When brands try to avoid channel conflict with their retailers they often sacrifice sales on their ecommerce site. But it doesn’t have to be that way. Here are three ways to turn the problem into a solution.
You think retail is tough, try manufacturing.
Not only do those who design and produce the products have to worry about a steady supply of materials, storage costs, shipping costs, and plant maintenance… they have to keep their sales channels happy.
And that can be a chore.
Here’s the toughest thing: the buyer loves to look for ways to “cut out the middleman.” That creates a major dilemma. If the manufacturer sells direct-to-consumer (D2C), the buyer is happy, but wholesalers, dealers, sales representatives, and retailers aren’t. The most successful companies that are implementing D2C into their selling strategy are finding a balance between selling through their own ecommerce stores and also through retailers.
For example, one company that’s currently disrupting the men’s grooming industry with this strategy is Harry’s. What initially started as an online-only shaving subscription service has turned into a massively successful men’s grooming brand that sells their products through an ecommerce store as well as in various big-box retailers such as Target and Walmart. This company has avoided channel conflict by maintaining a standard price for their products across all sales channels to circumvent any price competition between the retailer and manufacturer.
The key is maintaining stability throughout your sales and distribution channels. If the manufacturer limits distribution to flow only through retailers and other distributors to the customer, the brand distances itself from the marketplace and loses sales.
The business school term for that problem is “channel conflict,” but we call it “opportunity.”
What’s the solution?
In this article, we’ll take a closer look at the different types of channel conflict that occur, why it can hurt your business, and three practical and creative ways to mitigate channel conflict (with examples).
Types of Channel Conflict
Before we get into why channel conflict can seriously impact your business, it’s necessary to understand the different types of conflict that can occur in the distribution channel. First, let’s look at a normal distribution flow. Each layer of the flow is dependent on the next, which is why even the slightest disruption to this process can create conflict throughout the entire distribution network.
The first and most common form of channel conflict is vertical channel conflict. This occurs when two parties at different points in the distribution channel have a dispute. Causes of vertical channel conflict can include:
- Direct and Indirect Sales – when manufacturers sidestep retailers to sell direct-to-consumer. This can be a common culprit for vertical conflict because it creates competition between manufacturers and retailers that are selling their brands.
- Over saturation – when manufacturers allow too many retailers in a given territory to sell their brands. This can ultimately hurt sales and create fierce price competition for retailers.
Next, there’s horizontal channel conflict which occurs between two parties at the same level in the distribution channel. Causes of horizontal channel conflict can include:
- Loss Leader – when one member of the distribution channel significantly lowers the price of a product to drive traffic to their store. This is a tactic retailers use to bring people into their store, then they upsell more expensive products to customers to make back the margin they’re losing on the discounted product. This creates conflict with other retailers because there may be pressure for them to reduce the price of the same product, even if it will have a substantial impact on their profit margin.
- Turf War – occurs when multiple wholesalers or retailers are selling in the same territory. Manufacturers may appoint a few wholesalers to the same region or city, but if territories aren’t properly set, wholesalers will be battling for sales in the same territory.
Lastly, there’s multiple channel conflict which occurs when a manufacturer has at least two channels competing for sales of the same brands/products. A manufacturer may be selling their products direct-to-consumer (D2C), while also selling to a wholesaler/retailer. This creates conflict because the manufacturer and retailer may be selling the products to the same markets, but at different prices.
Now let’s take a closer look at why channel conflict should be one of the number one concerns for your business.
Channel conflict and your number one concern
Let’s be sure to begin this discussion by focusing on the main thing. We often speak with clients whose primary concern is for sales. Others are worried about offending their distributors.
But those aren’t the best way to frame your channel conflict strategy. Here at The Good, we care about sales and brand relations. Our philosophy, though, is that every decision should begin with concern for the customer.
In fact, all the ecommerce growth and optimization insights in our weekly emails are built on this foundation.
When customers are pleased, demand is high and sales are good. When customers aren’t pleased, heads begin to roll. Never lose sight of who really provides paychecks for your staff and employees. By developing that mindset in all you do – including your agreements with retailers and others in your distribution system – you’ll all have the same goal in mind.
When the customer is happy, every part of every channel works better. Make that idea the center of every marketing discussion, and you’ll be amazed at the difference it can make in team happiness and teamwork.
Channel conflict is potentially lethal to your sales efforts
Every pie only has so many pieces. If the pie is the difference between manufacturing costs and the selling price, you can slice it up in several ways.
Here are a few examples:
- You can sell direct and either require buyers to pick up the products themselves or cover shipping and handling costs. You get the whole pie.
- You can sell only through retailers and either absorb shipping or add it on. You split the pie with someone else.
- You can set up a system that might include field representatives, wholesalers, a commissioned sales team, affiliates, and retailers. Everyone wants a larger piece of the pie.
