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Drive and Convert (Ep. 036): Overcoming Channel Conflict

Direct-to-consumer is all the rage right now...and for good reason. Removing wholesalers, retailers, dealers, and marketplaces generally reduces costs and provides a better purchasing experience. BUT, the strongest brands find a way to balance a DTC model with other external sales channels. When considering this option, many brand owners are justifiably concerned about introducing channel conflicts to their business. So, today we're going to talk about channel conflict and how to manage it effectively as a fast-growing ecommerce brand.

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About This Episode:

Direct-to-consumer is all the rage right now…and for good reason. Removing wholesalers, retailers, dealers, and marketplaces generally reduces costs and provides a better purchasing experience. BUT, the strongest brands find a way to balance a DTC model with other external sales channels. When considering this option, many brand owners are justifiably concerned about introducing channel conflicts to their business. So, today we’re going to talk about channel conflict and how to manage it effectively as a fast-growing ecommerce brand.

Read the blog post – How to Best Manage Channel Conflict (and How to Prevent It)

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Episode Transcript:

Announcer:
You’re listening to Drive and Convert, a podcast about helping online brands to build a better e-commerce growth engine, with Jon MacDonald and Ryan Garrow.

Ryan:
Jon, welcome. I am excited again to be here, as per usual. And today is a wonderful day where you get to give me insights on problems that I experience personally, but also a lot of brands that we work with at LP, just constantly this struggle that e-com brands have around how to handle channel conflicts. I, probably at least twice a week, have this conversation with new merchants and existing clients at LP about… Specifically, the channel they’re struggling with is manufacturers and brands competing with retailers. But this channel conflict is a massive conversation, and you’ve seen it because you’ve worked with a lot of brands that have this all over the place, from manufacturer, to wholesale, to retail, to direct-to-consumer.

Ryan:
So, this direct-to-consumer, 2020 changed the game for a lot of manufacturers. And they’ve all had to go direct-to-consumer because retailers stopped selling. They were closed. They were locked down as a country. And so, brands that previously hadn’t gone direct-to-consumer started doing it out of necessity. And then in 2021, as we started to open the country, I think a lot of these brands are not turning that channel off now that they’ve seen a lot of the benefits. And so, now we’ve got to figure out how they balance this. And so, the best brands out there have a very solid D2C model. Locally, in Portland, the one that comes to mind is Nike, who you’ve worked with. Their direct-to-consumer model is phenomenal. I use all their apps. I buy all my shoes direct from them. They also have arguably one of the biggest retail distributions in the footwear space. And so, when other brands that are not Nike, which is most people listening to us, I assume, if Nike, you’re listening, call me, when they’re considering this option, what is the process that these brand owners need to be thinking through and looking at? Do they just flip off the D2C and let retailers jump back in there? Let’s jump into this, channel conflict. It’s a big conversation and let’s try to make it a little simpler.

Jon:
It definitely is. I think I heard a really good and I read a really good quote on Twitter today from Web Smith, who runs a great DTC newsletter called 2PM. And it was a hilarious little quip that went, “Mall owners are saying, “Hey, we’re back in business. This is great.” And then consumers going to the mall and saying, “I have to wait 28 minutes in line at the Sunglass Hut because they have a maximum capacity of six.”” This is still going to be a concern for at least another year for brands. And, well, we think retail is open, and it is open across the US for the majority of the country. I do think consumer habits have changed. And so, is it still a crucial channel? Yes. Is it going to be as much of a mix as it was prior? No.

Jon:
I think for real that consumers are going to buy more online. It’s a great time to be in e-commerce. But I think there are a lot of pros to still being in retail and to still adding new channels. So, I think the trend we’re going to see is a lot of DTC brands that started up over the last 18 months or were DTC prior to the pandemic and then continued to thrive through that because of their model. They didn’t have the retail dragging them down or the sunk cost of the inventory that hadn’t sold yet out there. So, I think what’s going to happen is we’re going to see even those DTC brands taking advantage of the pros of going into these other channels. I think there’s rapid growth potential, right? So, they’re tapping into new audiences overnight on this retail front. It’s really hard for a DTC brand to have the free advertising that comes with a retail location, right? Whether that be your own retail or being at a Nordstrom, right? And somebody walking into Nordstrom and getting the free advertising of seeing your brand. So, I think that’s an option.

