Understanding Channel Conflict

Manufacturers have historically been tentative in their approaches to electronic commerce, primarily out of fear of direct competition with, and potential damage to, existing sales channels. Consequently, electronic commerce has remained the province primarily of traditional retailers or e-tailing "pure plays." As retailers and manufacturers recognize that their role is to serve empowered consumers together, channel cooperation will replace channel conflict in the electronic marketplace.

Moving online has left many traditional businesses, particularly manufacturers, susceptible to channel conflict: direct competition with and potential damage to existing channels due to the introduction of new channels. The type and magnitude of channel conflict in the electronic marketplace depends on the nature of the industry and the individual company. Companies that don't own or closely control their offline distribution channels risk damaging sometimes decades-old relationships and revenue streams. However, companies that control their own channels risk cannibalizing revenues with online stores, which take customers out of existing channels and decrease the profitability of those older channels.

Each distribution channel has its advantages. For example, catalogs, direct mail and telemarketing can be efficient ways to target specific customer segments. Sales representatives (whether a manufacturer's representative or a retail salesperson) often provide detailed information and personalized, high quality customer service. Nonetheless, aspects of electronic commerce conflict with, and can be viewed by other channels as a potential rival for, sales and control of the customer relationship (see Fig. 1).

Figure 1: eBusiness and Channel Conflict

Existing Channel	eBusiness Threat
Catalogs	Online catalog w/o the cost of printing and postage
Direct Mail/Telemarketing	Same or greater level of information to consumer w/o same costs
Sales Force Manufacturer Reps	Same or greater level of product/service information available to consumer at all times
Distributors Retail Stores	Lower costs for good/services through disintermediation; shopping convenience
Door-to-door Infomercials	Same/greater level of "at home" service

Consumer Expectations in the Electronic Marketplace Channel conflict has always accompanied the development of new marketing channels, such as the introduction of outlet and discount stores in the 1980s. However, with the advent of the Internet, channel conflicts are intensified by the unique characteristics of the electronic marketplace:

• New Consumer Experience: A redefined 7/24/365 customer experience with complete price transparency and a high level of personalization is becoming standard on the Internet. Existing channels may struggle to meet these new expectations or risk being replaced.
• New Competitors: Companies with no physical storefronts are claiming market share from established businesses. Existing players must now compete with Internet companies with lower overhead.
• Time "Compression" Technology is allowing business processes - from manufacturing to selling - to happen quicker than ever before. Existing players must manage channel conflict quickly or risk losing market position.
• "Mass customized" Merchandise: The Internet, coupled with more responsive supply chains, is the foundation for the widespread availability of "mass customized" products over time. For example, apparel retailers may give their customers options to enter their body measurements online and order customized pants. A computer manufacturer can allow customers to configure their computer as they order it.

Much as manufacturers recognized the demand for outlet stores and began to use them to reach new customers and sell different products, manufacturers must create a win-win situation for themselves and their distribution channels in a new economy characterized by heightened consumer expectations and heightened consumer power.

Shifting Channel Power

Just as the advent of the Internet is raising consumer expectations, it is empowering them as well. Online shoppers are flocking to manufacturer websites, thereby tilting the balance of power in the channel. A Forrester Technographics survey of almost 9,000 users who've made an online purchase shows that 80% have visited a manufacturer's site, and their visits aren't limited to one part of the purchase process. They visit throughout the buying cycle and typically do not distinguish between retailers and manufacturers. These shoppers are a new powerful force - empowered consumers who want what they want, when and where they want it, and will circumvent retailers to get it. This segment is seeking:

• Product Information. A visit to a retail store doesn't give shoppers the detailed product specs that manufacturers can provide. Nearly 80% of online shoppers look for that information on manufacturer sites. With their interest piqued by an ad or a friend's recommendation, 37% click on a manufacturer site for the latest and greatest about new products
• Transaction Information/Capabilities. Consumers don't think retailers have the market cornered on information about prices or where to buy products. Seventy-nine percent of consumers turn to manufacturer sites for product prices, while almost half want to know where they can make a purchase.
• Product Help/Support. Shoppers do not differentiate among retailer or manufacturer sites when seeking help. One-third or more of shoppers go directly to manufacturer sites for help with installation tips, cross-sells, and other support. After getting a sample from clinique.com, more than 60% of shoppers then bought the product in a store.

Consumers are calling the shots now, defining where and how they want to shop. Both manufacturers and retailers must make themselves a part of the process.

Forms of Channel Collaboration

Manufacturers and retailers must combine efforts to acquire and satisfy empowered consumers by sharing customers, margins, and intangibles like brand.

Manufacturer/retailer relationships can take three forms: manufacturer support, collaboration, and seamlessness (see Figure 2).

Figure 2: Levels of Channel Cooperation

Type	Customers	Intangibles	Financial Implications
Manufacturer Support	Retailer owns the customer relationship	Manufacturer provides support and collateral
Retailer provides assortment and service; promotes the brand	Retailer keeps the margin and reduces costs with manufacturer merchandising and marketing help
Collaboration	Manufacturer and retailer share aggregate customer data	Manufacturer and retailer work together on merchandising and marketing plans	Manufacturer and retailer share performance-based revenue
Seamlessness offered by Reshare®'s solutions	Manufacturer and retailer jointly manage and market to customers	Manufacturer and retailer build one brand experience through new brand or partnership	Manufacturer and retailer split revenues

In the most basic form of channel cooperation (Manufacturer Support), manufacturers will support retailers with product information and collateral. In this model, the retailer still owns the customer relationship and handles all customer-facing activities. Marketing focuses on the retailers store and retailers earn their traditional margin. Collaboration allows manufacturers to get closer to the customer, exercise control over their brand and capture a greater share of the sales revenue. In its most advanced form, channel cooperation makes it difficult to tell where the manufacturer leaves off and the retailer takes over. Manufacturers and retailers share complementary objectives and share the customer. Both are effectively brand custodians, and both realize a financial premium from the empowered customer's willingness to pay for seamless service and a pleasing customer experience.

Determining Channel Power and Cooperation Levels

Manufacturers must evaluate the following factors when determining the right level of cooperation or when assessing their channel power:

• Brand Equity: A strong brand drives customers to a manufacturer's site while a weak brand points customers to a retailer;
• Margins: Higher margins let a manufacturer more easily absorb direct eCommerce costs not already part of its core expertise;
• Customer Involvement: The larger and less frequent a purchase, the more effort and consideration a customer exerts during the buying process;
• Retailer Value-Added: The more a retailer contributes to the customer experience, the higher the value-add (e.g., large product assortment, touch-and-feel);
• Internet Value-Added: The more the internet enhances the shopping experience, the higher the value add of selling directly (e.g., product configurators, deep explanatory content);
• Competitive Intensity: The level of competition within both the retail and manufacturing segments will also be a factor in channel strategy since it is a key determinant of market power (e.g., the more retailers there are then the stronger the manufacturer's position);
• Organizational Capabilities: Internal factors will also shape a channel strategy. Financial position, technological and human resources, organizational structure, fulfillment and marketing capabilities, etc.

Next Steps

Unable to realize the full potential of eCommerce due to concerns about channel conflict? Anxious to explore ways of mitigating those concerns and developing an impactful channel strategy for your company and brand(s)? Reshare® is a leading Internet professional services firm specializing in eBusiness solutions with a strong heritage of business, marketing and communications strategy. Reshare® can perform a diagnostic analysis of the above issues and the balance of power in the channel, and then devise channel strategies for turning conflict into cooperation.

Additional Readings:

Managing Channel Conflict