When multiple businesses are selling the same product, there’s danger of a pricing war. One undercuts the price of the others, hoping to make it up in additional sales. Then someone pushes the price even lower, and customers begin to get confused. Are the low-priced items as good as the higher priced items? Your products can lose value in the eyes of the end users.
Another effect of pricing battles is that the prospect will often hold up on a buying decision and wait for the price to drop even lower. That can lead to sales stagnation. Additionally, those who have already purchased your goods will feel cheated when they see lower prices. That can lead to higher return rates and degradation of your brand.
Price wars can also weaken your distribution channel. They can lose interest in promoting your company’s products, maybe even stop carrying your goods and look to your competitors. When the focus is on the pie, some might go away hungry.
Channel conflict the smart way
Smart companies keep the focus on the customer and get everyone who touches their products engaged in providing superior value to the customer. That puts the pie in a different light altogether. All stakeholders can unite in an effort to keep prices stable and share the pie fairly.
As the manufacturer, you can sit down at the table shoulder-to-shoulder to help pen agreements that outline the rights and responsibilities of every member of the sales effort. Your own participation can be a part of that strategy.
With a customer-centric effort, it won’t be difficult to show your distribution partners why it is important for you to join the effort and how your part will help everyone do better.
3 ways to overcome channel conflict
Here are three examples of how your brand can thrill customers by participating in direct-to-consumer sales – without angering or alienating your distributor base.
Offer products on your ecommerce site that are exclusive to you. Examples are shoes customized to the buyer’s feet, a unique hydration bottle design, a specially branded tent, or a jacket that can only be purchased on your site.
Exclusive products create buzz, build demand, and show off your brand. This tactic avoids channel conflict with your retail outlets and other sellers. That’s because you aren’t directly competing against them, and you’re not undercutting them on price.Exclusive products create buzz, build demand, and show off your brand. Click To Tweet
You’re simply offering a unique product; you’re keeping part of your production in house, but there’s still plenty else to sell.
Chaco (see below) will make sandals to match your school colors. Retailers can’t carry every conceivable combination, but the manufacturer can. It’s a win-win-win situation.
Providing personalized gear isn’t doable for all brands, but most manufacturers can provide a unique option only available on the brand site. You don’t have to go big to generate sales. You only need to be creative.
Every consumer loves free stuff. By using this tactic, you can create value for your consumer. “Buy a ski jacket at the regular price, get your choice of gloves free.”
You’re not undercutting your retailers by lowering the price of the jacket. You’re adding value by including extra product. A variation is to add on services or extend the warranty.
Your fans will love it, and your entire sales channel will benefit from the added exposure and marketplace chatter. Many will be attracted by your offer, but will go to another website to make the purchase (sans the free stuff) in order to get a lower advertised price.
Win-win-win: The customer, the manufacturer, and the rest of the sales team.
Here’s an example (see below) from Apple:
It’s common knowledge that Apple typically doesn’t offer discounts on their products. Nor do their retailers. What Apple does offer are gift cards with purchase (or an iPod some years) which they time up with specific buying seasons: beginning of the school year, holidays, and at the end of a product run.
Without explicitly offering a discount (which would tend to upset large box retailers), Apple is able to save their customers $100 and more on Apple products. And there’s nothing to stop retailers from doing the same thing.
Bundles and Kits
This last tactic is particularly fun for your customers. Creating bundles and kits for your products can grow sales, help your customers get more of your goods, and allow you to (once again) discount products without the appearance of a discount.Creating bundles and kits for your products can grow sales. Click To Tweet
For example, check out Gerber’s excellent idea below.
The Gerber team came up with the brilliant idea of bundling some of their most popular products into one kit for those who want to get ready for the “zombie apocalypse.”
The kit retails for $435 and included six knives which can also be purchased separately. The kit also included a zombie apocalypse carrying case to make sure buyers could easily take all their knives into the walking dead wilderness.
Channel conflict doesn’t have to be a problem; it can be an opportunity
Avoiding channel conflict is a two-step procedure. By beginning with the customer, you can create a common goal, and by finding ways to offer indirect discounts, you can avoid sparking pricing wars or creating hard feelings in your sales channels.
Interested in improving your direct-to-consumer experience? In need of some help with optimizing your ecommerce store? Schedule a free landing page assessment to find out how you can get started growing your business online and developing the perfect ecommerce experience.
Here are some additional resources to help you find more of those win-win-win possibilities:
- 5 Ways Brands Lose Online Sales and How to Win Them Back
- How Ecommerce is Changing Retail with Product Customization
- Ways to Change How Your Retail Partners Think About Showrooming
About the Author
David Hoos is the former Director of Marketing at The Good, conversion rate experts who deliver more revenues, customers, and leads. David and the team at The Good have made a practice of advising brands on how to see online revenue double through their conversion rate optimization services.