Ryan:
It is tough to grow your brand when you’re not in places other than a website.

Jon:
It definitely can be. And I think that’s where it gives you access to those offline shoppers, right? Not everyone wants to shop online. And I think that’s just a fact. But the reality is that even generations like my parents who would not buy online as much despite their son being in e-commerce every single day-

Ryan:
You and me both.

Jon:
But now they’re at the point where over the past year, they’ve had to adjust. They figured it out. My parents are using Apple Pay. Who would’ve thought, right? So, I think that there’s some good opportunities there still, and getting access to those offline shoppers is going to be key. And I think you’d get that authority by proxy. We just talked about the credibility of being on a shelf in a Nordstrom, or having that wide distribution at a Walmart and someone saying, “Hey, you know what? They’re in Walmart, they must be a legitimate business.” Because Walmart comes with the understanding that they’re going to have to work with procurement at Walmart, which we all have heard stories of. Or even a Target. Some people look at Target as the nicer Walmart, if you will, right? Better curated products. And I think the other pros that come out of this are just share of the mind and wallet, right? Being present in the lives of consumers keeps those brands front and center. So, if you can be on the end cap in Target, and somebody’s walking by that once a week on their weekly trip to get all their miscellaneous items they need for their house at Target, that’s once a week, you’re getting free advertising and a spot in their head, right? And so, I think there’s a lot to be said for that.

Ryan:
Oh, yeah. Even if you’re just in the app as people are scrolling to buy things to go pick up. That’s how my wife and I are shopping now, is scroll the app at Target, Walmart, Fred Meyer, whatever it is in the Northwest. Yeah, there’s eyeballs there.

Jon:
I do the same thing. I just, every time I’m out of a product that I need, I literally pick up my wife’s phone, go to the Target app, and scan the barcode. And it adds it to the shopping list. Super simple. It’s a great idea. And next time, she just goes and places the order and drives up and picks it up. It’s a really great experience. So, they’ve definitely have that down. And I think that’s where retail is still valuable, right? Because the consumer wants the convenience, right? There are no wait times, easier returns, being able to try something before they buy it, perhaps, and depending on the product, I think that there’s some options there to say, “Hey, you know what? I need more toothpaste, but I can’t wait three days for Amazon to get it to me, or whoever direct-to-consumer I’m going to order it from, right? But I know that I can get it at Target, and place the order in the app, and go pick it up within an hour or two.” Great. I think that that’s definitely a good opportunity.

Jon:
And I think for brands, they can get more volume. As you mentioned, it’s hard to grow if you’re just a website, especially when you’re starting out and you don’t have a ton of cash driving that traffic behind you. But I think that there’s volume in sales, but there’s also volumes in getting manufacturer discounts. What I mean by that is you hit different volumes of product orders that then you start getting price breaks, and your margins can go up from that. And the only way to really take advantage of that is to have retail or such a big DTC presence that you’re able to do it, but that takes time to get up to that speed. So, getting an order from 1,000 Walmarts that each want 50 of your products immediately is going to get you price breaks that you wouldn’t be able to warehouse and likely sell in time on your own site.

Ryan:
For sure. So, we know there’s a lot of benefits of adding channels as a brand, but I know that it’s not just as simple as flipping the switch and boom, new channel, yay, money in the bank. So, obviously, you’ve seen a lot of challenges when some of your clients or brands you’re affiliated with have done some of these things. So, what are the ones that come to mind that people need to be aware of?

