How to Prevent Distribution Channel Conflicts and Boost Pricing Power 💥
Pricing power is one of the major determinants of profitability. Many brands who just started out would have already made a breakthrough if it hadn’t been for a lack of pricing power. Such lost opportunities and competitive advantage are often byproducts of poor distribution channel management that lead to conflicts. That’s why companies, alongside their pricing teams, must work together to avoid the predicament.
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While all businesses are at risk of distribution channel conflicts, the impact is greater for lesser-known brands. Suppose your company sells laptops with unique and interesting features – only your brand is not yet as popular as Apple, Samsung, or Dell. So, you utilised a multichannel distribution to reach more customers. Then suddenly, the business is confronted with a channel conflict that doesn’t align with uniform pricing. What’s a probable outcome?
A prospective buyer browses multiple online stores and discovered that the prices of your laptops vary substantially from one shop to the next. He then purchases a different brand because yours appeared suspicious, possibly of inferior quality. A wasted earning potential, isn’t it? So, how exactly can you prevent channel conflicts?
In this article, we guide you through distribution channels and the potential conflicts between them. First, we’ll go over the different kinds of channels. Then, we show how channel conflicts can undermine brand and product pricing power. Finally, we propose suggestions on how to avoid and manage channel conflicts.
At Taylor Wells, we believe that inefficient distribution channel management is reversible and can be improved. With research and careful planning, you can prevent channel conflicts and reap the benefits of using multiple channels. By the end, you’ll learn how to boost your pricing capabilities and avoid channel conflicts.
Distribution Channel Management: Preventing Channel Conflicts to Increase Pricing Power
What is distribution channel management?
Distribution channel management is the method of regulating the movement of products from the manufacturers or producers to the end customer. A distribution channel is a means to which businesses transport their products. It is an important aspect of business because it delivers products to retailers and customers in all feasible conditions.
Why is distribution channel management important?
Every business develops large quantities of products for prospective customers in several locations. Although these products are manufactured in a production facility, it is crucial to track how these products will be distributed to depots, wholesalers, merchants, and, finally, customers. Distribution channel management ensures an appropriate, cost-effective, long-term, and dependable supply chain, which enhances a company’s profitability.
For brand promotions, businesses experiment with various tactics. Some companies consider multichannel distribution and marketing strategy. Some succeed, while others, on the other hand, face obstacles within channel conflict. To understand channel conflicts better, let’s talk about channels first.
What are distribution channels?
A channel is a way for your products to be distributed. This includes the following:
1. Direct-to-customer distribution channels
Direct channels enable your business to produce and sell your products to your customers. Since it permits more personal interactions, this sales approach may be suitable for smaller enterprises.
Direct selling provides a unique and intimate way to connect with your target market, solve customer concerns, and manage your marketing strategy. Adopting this form of sales channel may entail selling to customers directly through your physical store.
2. Indirect distribution channels
Indirect sales channels are more intricate. In some circumstances, a company will manufacture a product and then sell it to a distributor. The wholesaler then offers the product to middlemen, who in turn sell it to target consumers.
Others manufacture a product and sell it to a collaborator, who then sells it to the customer. However, the partner will not be treated as a distributor. Adopting an indirect sales channel approach may require collaborating with actual retail chains such as JB Hi-Fi or Harvey Norman to sell in well-known stores.
3. E-commerce distribution channels
E-commerce offers a virtual, self-service link to your customers. Although websites do not provide one-on-one interactions, they are a lot more efficient and cost-effective when reaching a vast number of customers.
You can reach out to customers practically anywhere, at any time. Using this type of sales channel means selling on your own website or collaborating with online retailers like Amazon.
What is a distribution channel conflict?
A multichannel approach involves various parties cooperating to produce, market, and transport the product. Examples of these parties are manufacturers, wholesalers, retailers, and resellers. When two or more of the sales partners disagree, channel conflict occurs.
Therefore, channel conflict is defined as when parties in sales processes are against one another. For instance, when a retailer refuses to sell products from a manufacturer due to price disagreements.
What are the types of distribution channel conflicts?
Based on the extent of disagreement and the concerned parties, a channel conflict can be classified into 3 categories:
1. Vertical Distribution Channel Conflict
In a vertical conflict, a channel partner at a higher hierarchy disagrees with a channel member from a lower level or conversely. For illustration, channel conflict among dealers and retailers or wholesalers and retailers can be considered vertical conflicts.
2. Horizontal Distribution Channel Conflict
Horizontal conflict refers to a dispute between channel partners on the same tier. Examples of this type of issue include disagreements between two or more wholesalers or merchants from different locations over pricing.
3. Multiple Distribution Channel Conflict
Vertical channel conflicts are uncommon, but when they do occur, and sometimes in conjunction with horizontal conflicts, the effects are severe. If a company sells its products through numerous channels, it may experience multi-channel conflict, which occurs when channel members participating in one distribution channel have a problem with another. This type of conflict frequently has wide-reaching consequences, even on a national scale.
