Success Strategies in Channel Management

Success Strategies in Channel Management Bargaining for Influence with Channel Members

Bargaining for Influence with Channel Members Desired Coordination Producer-Specific Investments by Downstream Channel Members Exclusive Dealing Saving Costs by Limiting the Number of Trading Partners Stimulating the Benefits of Selectivity While Maintaining Intensive Coverage Dependence Balancing Trading Territory Exclusivity for Category Exclusivity Reassurance Using Selectivity to Stabilize Fragile Relationships The Price of the Concession

Many producers desire to have inordinate influence over their downstream channel members. Rather than accepting the premise that market outcomes are efficient and channel members know best, these producers have strong views about how channel members should handle their brands. They are unwilling to take a hands-off approach, to let the invisible hand of competition guide the actions of their marketing channels. They do not believe that market incentives will lead the channel member to perform channel flows appropriately for their brands. Market selectivity is one of the best tools they have for so doing. Higher degrees of selectivity function as a sort of currency that can be used to purchase higher degrees of influence over channel members. The reason is that such distribution allows a downstream channel member to achieve higher margins and higher volume on a given brand. Selectivity allows a channel member, such as a reseller, to differentiate its assortment, creating strategic advantage. Hence, a higher degree of selectivity is an extremely powerful incentive. Bargaining for Influence with Channel Members

Some producers wish to influence reseller decisions and activities in great detail. Inevitably, this drive to control the downstream will lead the producer into conflict, because it will pressure the channel member to do something that it would not have done otherwise. For example, the producer may wish to dictate prices, promotional activities, displays, how the brand is presented by salespeople, and stocking levels, or may wish to limit the channel member's ability to resell to a customer of its own choosing. This is out-right interference in the management of the reseller's business. The reseller will resist, and the producer will need power to overcome that resistance. By offering protection from intra-brand competition, the producer exerts reward power. In general, all else constant, the more the producer wishes to coordinate activities with the channel member, the more selectively the producer should distribute. Because exclusive or limited market coverage means higher average reseller margins, the producer should be able to attract better resellers and more motivated suppliers. Desired Coordination

With a small but dedicated group of resellers, the producer may enjoy more vigorous overall market efforts, albeit from a smaller group of channel partners. Fundamentally, the argument can be made that intensive distribution creates a large but ineffective army; that is, a huge number of indifferent channel members, each of which represents the brand, but only in a desultory fashion. Of course, these arguments may be employed in reverse for the downstream channel member. If the organization represents only a handful of suppliers, it can offer greater rewards to each supplier, thereby gaining influence. This influence can be used to induce the producer to do a better job of supporting the downstream channel member; for example, by offering lower prices or promotional materials or better credit terms. Desired Coordination

Some brands demand that a reseller or agent acquire capabilities and commitresources that have no alternative use In short, for some brands or value offers categories, producer-specific assets are necessary to distribute the brand effectively. Naturally, however, downstream channel members prefer not to make them. These investments are expensive in themselves. More importantly, they raise the reseller's dependence on the producer. Hence, they make the reseller vulnerable to producer opportunism (deceptive seeking of one's self-interest). A rational reseller would hesitate to make these investments and incur the subsequent dependence on the producer. Therefore, the producer needs to induce the reseller to make these investments. Offering a degree of selectivity is an effective means to do so, because it increases the rewards the reseller can gain from the brand. Producer-Specific Investments by Downstream Channel Members

Trading Territory Exclusivity for Category Exclusivity The idea of balancing dependence is instrumental to understanding how upstream and downstream channel members use selectivity as a strategic tool to enhance their business interests. The principle is that no one wishes to be dependent on another channel member, because this gives the other party power and therefore creates vulnerability. The reseller will resist. One way toovercome their resistance is for the producer to create an offsetting dependence of its own upon the reseller. This calculated mutual dependence, or mutual vulnerability - which has been likened to a sort of balance of terror in international politics - is designed to bring stability to a relationship by making it unprofitable for either side to exploit the other. Dependence Balancing