Jon:
Just even getting in the foot in the door is really hard, right? There’s limited shelf space, and then its placement on that shelf space. So, you’re going to be at the top shelf or all the way at the bottom shelf, not at eye level. So, I think that there’s a lot to think about there and a lot of relationships to build up, let alone dealing with the procurement at these large retailers like Walmart, right? I have a personal experience from a good friend of mine who sells products that is perishable, and they sold into a massive drugstore chain. And it got placed in over 1,000 of the drugstore chain stores. They were a couple of percentage points off and hitting their sales volume to maintain a renewal, right? They were very, very close, and it was a few percentage points off. And as part of their agreement, the drugstore chain could just throw away or mark on severe discount the goods, but the company had to buy them back anyways and didn’t get the product back to resell.

Jon:
And so, these contracts are really not in the favor of the brand, they’re in the favor of the retailer. Because the retailer is like, “Hey, I gave you shelf space. I took a chance on you. It didn’t work out. You didn’t hit the metrics, so we’re going to give that shelf space to someone else. And by the way, we weren’t reimbursed for all the product that didn’t sell, and we have the right to do whatever we want with that product now.” So, I think it’s something where there’s a lot of risk involved there. So, sourcing and vetting these partners is really hard and can be really, really expensive, right? And I think you can lose significant margin each level of that. So, you really got to pay attention, right? There’s no higher margin sale than that direct-to-consumer owned sale. And I think that’s why a lot of brands are launching into DTC first, right?

Jon:
Of course then, you’ve got just the logistical complexities, right? You’ve got to get the products out there in bulk to these retailers. In that one order I was talking about with the drugstore chains, can you imagine having to get your product to 1,000 retailers all on the same date, all with product that has the same sell by dates? It’s just a massive issue to fulfill all of that. So, the logistical complexity really adds up quick. And you also do lose control over the customer experience. One of the complaints of that retailer was, hey, I went into a couple of our local drug stores that were selling this product, and it was just laying on the bottom shelf flat instead of hung up with the like product. So, no wonder it didn’t sell, because everyone saw the like product at eye level hanging. And that was where my product was supposed to be. So, you want me to reimburse you because you didn’t fulfill your contract?

Jon:
So, I think controlling that experience at an individual store level, there’s no way you’re visiting 1,000 of these doors and figuring out which ones aren’t doing it right. And then what, are you going to talk to the manager and say, “Hey, I own this product, so I need you to display it right.” How does that even work? So, protecting your brand and the business is really, really difficult. The contracts and stuff alone, it just adds up. So, there are complexities there. Are they barriers that are hard to overcome? Yes. But as you can tell, millions of brands have done it, right? Otherwise, there’s no retail products. So, it’s something that can be overcome, but it’s just, you got to go in at this eyes wide open.

Announcer:
You’re listening to Drive and Convert, the podcast focused on e-commerce growth. Your hosts are Jon MacDonald, founder of The Good, a conversion rate optimization agency that works with e-commerce brands to help convert more of their visitors into buyers, and Ryan Garrow of Logical Position, the digital marketing agency offering pay-per-click management, search engine optimization, and website design services to brands of all sizes. If you find this podcast helpful, please help us out by leaving a review on Apple Podcasts and sharing it with a friend or colleague. Thank you.

Ryan:
Even just getting that expertise in negotiating those contracts or understanding where the potholes are, massive challenge. I’ve had some of that myself. I’m looking at retail contracts, my eyes glaze over. And then finding… My lawyer doesn’t have experience in those, so he’s just like, “Yeah, that sounds good.” He has to go find lawyers that he knows. But there’s companies that can help you do that. And you pay them for the service, but then it’s margin erosion as well. Right now, we’re basically focused on direct-to-consumer brand that has not gone to retail yet or moved to other channels to sell their product. So, let’s assume that your brand decides the pros outweigh the cons, and they start to add new partners into the mix. Some of them can go direct to retail, some of them have to go to distributors that will then sell to retail. And so, that brings up a very complex map of how customers can get to your product and who the customers actually are. Because now you have multiple customers that aren’t the end-user. And so, what are these conflicts that come up in the space that you’ve seen and things that a brand needs to be aware of these conflicts?

Jon:
Well, I think you called out a really good one in the question, which is that you don’t own the customer data. So, you very rarely know who’s buying your product. It makes it really hard to get that lifetime value up because you don’t own the data. We’ve talked numerous times, and I feel like one of the biggest lessons I’ve learned from you has been that it’s okay to break even on that first sale, right? Spend it, get that first sale because you can get more from them, build up your customer database.

