Conflict can occur when the manufacturer’s sales force and a channel partner’s sales force are both trying to sell to the same customer or when two different channel partners are targeting the same customer.  Since multi-channel strategies are a fact of life, so is channel conflict. It’s important to recognize that some conflict is not only unavoidable, it is probably healthy.  A total lack of channel conflict is often a symptom of insufficient coverage.  The challenge is to know when the conflict is, in fact, too much.

There are two clear signs that point to excessive conflict: an eroding market share due to partners withdrawing support for your product and declining street prices for your product due to cannibalistic pricing practices by your partners. 

One way to manage channel conflict is through compensation. If there is conflict between a direct sales force and an indirect channel, a change in the way the direct sales force is compensated may be necessary. Functional discounts are an effective way to manage conflict between different channel types. By compensating for functions it is often possible to rebalance the competitive landscape, enabling formerly high cost channel partners to more fairly compete with lower service, lower cost channels. Other way to manage conflict include using named accounts, limiting authorizations for certain products, and defining authorized geographies for channel partners in which the manufacturer will provide sales support. 

IRCG has a proven set of tools for differentiating between healthy and dangerous levels of channel conflict, and a set of best practices for managing partners.  These often include joint performance scorecards, sales and channel management programs, and redesigned distribution agreements that partners are actually eager to sign. 

Managing Channel Transition 

Transitions are some of the most difficult challenges a manufacturer has to face. They create tension with existing channel members and inside your own organization.  Moving from one type of channel to another is always precipitated by changing customer requirements. If they didn’t keep changing on us, life would be a lot easier!

Here is a typical transition story.  At the introduction phase of a market life cycle most products are sold direct because customers don’t understand their benefits or know how to use them. The only channel that can afford this type of missionary selling effort is a manufacturer direct model.  As more and more customers learn about the product’s benefits, a transition takes place from a direct sales force to a technical distributor.  This transition is valuable because it enables the manufacturer to increase market coverage while reducing its costs.  The technical distributors offer high levels of application presale and post sale support, which is expensive.  But, at this stage, channel margins are high enough to pay for it.  The next transition occurs when end users no longer require the same level of application or technical support.  Since they become unwilling to pay for something they don’t need, they drive the prices down to the point where the technical distributor can no longer make a profit.  Typically, this opens the door to a different type of channel player – the broadline distributor.  These distributors are very efficient at moving a wide range of products from an array of manufacturers to an array of end users. They do not provide much in the way of technical support so they don’t incur those costs; thus their margins can be much lower.  When this transition occurs the technical distributors are understandably distressed by to be competing against “price sellers” who “offer no value add.”  At this point, manufacturers must be extremely careful in how they take advantage of the expanded market access provided by broadline distribution without losing the market making benefits of their technical channel.  Customers are often very adept at free riding. 

These transition points often build up slowly over time, and an experienced outsider can help a manufacturer determine if a fundamental realignment is appropriate.   IRCG has helped many manufacturers recognize and manage these transitions.  We have developed innovative but practical approaches to channel management and compensation, such as adding a demand creation discount that is offset by a reduction in gross margin for demand fulfillment activities.   It is critical that any changes, whether initiated by the manufacturer or the channel partners, are well considered and lead to improved relationships. 

Coordinating Channel Sales Efforts 

The core of channel coordination is a performance measurement system that encompasses partner alignment with the manufacturer’s strategy.  The system should include both results (financial) measurements and performance driver (activity) measurements.  Such a system is the best framework for action planning and identification of constraints limiting channel performance.  In our experience, partner relationships are ultimately based on economics.  Most issues impacting the effectiveness of a relationship can be traced back to how actions and policies impact sales and profit. 

IRCG has a set of proven options for channel measurement systems.  We also provide assessment services to evaluate current channel performance and provide clear recommendations for improvement.  These diagnostic tools provide insight into the key levers of channel improvement, including:

 §      Evaluation of channel partner attributes and performance.  Sorting partners into the categories of self-growing, growable and non-growable is an extremely powerful exercise for prioritizing issues and allocating resources.  The performance of self-growing partners can typically be improved simply by reducing obstacles such as onerous policies, constantly shifting priorities or high transaction costs.  Growable partners are those that have the prerequisites in place (financial, organizational, operational and attitudinal) to improve performance, but may need additional manufacturer support.  Non-growable partners are those that do not have the necessary prerequisites in place and are not likely to generate improved performance under any reasonable conditions.  Often, these partners consume (really waste) a significant amount of the manufacturer’s resources. 

§      Improving core sales practices and processes.  These include consistent definitions of customer segments, clear roles and responsibilities for all partners, national accounts policies, data and other reporting requirements, partner tiers and support levels, manufacturer service level performance, partner service level performance, channel conflict resolution process, lead generation and tracking, selling credit policies, etc. 

§      Rationalizing pricing practices.  Fundamentally, channel partners will only invest in selling efforts which yield financial return.  The manufacturer must ensure that it is neither overpaying nor underpaying for services provided by channel partners.  There are many pricing alternatives to support different strategies and channel configurations, including functional discounting, segmentation fencing, partner tiered pricing, etc.