What is the horizontal channel conflict?

Marketing channels, or distribution channels, function as links between production and the ultimate point of consumption. For example, if you are the producer of "X" product, then you might market your product through two wholesalers and through them to various retailers. The wholesalers and retailers are two vertical levels of your distribution channel. The two wholesalers or the various retailers are members of the same or horizontal channels.

Channel conflicts arise when one member of the channel perceives that another member is operating in a manner detrimental to his objectives. Horizontal conflict arises within the same layer of a distribution channel. It is essential for manufacturers to contain horizontal conflicts because these conflicts have a significant potential to damage a product’s goodwill, distribution and sales. This exercise of containing conflicts comes under channel relationship management, which requires careful policy making and continuous oversight through channel information systems.

Horizontal conflicts can occur when a channel partner reduces the price of a product. For example, a larger distributor might significantly reduce the price of a product to lure larger sales volume, on the back of various other products he might already be distributing. Because of its size, the larger distributor might be able to sustain cuts in his profit margins to reduce the cost of his merchandise and increase distribution from his stores. This places the smaller distributors at utter disadvantage because, comparatively, they might not have a large portfolio of products to distribute. They, therefore, can’t compete. Also, because they are smaller, they can’t sustain the hits to their profit margin that a price reduction might cause.

Another example in which horizontal channel conflict arises occurs when distributor territories aren’t clearly defined. A manufacturer might appoint different distributors for a city’s urban and suburban areas. If, however, it is not clear which areas are urban and suburban, either distributor might end up distributing products in the other’s territory. No distributor wants competition on her designated turf, so conflict could arise. Therefore, if your business has distributors working for you in this manner, clarify to each of them the specific areas to which they are entitled.

Variations in distributor operational policies also can result in conflicts. For example, if one of your product’s distributors practices a policy of offering credit sales, the other distributors might feel they're at a disadvantage if your product is not supposed to be offered on credit terms. A horizontal conflict might occur because customers might prefer to buy goods on credit terms and pay later in installments. Setting different product distribution policies gives the channel an advantage as customers might flock to that channel to get what they perceive to be a deal.

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One of the most popular types of small-business operations stems from a sole distributor agreement. A sole distributor agreement carries some significant advantages for both the manufacturer, including a high degree of product control, and the reseller, including a lack of competition. However, resellers must also be aware of the restrictions that such an exclusive agreement can impose on their decision-making processes.

The sole distributor agreement grants a small-business owner the exclusive right to distribute and resell a manufacturer's product in a specific territory. The manufacturer agrees not to allow any other firms to resell its products in the reseller's territory, while the reseller agrees not to sell any products that would compete with the manufacturer's items. Also, the reseller agrees to comply with the manufacturer's standards for pricing, marketing and promotion for its items.

Most sole distribution agreements involve small businesses that sell high-end luxury items, such as cars or jewelry. Some agreements involve specific technology applications, such as industry software packages. For instance, a reseller can sign on to a sole distribution agreement with a software developer to distribute its geographic information systems packages. These resellers can approach private firms, such as oil and gas exploration companies, and government agencies, such as urban planning offices, as the exclusive distributors of the GIS software.

The primary benefit for a small business in signing on to a sole distributor agreement is the lack of competition within the territory. Since most products sold under a sole distribution agreement are high-ticket items, the reseller also earns a level of prestige in the customers' view as the "exclusive distributor" of these items. The manufacturer also benefits from the lack of overhead in administering its distribution policies over only a single distributor in each territory.

A sole distributor agreement is not without its disadvantages. The reseller must comply with the manufacturer's policies in all of its operations regarding that product. The reseller may also not be allowed to sell a similar product to that offered by the manufacturer, even if the other product offers higher profit margins or has higher customer demand. The main disadvantage to the manufacturer occurs when the reseller's performance does not meet expectations, which can force the manufacturer to terminate the agreement and seek out a new distributor.

Multi-channel systems, where brands sell the same product across multiple distribution channels, are becoming more common.  Where established brands may once have offered their product through one primary distribution channel, emerging brands increasingly have to diversify across several distribution channels in order to stay relevant in new and evolving markets.  Unfortunately, this also means that channel conflict is becoming a more common issue.  Channel conflict occurs when identical products from the same brand are offered through multiple distribution channels.  This then causes them to compete with one another for customers and markets.

As your business grows, it is important to make plans for managing channel conflict before this problem almost inevitably arises.  You should have a plan in place to turn any conflict into a positive for all players.