Ryan:
I just want that documented that Jon MacDonald learned something from me and admitted it. It happened.

Jon:
It happens.

Ryan:
I’m going to call my mom.

Jon:
I’m throwing confetti. You can’t see it.

Ryan:
Yeah.

Jon:
Yeah, so I think that the manufacturers can also go rogue and sell directly to consumers. We see this all the time with the copycat products on Amazon, right? You start working with a manufacturer, and then, is it Amazon, goes directly to that manufacturer and starts buying up at a cheaper price because they can buy way more, or is it that a competitor goes out and says, “Hey, I can figure out who you’re using to manufacture the product,” and it becomes a problem. Or the manufacturer just listed themselves on Amazon. That happens all the time too.

Ryan:
Alibaba, ooh.

Jon:
Oh, Alibaba, there you go, exactly. You can go buy them for cheap because it’s a stock they have laying around, right? And there’s somebody who’s willing to make money. I think also, you can get oversaturation. So, I think you can have too many authorized retailers that are in a given market. Now, a lot of brands would say, “No, I want to be everywhere.” Well, the fact is, is do you really want to be everywhere? How is that going to hurt your brand? Are you going to be in the wrong places? So, you’re going to be at the gas station when you’re trying to be a premium brand? Probably not, right? You want to be at the Nordstrom. So, I think you have to really pay attention to that.

Jon:
And that also does lead to price wars. So, you’ll see quite often that one retailer severely under cuts the prices to steal business from their competitors. And what happens is it devalues your brand, right? It doesn’t change in a lot of instances what your margins are in selling to them because they’re eating that to get the customer, but the reality is, is that it still hurts your brand to always be on sale and always be on a discount. It makes consumers think that your product is not selling perhaps, or it just makes it seem hard for you if they do research and they want that product, maybe they want a variant that’s not in the store, but they see it on your website. But it’s 20% more on your website because you’re not doing discounting. Well, that’s a challenge, right? Consumers all of a sudden have been trained to accept that discount. You are giving up that pricing right. Even if you have the map pricing or any of that type of stuff in place, it’s not that hard to get around. Best Buy does it all the time. They just say, “Add to cart to get the price.”

Jon:
I can’t imagine what their cart abandonment rate is, but maybe that’s not a stat they’re really concerned about. That really just really bleeds into the turf wars of multiple retailers really vying for that position of being the top retailer or having the best products. And you’re caught up in that war that you can’t have a battle in at all. You have no army. Your soldiers are being moved around without you and you can’t play in it. So, it’s not a place that is always great for a brand, but I think it’s something to be thinking about.

Ryan:
Yes, preparing to have to monitor pricing on the internet is not a fun thing for companies that have never thought through that. I’ve seen it and you’ve seen it because we’re online every day in e-commerce, and you just see the beauty space in particular is brutal for map enforcement. It’s just disgusting. I would not start a beauty brand.

Jon:
Margins are high if you can protect them, but…

Ryan:
Yeah, margins are high, but protecting it, whew, tough. So, how have you seen some of these brands effectively manage some of these channel conflicts? Because we know they’re going to happen. We know there’s going to be frustration, but there’s also going to be some ways that you’ve seen success in handling them.

Jon:
There’s a lot of options and some tactics that you can deploy. I think exclusive products is a huge one, right? Have products that are only available on your website or only available at certain retailers. Retailers love this, right? And it could be as simple as the same flavor with a different name, right, that you put places if you’re… I’ve seen that. I’ve seen colorways that are only exclusive online, DTC. Nike does that, right, with Nike ID. That’s such a great… It’s a customizable products, for instance, right? You can’t get Nike ID anywhere else but their stores or their website. You can’t go into Nordstrom. You get what they have and what they stock, which is a limited selection. Extended sizes, I mean, someone like me wears a size 15 shoe. I can’t go into a retailer. I have to go online, right? Nordstrom laughs at me when I ask for a 15.

