Marketers are among the first to witness what I call the “fragmentation” of everything: media, consumer preferences, shopping habits and distribution channels.
Brands are almost forced to diversify their presence across multiple distribution channels to avoid becoming irrelevant.
Emerging brands have usually adapted well to the new reality: they offer no exclusivity to a particular distribution channel.
For established brands that were built and have been loyal to a single distribution channel, where most of their customers (used to) shop, deciding on a multi-channel distribution strategy is increasingly a challenge.
Faced with increased consumer expectations that products be available instantly, anywhere they shop, these brands face a big dilemma: how to expand the brand distribution for more exposure and sales, without loosing the support of the existing distributors?
In short, how to avoid channel conflict?
I have some good news for those of you facing this dilemma: the channel conflict challenge is difficult, but not impossible to navigate.
What is Channel Conflict?
The potential for channel conflict exists when a brand is available through multiple distribution channels that are in direct competition for the same market and customer, with an identical product offering.
Once you make the decision to expand, it is important to have arguments in place to address these concerns during discussions which will inevitably occur. Your existing distributors will most likely complain every time your brand is available through a new channel, regardless in the new channel is a direct competitor or not.
The Accelerating Factor
The rapid growth of eCommerce has only exacerbated the need to expand brand distribution. Selling online used to be prohibitive, especially for most small business, but not any more.
A-la-carte platform such as Shopify and WooCommerce makes online expansion fast and cost effective, with all the benefits that come with it: 24/7 availability, price transparency, rapid international expansion, and so on.
Faced with the constant pressure to grow sales, it’s hard for executives to resist exploring the ecommerce channel.
Traditional bring and mortar distributors, in particular those less sophisticated, see eCommerce as a threat, and rightfully so. Expect a lot of push back if you manage a brand that was traditionally sold through independent brick and mortar stores when you decide to adopt eCommerce.
The Dangers of Channel Conflict
Strong, established brands that are demanded by consumers tend mitigate the conflict easily. However, for most up-and-coming brands hungry to expand the dangers are real. Potential negative consequences include:
- Existing distributors will stop pushing or drop your brand. Brand owners have to assess the impact each channel has on the overall business and the probability that distributors switch brands, before making a decision.
- Difficulty in maintaining price consistency across channels, resulting in price wars. Since your products will be available through multiple channels consumers might delay the purchase indefinitely in search for the deal.
- Declining sales. The new channel should have the potential to offset any lost sales within the existing channel, which inevitably occur when customers are given new purchasing alternatives. Expanded distribution should only be pursued if it generates incremental sales. Otherwise the risk of sales canalization is real.
- Bad PR. Having your own distributors bad-mouthing your brand is even worse than dropping it. Bad PR affects the brand image as a whole, regardless of the distribution channel.
- Unhappy customers. Distributors might retaliate by refusing to offer support for your brand, even to customers who purchased your product through them.
Reasons for Expanding Your Brand Distribution
- Flat or decreasing sales. Lack of sales growth is typically the main reason behind the decision to expand distribution, assuming existing distributors are partially to blame for it. In theory a new channel will expose the brand to new customers and markets, thus generating sales growth.
- Changes in purchasing habits. The way we shopped has changed dramatically, from local mom and pop shops, to big box stores, online, and everything in between. Moreover, consumers have little or no loyalty to a particular channel; we all make shopping decisions based on personal circumstances that change daily. Brands are almost forced to explore all distribution options in order to grow.
- Increased competition. New brands are launched on the premise of non-exclusive distribution, which makes it harder for brands loyal to a particular channel to compete in exposure and reach.
- Decrease of distributor support. Many brands are stuck with distribution channels that are becoming non-relevant to the new generation of consumers, who simply don’t shop there.
How to Avoid Channel Conflict
All of the above makes the decision to expand the brand distribution both tempting and risky. For some brands it is a question of survival, which gives them little options but to expand.For others it’s an opportunity to grow sales and expand.
Regardless of the situation, here are some tips on how to mitigate potential channel conflict:
- Have a realistic assessment of risks and opportunities associated with your decision. Will the new channel cannibalize existing sales, or augment them? How real are the risks of loosing business with existing distributors? Will current distributors even be around in 5 years? Are existing distributors the cause for the decline in sales?
- Be upfront with your existing distribution. Once the decision has been made, do not keep it a secret and hope the existing distributors will not notice. Present your vision and goals clearly and explain how a stronger brand will benefit all parties.
- Be ready to accept criticism. As I mentioned earlier, distributors will probably complain, regardless if the channel conflict is real or only perceived. Have a script in place to tackle common objections, and ease their concerns.
- Price your products fairly across all channels. Give every party involved the chance to compete while being profitable.
- Do not favor one channel over another. Present your customers with all the options to purchase your product, and let them make the final decision.
- Assign geographical exclusivity for your brand. Having well defined territorial boundaries for brand representation will certainly eliminate channel conflict among brick and mortar distribution. This strategy is less effective in the case of eCommerce.
- Implement a lead attribution system that will allow the entity who obtained the lead to get the sale. If feasible, this strategy will go a long way to eliminate confusion and conflict.
- Explore private labeling. While certainly more costly and difficult to implement, creating a private label brand for a particular channel is a safe way to grow sales without the negative effects of channel conflict. Private labels are growing in popularity among distributors and retailers so your strategy is likely to be welcome with open arms.
Before making a decision to open a new distribution channel brand owners have to assess how the decision impact your existing distribution.
The goal of opening a new distribution channel is to penetrate new markets and attract a new category of customers the brand is currently not servicing. In other words, the goal is to gain brand exposure and sales, not cannibalize the exiting ones.
Photo credit: Joel Kramer on Flickr