Types of Channel Conflict

Channel conflict can manifest in a variety of forms.  Three types of conflict are particularly common: vertical channel conflict, horizontal channel conflict, and multi-channel conflict.

• Vertical channel conflict occurs amongst levels within the same distribution channel.  For example, a wholesaler and manufacturer could have a dispute over a product’s price.
• Horizontal channel conflict happens at the same level within one distribution channel.  An example of this is when two retailers belonging to the same manufacturer have a discrepancy in terms of promotional schemes or area coverage.
• Multi-channel conflict is when multiple distribution channels participate in selling the same brand.  For example, if the same product is available on a retailer’s website and brick-and-mortar store at different price points.

eCommerce as an Accelerant of Channel Conflict

The rapid growth of eCommerce has accelerated the problem of channel conflict.  While eCommerce used to be prohibitively expensive except for the largest brands, it is now possible — and cost-effective — for almost any sized business to sell products online.  However, eCommerce sites are often in competition with brick-and-mortar retailers, leading to channel conflict.

Develop a Plan to Manage Channel Conflict

Channel conflict can, undoubtedly cause problems for a business.  However, it is also possible to mitigate the negative effects by transforming elements of such conflict into a benefit for all stakeholders. This is why having a plan for managing channel conflict is critical.

It is important to recognize that not all channel conflict is inherently bad.  In fact, a lack of any channel conflict could be an indicator that a business does not have sufficient market coverage.  For example, a limited number of “border wars,” in which members of the same network compete for sales in the same account, can indicate that a business is reaching sufficient market coverage and approaching the point of over-saturation.

However, when channel conflict does become destructive, there are several possible steps to managing it that will ultimately make all stakeholders better off.  First, when deciding to expand your business, make a realistic assessment of both the risks and the opportunities that may arise from the decision.  Then use this assessment to make a plan to pre-empt conflict.

Make sure that you notify your existing distributors of your intention to expand.  While it may be tempting to keep the expansion quiet, it will be more beneficial in the long-run to clearly explain your goals to existing distributors.  Share with them how  the planned expansion will strengthen the brand, therefore benefiting them.

When you share your vision with existing distributors, be ready to accept their feedback and criticism.  Existing distributors who are nervous about potential competition may be unhappy about expansion regardless of whether a problem is likely to arise.  Develop a plan ahead of time to ease such concerns.  For example, making sure to price the product in a fair way across channels and not favoring any particular channel over another will allow all players to compete with one another on a fair playing field and minimize issues.

Additionally, steps such as creating joint promotions and marketing campaigns for all channels to use can help develop trust and a sense of partnership across channels, while allowing you to save time and resources on developing multiple campaigns.

Turning Channel Conflict Into a Positive

There are additional steps you can take to head off channel conflict as your business expands.  Consider assigning distinct territorial boundaries for brand representation to eliminate geographically-based conflict among brick-and-mortar retailers.  You may also develop and implement a system across channels to attribute leads to particular entities. This allowes the entity that develops a particular lead to close a sale.

Although it is a more expensive option, private labeling for particular channels is one way to safely grow your business. This method is becoming increasingly popular among retailers and distributors.  As an alternative to private labeling, you might also consider assigning particular products within your brand to specific channels. This can help to minimize competition.

Exchanging employees is one of the more creative solutions available for managing channel conflict.  Swapping employees, for example between the retailer and wholesaler level, on a temporary basis can help employees at different levels understand operations and roles at other levels in the channel.

Managing Channel Conflict for Your eCommerce Site

If your eCommerce site is one distribution channel among many, there are also several options to successfully manage and resolve channel conflict.  Much like private labeling, exclusive branding can increase the value of your product for potential customers.  Products that are custom-designed or personalized, for example, help your customers see your products as unique.

Additionally, bundling and offering products in kits makes a set of products more appealing to customers. This allows  you to offer discounts on particular products in combination with others.  Finally, product giveaways create value for your customers while driving sales.  While this tactic might be viewed as a means of undercutting your retailers, it actually is beneficial to all parties.  This is because it makes your product more memorable for customers and generates exposure.

Channel conflict is one of the major pitfalls you are likely to encounter as your business grows and evolves.  Developing a plan for managing channel conflict will allow you to minimize the pitfalls.  It will also allow you to transform potential conflicts into a positive for all players. Contact Iron Plane, your Magento Development Company for more information.

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