Jon:
But I think bonuses, but not discounts is a great way. So, instead of authorizing price reductions at these retailers, include gift of purchase or other add-ons, right? Convince that shoe retailer to say, “Hey, yeah, you know what? I’m going to throw in a pair of socks from the same brand.” Right? So, if I’m buying shoes at… Okay, let’s just go back to that Nordstrom example. Not a good example because Nike would never do this, but if I’m going to buy a pair of Nike’s at Nordstrom, and I want… It’s like, “Yeah, it’s not really the colorway I wanted, but I can get a free pair of Nike socks with these shoes. That’s probably okay. I’ll be okay with this colorway.” Right? So, how do you get over those objections? A little bit there. Or even going online. Yeah, I know it’s $10 more online, but I’m getting that free gifts of purchase if I do it from them. So, I’m okay waiting a week, right?

Jon:
So, you’re overcoming that additional objection in doing that, which is great. And I think if you’re going to work with these retailers, you have to have a watertight contract. You’ve talked recently a lot about working with a legal team to have those in place, right? And how they have to find… There are specialists. They have to find a specialist to help you out with this. And unfortunately, in the case of my friend who had that happen with the massive drugstore chains, it’s wasn’t tight enough of a contract, and it cost him dearly. But I think if you tell partners exactly what, where, how, whom they can sell your products, you control that narrative a little more, and this is all predicated on you having a product that people want, right?

Jon:
Obviously, the first time you get in and you’re trying to prove yourself at that first retailer, you might have a hard time negotiating this, unless you have a very solid DTC model that you can prove the numbers to. And then, I think last but not least, just start small. Always start small. Just know that you’re extending yourself out there, you’re producing the product, there’s a chance that they come back and don’t pay, or want to wait and pay until you’ve sold, or whatever those things are, but just test the product in a few stores and then expand as you get more comfortable. I think that’s really going to be the key.

Ryan:
I think even the bigger retailers have figured out how to allow smaller brands to test through their marketplaces. Walmart’s got a marketplace, Home Depot, Target, Urban Outfitters has one now, easy ways to show a Walmart, hey, here’s our volume that we can sell at least on your website, and here’s… They already have the product images. They can see that sell-through rate and see how it’s competing against things they may have in store and say, “Wow, side-by-side on the site, this product is selling really well. We think we can put that on the shelf, the physical shelf instead of the digital one and see the same sell-through.” So, it’s really low barrier to entry for a lot of brands.

Jon:
Yeah, I agree with that. I think a lot of these marketplaces are doing well. I think the challenge goes back on those marketplaces is the same as it is with selling on Amazon. If you become really, really popular in those marketplaces, Walmart’s going to just go to that manufacturer. There’s a very good chance of that, right?

Ryan:
Yeah, you better be the brand, I guess, is what I would be. I would not be a retailer selling on Amazon or Walmart personally.

Jon:
Yeah, I’m-

Ryan:
They will cut you.

Jon:
I’m shocked every day when I meet dropshippers, because I don’t understand how they’re still in business. You don’t own the brand. You’re selling always a commodity product at margins that are single digits at best. And it’s just not a model I would get into, but I understand the appeal. It’s easy, low costs and barrier of entry, and you can learn a lot about e-commerce in doing it, right? So, there are some benefits there, but at the rate that ad cost has gone up and the margins that are in dropshipping, you don’t hear about it as much anymore. I just don’t think that it’s as lucrative as it once was.

Ryan:
For sure. You have to be really good, I think, at SEO or having an existing site that has good traffic that you can add some of those on. I’ve looked at drop shipping only to prove an industry model where I would then go have a product that I’ve developed. I’d say, “Hey, there’s a big market here. We can see it through drop shipping.” Great, now I’m going to go back, figure out the product I’m going to be making because I can fill this spot, and then I own the product, and push harder now that I own a product that can’t be duplicated on Alibaba or Amazon easily gets some protection.

Jon:
That’s a great example right there.

