Key Takeaways
- Distribution channel management helps prevent channel conflicts and protect your pricing power.
- Align resources, sales procedures, and market coverage across every distribution channel.
- Consistent pricing across channels reduces price competition, brand devaluation, and lost sales.
- A strategic pricing approach can help businesses manage channel conflict while protecting margins and supporting growth.
Pricing power is one of the major determinants of profitability. Many brands that are just starting out could make a breakthrough if they had stronger pricing power. Such lost opportunities and competitive disadvantages are often by-products of poor distribution channel management, which can lead to conflicts. That’s why companies and their pricing teams must work together to avoid these conflicts.
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While all businesses are at risk of distribution channel conflicts, the impact can be greater for lesser-known brands. Suppose your company sells laptops with unique and interesting features, but your brand is not yet as established as the leading laptop brands. To reach more customers, you use a multichannel distribution strategy. What’s a likely outcome?
A prospective buyer browses multiple online stores and discovers that the prices of your laptops vary substantially from one shop to the next. They then purchase a different brand because yours appears suspicious or possibly inferior in quality. A waste of earning potential, right? 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’ll show how channel conflicts can undermine brand and product pricing power. Finally, we’ll suggest ways to avoid and manage channel conflicts.
How to Prevent Distribution Channel Conflicts
To prevent distribution channel conflicts, businesses need to focus on three areas:
- Use the right resources for each channel. Direct, indirect, and e-commerce channels require different forms of sales, technical, marketing, accounting, and co-marketing support. Using these resources effectively helps each channel serve its intended purpose.
- Create a unified selling strategy. Sales procedures need to be coordinated across channels, particularly for account management and pricing. Each channel should also have clearly defined geographical and market coverage so channels do not compete for the same customers.
- Implement a consistent pricing system. Pricing policies should apply across sales channels so that one channel does not gain an unfair advantage over another. Businesses can also use pricing solutions that integrate with existing CRM processes and support pricing recommendations across channels.
Together, these approaches help businesses reduce overlap, maintain pricing consistency, and limit the conflicts that can weaken pricing power. The right approach also depends on how each distribution channel operates, which is why it is important to understand the different channel structures first.
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 strengthen 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 process of regulating the movement of products from manufacturers or producers to end customers. A distribution channel is a means through which businesses transport their products. It is an important aspect of business because it ensures products reach retailers and customers under the right conditions.
Why is distribution channel management important?
Every business develops products for prospective customers in several locations. Although these products are manufactured in production facilities, it is crucial to track how they will be distributed to depots, wholesalers, merchants, and, finally, customers. Distribution channel management helps ensure 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 as part of their marketing strategy. Some succeed, while others face obstacles due to 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 sell your products directly to customers. Since they permit 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. Using this type of sales channel may involve selling directly to customers 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. Using an indirect sales channel may require collaborating with established retail chains to sell products through well-known stores.
3. E-commerce 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 customers almost anywhere, at any time. Using this type of sales channel means selling on your own website or collaborating with established online retailers and marketplaces.
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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 occurs when parties involved in the sales process are in conflict with one another. For instance, this can occur 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 parties involved, channel conflicts can be classified into three categories:
1. Vertical Distribution Channel Conflict
In a vertical conflict, a channel partner at a higher level disagrees with a channel member at a lower level, or vice versa. For example, channel conflicts between dealers and retailers or between 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 over pricing, even when they operate in different locations.
3. Multichannel Distribution Conflict
Vertical channel conflicts can have serious consequences, particularly when they occur alongside horizontal conflicts. If a company sells its products through numerous channels, it may experience multichannel conflict, which occurs when channel members in one distribution channel have a conflict with members in another. This type of conflict can have far-reaching consequences across a business and its distribution network.
How does distribution channel conflict destroy pricing power?
Pricing power refers to a company’s ability to increase prices without significantly reducing 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 the brand and its products.
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, competing platforms may quickly detect this offering through automated price-monitoring tools.
They may then imitate the promotion or possibly beat its price. This can result in a reduced product price, a decrease in product value, a 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 fallen will feel deceived. Both scenarios lead to brand devaluation and lower sales.
3. Channel conflicts can 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. This 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 need resources to handle channel conflict and customer engagement. These may include inside sales, outside sales, field sales, sales operations, corporate development, preorders, and technical or field engineering.
For indirect sales channels: When a collaborator handles sales, your resource requirements are different. These may include accounting system management with an emphasis on training and co-marketing efforts.
For e-commerce channels: Maximise marketing and technical support from IT to increase engagement and sales.
2. Establish a unified selling strategy across distribution and sales channels.
To avoid channel conflict, you must establish distinct sales procedures for each channel. When sales processes are not coordinated, particularly in terms of account management and pricing, conflict is more likely to occur. Channels will compete for the same customers, thereby undermining your efforts to grow market share.
For example, you should not position your physical store to compete directly with 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 overlap and potential 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 to another 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 that make it easier to operate across sales channels. For instance, some technologies allow you to expand your product, content management, and IT capabilities across channels.
We know that you want solutions that will fit into your CRM processes. Just make sure that the license supports additional 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 pricing methods across all channels.
In fact, our findings show that with the right setup and pricing team in place, incremental earnings 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 annual profits 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 channels 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.
Consider a company that sells a product in-store for $25 while an online partner sells the identical item for $20. This diverted sales from retail establishments and had a substantial impact on demand. To overcome this issue, they had to choose between lowering their price and terminating their partnership with the online shop. The first choice would reduce the company’s profit margin, while the latter would be impractical.
With the help of its pricing team, the company found the perfect answer to its dilemma through strategic pricing across its channels. To maintain higher prices, the company began selling the newest version of its products in its physical stores. Online partners, on the other hand, only sold older versions to avoid competition and target a different demographic.
Finally, adopting a strategic pricing approach across its existing channels can help the brand protect demand, support sales growth, and minimise the likelihood of channel conflict.
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Bottom Line
Distribution channel management inefficiencies, resulting in channel conflicts, have a variety of negative consequences for any organisation, such as weakening the pricing power of a brand and its products. Disagreements and mistakes are an inevitable part of running any business, particularly those in the process of transformation and expansion. Nonetheless, companies looking to expand their distribution channels can reduce potential conflicts by maximising their resources and implementing uniform sales and pricing strategies across sales channels.
For a comprehensive view on integrating a high-performing pricing team in your company, download a complimentary whitepaper on How to Improve Your Pricing Team Performance.
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.
