Updated: Jul 24, 2021
In this article, we will cover the potential impacts of channel conflict and give you some important tools to help manage distribution channel conflict. Our focus will be on the channel conflicts that arise from a new Direct Online Offering. For example, if you start to sell on Amazon however the principles apply more broadly.
One of the key stumbling blocks and fears that prevent businesses from launching a Direct Online Channel is channel conflict. The impact on the established and mostly linear relationship in the traditional distribution model (which has served your business well in the past) will be challenged. Making changes requires conviction, courage and a vision!
What is Channel Conflict
Channel conflict will arise when any of the parties in an existing distribution chain have the belief (it may not be fact-based) they will be disadvantaged by a new competitor from within the existing value chain. A new party competing for the same customer could have a negative impact on profit. This happens either via reduced sales volumes or margin reductions (turf war - prices are lowered to maintain sales volume).
A critical conflict that is often overlooked is the Internal Conflict between sales channels from within a business. For example, a field sales team focused on servicing wholesale clients may feel very threatened by a shift towards direct distribution.
Staff will be concerned on a number of levels:
Financial security (loss of their job or reduced sales impacting volume-based commissions)
Relationships and reputation (how will their customers perceive this change and what commitments have they or the business made in the past)
Employees long term prospects and ongoing career growth
Perceived loss of management support for their channel
Leaders may be distracted by focusing on the bright new shiny object or finite budgets may result in less investment in the indirect channel which can further erode the existing indirect channel’s confidence and perceptions.
What Can Go Wrong!
The worst-case scenario is the loss of the distribution channel partner knocking out your sales and profit. This would be an extreme situation that would only arise if the potential channel conflict is very poorly managed and you are very reliant on one channel partner. The more likely scenario is the distraction, grief and extra time you will have to devote to your existing relationships.
Our steps below will help you avoid being floored!
4 Steps To Manage Channel Conflict
1. Confirm your Strategic Intent
Why are you entering into Direct Online Distribution?
Access to new customers
Replace lost sales from bricks and mortar distribution channels
Getting closer the customers/user of your product to improve feedback loops
Compete with imported products that are not well serviced
Desire to own the customer data
Your situation will be unique to your business and will depend on the many factors not limited to the maturity of your business, your products, the market, competitors actions, organisational culture.
Developing a clear strategic intent on your purpose to enter into direct online distribution creates a clear frame of reference in your decision making. This clarity will help inform your communications and actions and carry you through any challenges should channel conflict arise.
Documenting your intent provides a great reference point to refer back to during those challenging times and will help you see it through.
2. Impact Analysis
Once you have established the clear reasons and intent for entering into direct distribution complete an impact analysis.
Identify the stakeholders impacted (consider your own staff, your suppliers as well as your distribution channel partners)
Stand in their shoes - Fully consider how your proposed changes could impact their business/livelihood (real or perceived).
Consider how each scenario could play out and the impact on your business sales and profitability
Develop mitigation plans
Your staff working in the channel are critical to communicating any change. If they are on board and supportive it will make a huge difference. They are also excellent sounding boards to help understand potential issues and the likely reaction.
3. Develop a Communication Plan
Communication is critical to managing channel conflict and successfully launching your direct eCommerce channel. Your communication plan will flow out of the impact analysis and strategic intent.
For each stakeholder group, develop a plan that covers:
Who will deliver the messages
When messages will be delivered and in what formats
How frequently each stakeholder needs to be updated/engaged (before, during and after the launch)
Address the key concerns your impact analysis has identified
The key messages for each stakeholder group
Mitigation plans - see steps below for tactical ideas
The greater the potential impact of the change on your business the more detailed your plan will need to be.
Allow for flexibility in your approach, your stakeholders/staff may raise relevant questions that you hadn’t considered that will help reduce or eliminate conflicts.
