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.
Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.
Chris’ combination of academic credentials, career experience and temperament ideally suit his calling as a business development advisor. Clients say he has a mind for business and a heart for service.