Anti-Diversion Strategy:
Professional Skin Care & Beauty Brands

Situation Overview
Professional Skin Care Manufacturers distribute their products through a variety of channels and methodologies. Depending upon the company, these may include: specialty retailers such as salons and wellness centers; skin care professionals such as dermatologists, plastic surgeons and estheticians; multi-level marketing organizations; and, direct sales through infomercials, catalogs and websites.

Distribution of Professional Skin Care products was once dominated by medical care providers, followed by spas & salons. However, as mainstream marketers such as Olay, Lancôme, Neutrogena, Clinique, and Estée Lauder have entered the market, competition has increased and distribution expanded to traditional venues such as department stores, beauty supply stores and drugstores. In fact, this segment of the industry is now the second largest, with growth exceeding sixteen percent in 2004.

The advent of the internet and online sales presents another challenge to the industry. As product category choices and availability increase, manufacturers must match demand with supply or suffer losses in potential growth. At the same time, in order to preserve the
distribution channel, perceived value/price point, and brand cachet, Professional Skin Care brands cannot be distributed through the same venues available to mainstream marketers (e.g. drugstores, mass merchandisers and low-end department stores). As a result, manufacturers must pursue greater traction in the segments appropriate to the brand where mainstream marketers are now also competing.

Product diversion acts as a direct threat to brand value. While it may not be possible to eliminate all diverters, it is possible to disempower them by eliminating the primary reason for their existence. By meeting demand of a growing base of online shoppers, and by policing supply flow, manufacturers are able to curtail diversion. Global Diversion is increasingly becoming a threat to the value of brands in overseas markets.. Products are exported outside of the US and sold online around the globe at US prices that are often 20-30% lower than foreign prices. Of equal importance are the price-cutting practices that are occurring at US websites. Although the price spread is not as dramatic in the US as it is in foreign markets, small diverters will cut prices to secure sales. Large diverters are willing to discount, effectively creating "loss leaders”, that attract customers to the myriad of other products they offer. Some merchandisers will even offer product that they, themselves, must purchase at retail, for the sake of boosting their apparent legitimacy to the marketplace.

Customer Defections attack profitability. Lack of inventory at a retail store often causes defection to another product, and for die-hard internet shoppers who know exactly what they want, lack of online commerce also causes defection. Shoppers at websites such as strawberrynet.com are offered many competing brands and ancillary products competing for a finite number of consumer dollars. A Harvard University study shows that by retaining just five percent of your customers, profits rise by no less than twenty-five percent.

The Challenge
For Professional Skin Care & Beauty Manufacturers, maintaining brand value is critical to the success of their business. Competition among manufacturers for the loyalty of their channel partners is fierce and depends upon the manufacturer’s full support of its partners. Diversion, and the brand devaluation it causes, disincentivizes channel partners. The challenge is developing a strategy and system that will combat diversion, reduce channel partner defection, and maintain brand value while the manufacturer sells across multiple channels.

The Solution
Combating Diversion requires several proactive and interactive measures to be taken concurrently.

Benefits of an Effective Channel Management Solution
Not all solution providers are alike. When looking at solution providers such as those below, the best of breed will deliver:

• The ability to sell online at the manufacturer website without competing with their channel partners
• Reduction in order processing cost and time. Some industries have saved up to 72% across the entire distribution chain.
• Increased order size as the result of ease of use and access. Some industries have experienced increases as high as 30%
• 24/7 ordering availability to all partners
• Increased order accuracy for all partners
• Direct consumer access that will enable the manufacturer to conduct product research
  and obtain valuable customer feedback
• Up-selling and cross-selling abilities for other products
• Absolute control of brand and customer experience at manufacturerbrand.com
• More time for channel partners to offer improved customer service and prospect for new customers.
• Channel Partner relations that are grown on a strong platform of trust where the rules of
  engagement are established and published for everyone to see and understand.
• A credible demonstration of fairness to all channel partners
• Flexibility to implement or enhance the manufacturer’s traditional business rules in an online environment.
• An equitable channel partner identification and selection process
• Reduction in handling, loss, theft, damage, insurance, and warehousing needs for channel partners

Solution Providers
The cornerstone to the strategy requires an expert Channel Management company with a software solution. The following companies provide various solutions, one or more of which may be suitable for your circumstances.