4. Framing the Conversation and Listen
In an effort to remain relevant many businesses are looking for ways to improve customer value. Framing your foray into Direct Distribution around customer value will resonate with your distribution channel partners.
A focus on customer value moves the conversation from one of competition to providing customers with a choice on how and when they buy your product. An important added benefit to discuss is the accelerated feedback loop and 1st hand knowledge of customer needs and views which should drive improved products and responsiveness across all distribution channels.
Having early, frank and clear discussions with channel partners both internal and external that cover how you plan to manage any channel conflict, your strategic intent for moving online will go a long way towards managing your current distribution partner relationships and successfully growing your online presence.
6 Tactical Steps that can help manage channel conflict:
1) Implement Recommended Retail Prices (RRP's) for all channels
RRP's encourage an even playing field across all parties and allows the customer choice of their channel eg online, physical store, phone, market etc: (note the focus on the customer) without creating a price war.
RRP's would reinforce any communication messages to your Retail partners about letting the customer choose the channel that works best for them. Ensuring consistency of RRP’s can be challenging and difficult to enforce for smaller businesses.
Apple is a good example of a large business that has very strong retail price controls across its channels.
Apple still differentiates by offering free shipping and periodically providing discount vouchers. (These and other tactics can be deployed once your channel partners are comfortable with the new paradigm. Your channel partners are likely to be doing the same thing assuming they have margins available.)
2) New Online Branding and Proposition
Creating a new brand and proposition for online distribution ensures that existing channel partners are less threatened by your entry into the market. Communication with channel partners can be very specific about what the direct brand proposition is and how it is differentiated from the indirect channel. The drawback of this approach is the cost of establishing a new brand and the time to build its reputation.
3) Exclusive Online Products
Creating product bundles that are not available for your other distribution channels. This can include the main product + something complementary. For example, if you manufacturer candles you could include a bonus set of tea lights, creating product differentiation when compared to your Indirect Channels.
4) Separate Target Customers
Part of your intent of moving online may be to attract a new customer segment. You will be able to clearly articulate to your current distribution partners who you are targeting, how you intend to target and demonstrate why they will not be impacted by the change.
5) Compensation For Distribution Based on Geographical Area
Compensation for direct sales in an intermediaries distribution region could be offered, while this is a great opportunity to maintain goodwill with the distributor, the distributor still needs to be able to add value. Otherwise, you could potentially reward the worst intermediaries for growth you generate compared to higher performers who already have good market penetration.
Managing these schemes can be time-consuming if regions are not clearly defined disputes between intermediaries may occur and with you in the middle.
6) Creating Additional Value
Depending on the nature of the product you can leverage your existing distribution network for ongoing services like repairs and maintenance.
For example: If you sold Motor Vehicle GPS systems through independent vehicle service centres and were moving to direct online distribution you could include promotional links back to the distribution network to support professional fitting or maintenance. This creates a win-win-win as you expand the customer base, add value to the service centres and provide high-quality solutions for your customers.
For many industries, the shift towards Online Retail is well underway or gathering momentum (the unfortunate circumstance of the pandemic is no doubt contributing) to the shift.
Forward-thinking businesses see the value in developing their own online channels as a way of future-proofing their business. By having full control of the value chain, your brand can become a valuable asset with loyal and supportive customers. As we shift further to a more social and online world where influencers having an ever-increasing impact on successes we believe taking more control of your distribution is critical.
We are fortunate that the barriers to entry into direct online retail are very low with the advent of online marketplaces like Amazon and eBay as well as the ability to very quickly build an online store using tools like Shopify.
Clover Global Pty Ltd is an Australian based consulting agency that is primarily focused on helping established Australian small and medium-sized businesses be successful on Amazon. We are Amazon sellers ourselves!
Our services include expert advice on set-up, listing and growing sales on Amazon marketplaces.
Find out more about our Amazon Consulting Services or Get In Touch with us today to see how we can work together to successfully launch your products on Amazon.