Success Strategies in Channel
Management
Bargaining for Influence with Channel
Members
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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
Reassurance
Trading Territory
Exclusivity for
Category
Exclusivity
Using Selectivity to
Stabilize Fragile
Relationships
The Price of the
Concession
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Bargaining for Influence with Channel
Members
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.
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Desired Coordination
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.
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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.
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Producer-Specific Investments by Downstream
Channel Members
Some brands demand that a reseller or
agent acquire capabilities and commit
resources 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.
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Dependence Balancing
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 to
overcome 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.
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Trading Territory Exclusivity for Category Exclusivity
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 ProducerSpecific 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.
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Reassurance
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.
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Exclusive Dealing
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-memberspecific 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
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Saving Costs by Limiting the Number of Trading
Partners
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.
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Stimulating the Benefits of Selectivity While
Maintaining Intensive Coverage
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.
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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..
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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 serviceonly facilities. Relieved of the service
burden, more stores would be qualified to
offer sales
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