How does distribution channel conflict destroy pricing power?
Pricing power reflects the impact of a change in a product price on its demand. Without optimal pricing power, your business may be unable to survive and flourish in the face of rising costs. Here are some of the ways channel conflict reduces your pricing power, as well as additional downsides:
1. Channel conflicts devalue brand and product.
When there is a channel conflict with a retailer, it may execute a price promotion on its website that is only available to its customers. Unfortunately, in just a few hours, pricing AIs utilised by other platforms will most likely detect this offering.
Without a question, they will swiftly imitate or possibly beat the promotion. This can result in reduced product price, decrease in product value, profit drop, and major damage to your brand reputation.
2. Channel conflicts lead to a sales slowdown.
Since prices are unpredictable during a channel conflict, customers will likely postpone their purchase until the price falls. Meanwhile, customers who already purchased a product only to discover that the price has lowered will feel deceived. Both scenarios lead to brand devaluation and lower sales.
3. Channel conflicts will further weaken distribution processes.
Businesses that are already seeing channel conflicts must address the issue as soon as possible. Prolonged disputes between sales partners frequently lead to the worst-case scenario. That is when distributors and resellers lose interest in promoting or even selling your products. Organisations that use a multichannel approach must avoid this if they do not want their brand to fail.
Distribution Channel Management & Conflict Prevention
1. Use distribution and sales channel resources to the fullest.
For direct-to-customer sales channels: Your sales department will necessitate resources to handle channel conflict and customer engagement, which includes aspects such as inside sales, outside sales, field sales, sales operations, corporate development, preorders, and technical or field engineering.
For indirect sales channels: When a collaborator conducts the sales activity, your resources are different. These may include accounting system management with an emphasis on training and co-marketing efforts.
For eCommerce channels: Maximise marketing and technical resource support from IT to generate engagements and increase sales.
2. Establish a unified selling strategy across distribution and sales channels.
To avoid channel conflict, your channels must establish distinct sales procedures. When sales processes are not coordinated, mainly in terms of account management and pricing, conflict is more likely to occur. Channels will compete for the same customers, therefore negating the purpose of growing your targeted market share.
For example, you cannot place your physical store adjacent to an indirect sales channel, such as a supermarket. Competing with them will not increase your brand awareness. Your sales procedures must have well-defined geographic and market coverage for each channel to eliminate overlapping and possible conflicts.
3. Implement a pricing system for all distribution and sales channels.
Being inconsistent will not help you. Setting certain rules for one channel but not applying them in the other may lead to channel conflict. We advise you to ensure that your pricing policies are uniform across sales channels so that no one has an edge over the others.
There are pricing solutions in making it easier to operate across sales channels. For instance, some technologies allow you to expand your product, content management, and IT resources.
We know that you want solutions that will fit into your CRM processes. Just make sure that the license includes an extension to other sales channels and that you do not need to pay for additional permissions. Furthermore, verify that your solution provides comprehensive pricing recommendations based on proven methods for the best pricing policy across all channels.
In fact, our findings show that with the right setup and pricing team in place, incremental earnings gains can begin in as little as 12 weeks. The team can capture at least 1.0-2.25% more margin after 6 months using well-researched price management techniques. After 9-12 months, organisations are frequently generating 3-7% higher profits every year as they find more complex and previously unrealised possibilities, efficiencies, and risks.
Distribution Channel Management & Channel Conflict Resolution
The advantages of extending marketing across several platforms are too compelling to ignore. However, failure to synchronise prices across channels may result in serious channel conflicts. Let’s look at a real-world example of how an organisation used pricing to overcome channel conflict.
A company we know used to sell a product in-store for $25 whereas their online partner sells the identical item for $20. This snatched sales from retail establishments, having a substantial impact on their demand. To overcome this issue, they had to pick between lowering their price and terminating their partnership with the online shop. Admittedly, the first choice will reduce its profit margin, and the latter is impractical.
With the help of its pricing team, the company found the perfect answer to their dilemma with strategic pricing across its channels. To maintain higher prices, the company began selling the most updated or newest version of its products in its physical stores. Online partners, on the other hand, will only sell older versions to avoid competition and target a different demographic.
Finally, by adopting smart pricing across its existing channels, the brand was able to boost demand and accelerate sales growth while also minimising the likelihood of a channel conflict.
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Bottomline
Distribution channel management inefficiencies, resulting in channel conflicts, have a variety of negative consequences for any organisation, such as weakening a brand’s and its products’ pricing power. Disagreements and mistakes are an inevitable part of running any business, particularly those in the process of transformation and expansion. Nonetheless, companies looking to increase their distribution channels can reduce possible conflicts by maximising their resources and implementing uniform sales and pricing strategies throughout sales channels.
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Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
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