At the extreme, each side trades exclusivity for exclusivity. Resellers offer the producer exclusivity in its value offers category. In return, producers offer the reseller exclusivity in its market area. This is a swap of category exclusivity for territory exclusivity. Of course, this is the extreme case. It is more common to exchange some degree of selectivity, without going so far as to eliminate other brands for the reseller or other resellers for the producer. Secondary Effects of Producer-Specific Investments To this point, we have discussed two direct effects of producer-specific (i.e., difficult to redeploy) investment. One is that the reseller becomes a more potent channel member, increasing its performance on behalf of the brand. The other is that the reseller becomes more dependent, hence more vulnerable to producer opportunism. Trading Territory Exclusivity for Category Exclusivity

Using Selectivity to Stabilize Fragile Relationships In the complex negotiation between upstream and downstream channel members, both sides are preoccupied with concerns about what will happen once an agreement has been struck. These fears destabilize the relationship, thereby reducing channel effectiveness. Therefore, the stronger party may be motivated to reassure the vulnerable party of its good faith. The Price of the Concession: Factoring in Opportunity Cost In bargaining away the right to have an unlimited number of trading partners, the producer is making a concession to the downstream channel member. Of course, when the concession is substantial, the producer will be less willing to make it. Two circumstances are crucial to assess the price of the concession: the importance of the market area and the competitive intensity of the value offers category. Reassurance

Downstream channel members "pay" the supplier for: Limiting the number of competitors who can carry the brand in the channel member's trading area Providing desired brands that fit the channel member's strategy Working closely to help the channel member achieve competitive advantage Making channel-member-specific investments New value offers New markets Differentiated channel member strategy requiring supplier cooperation Accepting the risk of becoming dependent on a strong channel member Downstream channel members need to "pay more" when: U The trading area is important to the supplier The trading area is intensely competitive Exclusive Dealing

The rationale here is not to gain more influence by increasing one's reward power. It is simply to cut costs by dealing with fewer entities. Producers limit the number of trading partners to keep their selling expenses down. By not serving marginal resellers, they reduce the number of salespeople or the expenses (travel, entertainment, samples, etc.) associated with a large account base. Producers that, as a matter of policy, offer high levels of support to each channel member tend to distribute more selectively in order to limit the total costs of channel support. To the extent that fewer resellers means lower turnover, there is less opening, training, and servicing of new resellers. Fewer channel partners often means fewer but larger transactions, reducing inventory holding costs and other processing costs. Saving Costs by Limiting the Number of Trading Partners

Selective distribution has the benefit of increasing the producer's ability to motivate and to control downstream channel members, at the cost of reducing healthy intra-brand competition and making it more difficult for the prospective purchaser to find the brand. Covering a market intensively makes the opposite trade-off. Some producers experiment in search of ways to gain most of the benefits of selective distribution, while retaining intra-brand competition and making it easy for the prospect to become a buyer. Here are some methods that may or may not be effective or efficient means of gaining the best of both worlds (intensive and limited coverage). One method, noted earlier, is to invest in brand building, so as to generate so much brand equity that downstream channel members will tolerate high intra-brand competition and not destroy the brand by such tactics as bait and switch. Stimulating the Benefits of Selectivity While Maintaining Intensive Coverage

Another method is to couple information sharing with frequent introduction of new value offers that have a low failure rate. A popular variation of information sharing is lead generation. A lead is a request from a prospective purchaser to be contacted by a producer. Leads are usually generated via marketing efforts (advertisements soliciting names and coordinates, trade shows, and so forth). Producers can invest in generating leads, then turn them over to a downstream channel member to contact the prospect.. Stimulating the Benefits of Selectivity While Maintaining Intensive Coverage

A lesser known approach is to offer "branded variants," variations of models of a branded value offers. The key feature is that some of the variations (i.e., combinations of levels of attributes) are made available only to certain resellers, not to the entire channel. The key to the branded variant strategy is that certain combinations are made available only to selected channel members, thereby giving them a sort of exclusivity. Building pull increases the producer's coercive power: The threat is that customers will be dissatisfied if they do not find the brand. In contrast, other methods are ways to exert reward power. A different approach is to focus on mitigating the buyers' costs of selective distribution. Traditionally, this is offered at the point of sale. To induce resellers to invest in service facilities, producers are obliged to be more selective in coverage, which in turn inconveniences the customer. One solution is to decouple sales and service by establishing separate service-only facilities. Relieved of the service burden, more stores would be qualified to offer sales Stimulating the Benefits of Selectivity While Maintaining Intensive Coverage

Success Strategies in Channel Management