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Changing Channels? Beware of Conflicts
At one time manufacturing businesses generally sold their products
through just one channel. Either they sold directly to their customers
or they sold through distributors and/or retailers. Some manufacturers
also expanded into new territories by selling through agents, but in any
given area there was usually just one active channel between the
business and its customers.
Today, however, multi-channel marketing is the norm, and when businesses
expand their number of channels it can cause disruptions in
relationships with their traditional channels. The worst conflicts arise
when a manufacturing business that formerly sold through retailers only
starts selling its products direct to the public. The retailers fear
being undercut and have been known to refuse to stock that
manufacturer’s products as a result.
Online Direct Sale Model Attractive to Manufacturers
Dell Computers is just one company that’s made a success of selling
directly to its customers. Not only has the business produced record
levels of profits; it has also produced benefits for the environment,
according to the Dell website:
“Dell's direct business model yields strong production inventory and
capital investment efficiencies that translate into tangible benefits
for the environment. Because all products are made to order, Dell
currently maintains only three days of inventory for most parts and
equipment, which keeps the environmental impact of warehousing to a
minimum. Components and parts are only ordered and shipped to Dell when
they are ready to be assembled into the final computer product, thereby
saving energy and operational costs associated with storing inventory.”
And these efficiencies and savings in Dell’s business model also
translate into profits that most computer hardware manufacturers envy.
Is there any room for retailers in Dell’s system? The answer is a firm
‘no’. Dell doesn’t want any other businesses to stand between it and its
customers.
Hypothetically, though, you can imagine what would happen if Dell
invited retailers to stock its best-selling brand. Any retailers
accepting the invitation would be forever concerned about being
out-marketed and undercut by Dell, and the conflicts between the direct
selling channel and the retail channel would be ongoing.
The Internet has created a new direct selling channel that for some
companies has been extremely rewarding. They’ve cut out the middleman
and done so with minimal extra cost. Profits from direct sales flow
straight to their own bottom line instead of being siphoned off to
retailers, agents and distributors.
Direct Sales Impact Traditional Sales Channel Relationships
Their successes with direct sales have, in many cases, caused a negative
reaction in their traditional sales channels. A retailer whose business
is largely based upon a brand that’s in the process of creating a direct
sales channel will begin to look for another flagship brand to underpin
their operations, and that will impact upon the manufacturer’s revenues
just at a time when they’re funding the new direct selling channel.
There is no easy solution to the problem. The allure of direct selling
is simply too strong to resist, yet the thought of trashing a company’s
existing sales channels is daunting, to say the least. Channel conflicts
pose a threat of serious commercial damage unless they’re managed
correctly.
Evaluate Existing Major Channel Partners
The first step any manufacturer considering entering direct selling is
to evaluate each of its major channel partners. Cellular phone makers,
for example, market through a network of retailers, wholesalers, telcos,
department stores, and sometimes their own branded stores. Each channel
should be carefully reviewed and the relative importance of every
‘partner’ determined.
Of greatest importance is the need to calculate the revenue and profits
each channel partner generates for the manufacturer. Some manufacturers
doing this calculation for the first time have actually found channels
that were costing them money and should have been discarded anyway.
Options for Combining Direct Sales and Retail Channels
Solutions that might best be called ‘creative’ need to be developed for
those channels that are found to be the most profitable in these
analyses. Placating angry retailers is not an easy job, but negotiations
can yield results that enable both sides to come out ahead. Here are
just a few of the solutions created by manufacturers negotiating with
retailers that can be considered:
1.Restrict the number of product lines that are sold directly
2.Partner with retailers to enable them to make sales via the
manufacturer’s direct selling channel and receive a commission
3.Give some retailers exclusive product selling rights
4.Use existing retailers as product delivery locations
5.Reduce the number of retailers selling their products in a given area
to increase the business of their better retailers
6.Reserve marketing in particular languages to language-specific
retailers
7.Direct online customers to retailers in specific areas
8.Agree not to sell products directly below certain price levels (if
this is permitted under applicable legislation)
Channel Conflicts Can Be Resolved
Channel conflicts are the almost-inevitable consequence of expanding a
business through direct selling. The difficulties are not usually
insurmountable, and it provides manufacturers with the stimulus to take
a good look at their existing channel partners and eliminate any that
aren’t making a sufficient contribution to their bottom line.
Channel conflicts can actually be good for the relationships between
manufacturers and their most successful resellers. Most of these
conflicts can be resolved by negotiation, and both parties can benefit
from the outcome.
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