Channel Conflict: Manufacturers’ Greatest Online Strategy Challenge and 5 Possible Solutions

Digital channel conflict isn’t new.  This McKinsey report published in 2005 talks about the increasing problems distributors, wholesalers and manufacturers have when trying to sell to retail partners while also being online retailers in their own right.

According to Forrester Research and Gartner, despite the rapid growth of online commerce, 66 percent of product manufacturers identified channel conflict as their single biggest issue hindering their online sales efforts.

Veronica is a talented digital marketer but can’t sell her company’s perfume online in anywhere near the quantities the company’s investors would like.  The company uses retailers to sell on the high street who also sell online, but feel that they should be getting 10% or more of their orders directly from the web where margin is 100% greater than going via their channel partners.

Veronica’s company is contractually compelled to sell their product at the Recommended Retail Price (RRP) online, while her retail ‘partners’ can sell it online bundled with other products or with store points or even discounted on occasion.

When the customer looks for Veronica’s perfume she appears high in search engines, but so do her stockists, only they have a better offer and many customers are already pre-registered with them, and some customers want to buy a diverse range of other products at the same time, something Veronica’s company can’t provide.

No amount of cool website design, SEO, tweeting or more optimized checkouts are going to increase the perfume sales. Online availability isn’t the problem.  This biggest mistake Veronica’s management team can make is to expect digital tactics to deliver direct business growth when the real problem that needs to be addressed is one of digital marketing strategy.  And make no mistake; channel conflict is a marketing problem, it’s 100% textbook marketing strategy challenge.

Veronica is at odds with senior management who perceive the problem to be a supply chain issue and keep her away from the decision-making that could resolve the situation. In fact they don’t perceive the problem to be a marketing issue at all!

In the end the senior managers opt for a fudged outcome.  They choose to keep their online retail presence and sell at RRP, avoid any discord with their retail partners and tell Veronica to spend more on SEO.  In 12 months time, lacklustre online sales will once again be in the spotlight and who is to blame?  Veronica.

There is no doubt that channel conflict isn’t easy to solve.  It requires bravery and strength in leadership.

Here are five possible approaches that can be taken to assist in overcoming the marketing challenge.

  1. Stop direct e-commerce plans and instead seek better positioning on partner websites in exchange for your channel support.  The manufacturer’s website then becomes a promotional platform only (doesn’t fulfill investor ambitions)
  2. Choose to go head-to-head with your partners and seek to displace them in search and other digital channels (high risk as larger retailers tighten their terms and conditions)
  3. Create a new web only version of the product that retailers have no access to. (Typically upsets channel partners)
  4. Discount
  5. Rebrand product and sell independently (lose momentum and brand leverage).

None of the above five methods of resolving channel conflict come without their deficits and it really depends on the business proposition if you’re able to go direct.

For example Tempur beds sell successfully online and in retail in the USA as well as via third party retailers that sell online and in bricks and mortar stores. Tempur have invested millions in brand building giving them the strength to command terms in the market.

Apple ditched their retailers to go direct, but they had innovation and demand sorted before cannibalizing their retail partners.  Few businesses have such strength.

Out of the five options mentioned the one that tends to work best in my experience is point 1, and that is to ditch direct e-commerce.  It is easier to convince channel partners that have massive website visitor numbers and who have invested heavily in the online retail game to give you more prominence and double sales than it is to double margin going direct.

If you would like to talk about your online channel conflict challenges, why not phone Niall or Edward in iON on +442890455911 or drop them a message via their website www.ionology.com.

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About The Author

Niall McKeown is the CEO of iON and author of the forthcoming book 'The 7 Principles of Digital Business Strategy'.