Channel Power

Strong channel partners often wield what’s called channel power and are referred to as channel leaders or channel captains. In the past, big manufacturers like Procter & Gamble and Dell were often channel captains. But that is changing. More often today, big retailers like Walmart and Target are commanding more channel power. They have millions of customers and are bombarded with products wholesalers and manufacturers want them to sell. As a result, these retailers increasingly are able to call the shots; in other words, they get what they want.

Category killers are in a similar position. Consumers like you are gaining marketing channel power, too. Regardless of what one manufacturer produces or what a local retailer has available, you can use the Internet to find whatever product you want at the best price available and have it delivered when, where, and how you want.

Channel Conflict

A dispute among channel members is called a channel conflict. Channel conflicts are common. Part of the reason for this is that each channel member has its own goals, which are unlike those of any other channel member. The relationship among them is not unlike the relationship between you and your boss. Both of you want to serve your organization’s customers well, but your goals are different. Your boss might want you to work on the weekend, but you might not want to because you need to study for a test on Monday.

All channel members want to have low inventory levels but immediate access to more products. Who should bear the cost of holding the inventory? What if consumers don’t purchase the products? Can they be returned to other channel members, or is the organization in possession of the products responsible for disposing of them? Channel members try to spell out details such as these in their contracts.

No matter how “airtight” their contracts are, there will still be points of contention among channel members. Channel members are constantly asking their partners, “What have you done (or not done) for me lately?” Wholesalers and retailers frequently lament that the manufacturers they work with aren’t doing more to promote their products—for example, distributing coupons for them, running TV ads, and so forth—so they will move off store shelves more quickly. Meanwhile, manufacturers want to know why wholesalers aren’t selling their products faster and why retailers are placing them at the bottom of shelves where they are hard to see. Apple opened its own retail stores around the country, in part because it didn’t like how its products were being displayed and sold in other companies’ stores.

Channel conflicts can also occur when manufacturers sell their products online. When they do, wholesalers and retailers often feel like they are competing for the same customers when they shouldn’t have to. Likewise, manufacturers often feel slighted when retailers dedicate more shelf space to their own store brands. Store brands are products retailers produce themselves or pay manufacturers to produce for them. PC Cola is Superstore’s store-brand equivalent of Coke, for example. Because a retailer doesn’t have to promote its store brands to get them on its own shelves like a “regular” manufacturer would, store brands are often priced more cheaply. And some retailers sell their store brands to other retailers, creating competition for manufacturers.

Vertical versus Horizontal Conflict

The conflicts we’ve described so far are examples of vertical conflict. A vertical conflict is a conflict that occurs between two different types of members in a channel—say, a manufacturer, an agent, a wholesaler, or a retailer. By contrast, a horizontal conflict is a conflict that occurs between organizations of the same type—say, two manufacturers that each want a powerful wholesaler to carry only its products. Horizontal conflict can be healthy because it’s competition driven.

Channel leaders like Walmart usually have a great deal of say when it comes to how channel conflicts are handled, which is to say they usually get what they want. But even the most powerful channel leaders strive for cooperation. A manufacturer with channel power still needs good retailers to sell its products, and a retailer with channel power still needs good suppliers from which to buy products. One member of a channel can’t squeeze all the profits out of the other channel members and still hope to function well. Moreover, because each of the channel partners is responsible for promoting a product through its channel, to some extent they are all in the same boat. Each one of them has a vested interest in promoting the product, and the success or failure of any one of them can affect that of the others.

One type of horizontal conflict that is much more difficult to manage is dumping, or the practice of selling a large quantity of goods at a price too low to be economically justifiable in another country. Typically, dumping can be made possible by government subsidies that allow the company to compete on the basis of price against other international competitors who have to operate without government support, but dumping can also occur due to other factors. One goal of dumping is to drive competitors out of a market, then raise the price. Chinese garlic producers were accused of this practice in the early 2000s, and when garlic prices soared due to problems in China, other countries’ producers were unable to ramp back up to cover the demand. U.S. catfish farmers have recently accused China of the same strategy in that market. While there are global economic agreements that prohibit dumping and specify penalties are assigned when it occurs, the process can take so long to right the situation that producers have already left the business.

Achieving Channel Cooperation Ethically

What if you’re not Walmart or a channel member with a great deal of power? How do you build relationships with channel partners and get them to cooperate with you? One way is by emphasizing the benefits of working with your firm. For example, if you are a seller whose product and brand name are in demand, you want to point out how being one of its “authorized sellers” can boost a retailer’s store traffic and revenues.

Oftentimes, companies produce informational materials and case studies showing their partners how they can help boost their sales volumes and profits. Channel partners also want to feel assured that the products coming through the pipeline are genuine and not knockoffs and that there will be a steady supply of them. Your goal is to show your channel partners that you understand issues such as these and help them generate business.

Sometimes the shoe is on the other foot—retailers have to convince the makers of products to do business with them instead of the other way around. Beauty.com, an online retailer, is an example. Selling perfumes and cosmetics online can be difficult because people want to be able to smell and feel the products like they can at a department store. But Beauty.com has been able to convince the makers of more than two hundred upscale cosmetic brands that selling their products on its website is a great deal and can increase their revenues. To reassure sellers that shoppers can get personalized service, Beauty.com offers the site’s visitors free samples of products and the ability to chat live online with skin and hair care consultants (Evans, 2007).^[1]

Producing marketing and promotional materials their channel partners can use for sales purposes can also facilitate cooperation among companies. In-store displays, brochures, banners, photos for websites, and advertisements the partners can customize with their own logos and company information are examples.

Educating your channel members’ sales representatives is an extremely important part of facilitating cooperation, especially when you’re launching a new product. The reps need to be provided with training and marketing materials in advance of the launch so their activities are coordinated with yours. Microsoft is a company that does a good job of training its partners. Before launching operating systems such as Windows 10, Microsoft provides thousands of its partners with sales and technical training (“Ten Mistakes,” 2009).^[2]

In addition, companies run sales contests to encourage their channel partners’ sales forces to sell what they have to offer. Offering your channel partners certain monetary incentives, such as discounts for selling your product, can help, too.

What shouldn’t you do when it comes to your channel partners? Take them for granted, says John Addison, the author of the book Revenue Rocket: New Strategies for Selling with Partners. Addison suggests creating a dialogue with them via one-on-one discussions and surveys and developing “partner advisory councils” to better understand their needs.

You also don’t want to “stuff the channel,” says Addison. Stuffing the channel occurs when, in order to meet its sales numbers, a company offers its channel partners deep discounts and unlimited returns to buy a lot of a product. The problem is that such a strategy can lead to a buildup of inventory that gets steeply discounted and dumped on the market and sometimes on gray markets. This can affect people’s perceptions of the product and its brand name. And what happens to any unsold inventory? It gets reinserted back into the channel in the next accounting period, which takes a toll on the “stuffers’” sales numbers.^[3]