufacturers or distributors to beat the competition."

    If Cobra, the supplier, saw that you were going to price the boards significantly less than than others whose boards they produce, they have the right to deny you the opportunity to work with them in order to maintain their existing relationships. They were not giving others favorable pricing to eliminate competition. They had not contacted other manufacturing facilities to say, "hey, if Tower contacts you for boards, they cost this much." They had an issue with your business model and chose not to produce boards for you. 
    Had they produced boards for you and you "undersold" other distributors using their facility, that could have had wide-reaching implications on their business, including the loss of established clients and relationships, or a forced price drop, diminishing the value of their business. Their decision ostensibly was in their best interest, though not in yours.I don't debate that larger players put extreme pressure on new entrants in the market - every entrepreneur will face it as they open a new business. Some suppliers/manufacturers will not work with you as a result of your business model, lack of experience, financial standing, capacity issues, their existing business relationships or any number of other issues. That doesn't mean there's price fixing or a conspiracy.

  • John Beausang

    How is that price fixing? Your argument is still that you were denied access to their facility, not that they made you pay a specific amount or that all the companies who do business with the Cobra factory got together and set a price. That's not realistic. I can't imagine Surftech having lunch with Riviera or Trident and saying, "Ok, let's all charge $500 wholesale and $1000 retail! Who's in?!" They don't even like having tents next to each other half of the time. If you are bummed that they didn't want to produce your boards, that's legit. I can see why you'd be upset. But what does that have to do with price fixing? I don't see your argument. And as far as the consumers losing out, you prescribe to the idea that the cheapest price is the best price—that somehow this helps the consumer. That whole disposable consumerism is just so sad. When you chose a product because it is well designed, made, sold, instructed and used—boards that last and work—it's worth something. It seems like you woke up one morning and saw a trend and said, "I can make a lot of money by using my knowledge of SEO and direct sales with a cheap product in this growing market. Maybe I can pitch it on TV and get funded." I don't have an issue with that, but own it. Don't pretend you're the victim here. You are not invested in the sport. You are only invested in your brand. There's a difference. It's related to soul and the soul of the sport. You have every right to do what you do and I'm sure you'll bring a lot of people on to the water in the process, which is cool. But there is a culture here that you have shunned and in return, they aren't letting you play in their reindeer games. It's a bummer, but it's not price fixing.

  • Samantha

     I can not believe that this article made it to FC. Tower boards are a joke, they are in it for a quick buck and that is it. Its nice to see Cobra take a stand. Did you even bring a design to Cobra? Or were you just planing to copy what someone else had done? There is more to SUP than just turning a profit and its sad to see companies like yours are running such a great sport by flooding the market with crap.

  • Cssinclair

    WOW price fixing.   Go to a SUP store the prices are all over the board.  othe than the Costco boards there are a lot of cheap brands even though most are coming out of CHina.   This maybe the worse example of price fixing I've ever seen.

  • Jeff

    I am not sure price fixing is accurate at all in this story. SUP's are extremely popular right now, and there is more demand than there is a supply of. I am guessing that Cobra wanted to protect the long term growth of this amazing sport. Companies like Tower that sell direct to consumer are hurting retail shops that are trying to make it in this delicate economy.   Retail shops are the back bone to the growing sport. You need the retailers to get people interested in the sport, providing rentals, clinics, demos etc. It sounds to me like Cobra made a decision to protect itself, not to fix prices.

    It is very easy to sell at a discount price when you do not have to worry about supporting the industry around your product.

    Its to bad the author did not do his research, if you look at the brands the Cobra produces, you will see they have boards in the Tower price range all the way to the top of the price spectrum.

  • Josh

    At the time you went to Cobra, was it owned by other manufacturers? If it was independently owned, it made its own choices about whom it wished to work with and the price at which it would produce products for those clients. That's not price fixing. Neither is competitors "setting similar prices." 
    The manufacturing of SUPs is not owned by Cobra. Other producers use factories in China, Vietnam, the US and other locations to produce boards - you had that choice available to you in a fully competitive environment.