Ryan:
One thing we didn’t touch on, but it’s probably valuable as we finish this up is how do you guide people on Amazon? Because some brands should be there, some brands shouldn’t be. What’s your reaction when somebody says, “Jon, we need to handle Amazon.”?

Jon:
Right. I think there’s a couple of things. I think that Amazon is its own beast. And it’s something that if you are not prepared to invest the time into Amazon, then don’t even bother, right? It requires time and capital, right? You’ve got to spend a bunch of time optimizing your pages. You have to spend a lot of time on the content. You have to still have to form relationships with Amazon. And then capital, you think spending on Google is a big budget. The number, what is it, number two or number three ad channel is Amazon ads right now.

Ryan:
Fastest growing ad channel, for sure, right? But it’s right behind Google and Facebook.

Jon:
There you go. So, I knew you would know. See, I learned two things from you. There you go, [inaudible 00:23:16]. I learn from you every day.

Ryan:
As of context, my budget on Amazon for my brand is five times what it is on Google. Maybe six times.

Jon:
There you go. And how about the sales volume? Is it five or six times? So, do you think you spend more to get a sale on Amazon than you do on the other channels?

Ryan:
It’s probably about the same. Maybe it might actually be a little cheaper. My conversion rate on Amazon, astronomical. Now, I’m converting it 50% sometimes on Amazon.

Jon:
Okay. I have a job for you.

Ryan:
I don’t think it’s because I’m really good at optimizing my pages. I think I’ve accidentally got some good things going, but-

Jon:
Don’t sell yourself short, Ryan.

Ryan:
I would agree, it is so different than a website in Google and social traffic. There are things happening on Amazon you just don’t understand. And conceptually, I have this argument with our Amazon team a lot and the team running my ads, because I know that there is an algorithm on Amazon. I know it’s not random group of 10 humans pushing buttons internally to decide what rank’s going to happen, or what’s going to sell, or where this ad is going to show up. I know there’s an algorithm. And anytime there’s an algorithm, you can figure it out and understand it. I’ve done a lot of that on Google over the last 12 years. Amazon’s algorithm is strange. And it is… There’s a lot of smart people there, right? And so, I just haven’t… Maybe they’re so much smarter than me, I haven’t been able to figure it out. But it takes time. A lot of failure to figure it out.

Jon:
I agree with that. I just think if you’re not willing to invest that time and money, then don’t even bother with Amazon. Focus instead on DTC and put some effort into trying out some retail.

Ryan:
Got it. Okay. Anything else, Jon? Anything you want to leave us with on channel conflicts and how to resolve those?

Jon:
Not that I can think of at this point. I think that it’s worth a shot. Give it a shot, but go in eyes wide open. And I think the most valuable way to do this is build up a great DTC brand and then use that to parlay a retail experience. And contract, because otherwise, they’re taking a bet on you, and I can promise you that contract’s not going to be as good.

Ryan:
Yep. So, to summarize, you need to do it. If you’re a brand, I think it’s… If you don’t, you’re selling your brand short. At the end of the day, I think there’s a lot of expansion potential. But there’s going to be potholes and pitfalls that you’re going to experience. It’s not a smooth transition, direct-to-consumer to having distribution to having retailers. And I think it’s… Find some experts to help if you can, and then understand there’s going to be more conflicts you can’t predict. There’s going to be things you can’t see when you start that are going to happen. You’re going to have to be able to pivot and move quickly and fix problems. There’s going to be unique fires, I think. They’re going to come up.

Jon:
All part of the fun of running, expanding, and growing business.

Ryan:
Yes, it is. All right, well, Jon, I appreciate the time, and hitting at a point that I think a lot of D2C brands are trying to work through right now as they move into 2021.

Jon:
Awesome. Well, thanks Ryan. Have a wonderful afternoon.

Ryan:
Thank you, you as well.

Announcer:
Thanks for listening to Drive and Convert with Jon MacDonald and Ryan Garrow. To keep up to date with new episodes, you could subscribe at www.driveandconvert.com.

About the Author

James Sowers

James Sowers is the Director of Marketing at The Good. He has more than a decade of experience helping software and ecommerce companies accelerate their growth and improve their customer experience.