Horizontal and vertical marketing conflicts involve disagreements among businesses in a marketing channel. A marketing channel is how a product moves from its manufacturer to the consumer. Channels have different stages, or levels. Typically, the first level of a channel is a factory. The second level is the wholesaler who buys a large number of products to sell to retail stores, which occupy the third and final level. When members of a channel disagree about methods or goals, conflicts ensue. Show
A horizontal conflict refers to a disagreement among two or more channel members at the same level. For example, suppose a toy manufacturer has deals with two wholesalers, each contracted to sell products to retailers in different regions. If one wholesaler decides to branch its operations into the other wholesaler’s region, a conflict will result. If the toy manufacturer doesn't help solve the problem, its business dealings with both the wholesalers – and the downstream retailers, as well – might be in jeopardy.
Vertical conflicts involve a disagreement between two channel members on consecutive levels. For example, if the toy manufacturer discovers its products are arriving at retail stores later than scheduled, a conflict might develop between the manufacturer and the wholesaler responsible for shipping to retailers. At the same time, the retail stores might be in conflict with the wholesaler due to its inability to ship products on time.
Multichannel conflicts refer to disagreements among members in separate marketing channels. While neither strictly horizontal nor vertical, these conflicts can affect all members of every channel. For instance, suppose the toy manufacturer participates in two marketing channels. In the first channel, the manufacturer sells its products directly to consumers via its official website.
In the second channel, the manufacturer sells its products to wholesalers for resale to retailers. If the toy manufacturer’s website sells the products for much lower prices than retail stores, sales in the second channel will plummet. The resulting conflict will require some solution that works for both channels.
No simple recipe exists for avoiding channel conflicts. In fact, conflicts can only be minimized, not avoided, according to the book “Marketing Management,” by Rajan Saxena. The most effective approach for business owners is to approach channel management with transparency and a willingness to find compromises that work for all the members of the various channels to which it belongs.
Some of the most well-known and purchased brands out there leverage multiple distribution channels. Nike, for example, balances selling direct-to-consumer through their ecommerce store with selling through retailers (such as Amazon, Nordstrom, and Foot Locker). This is no small feat. Multiple channels increase the chances that manufacturers, buyers, retailers, and your brand conflict. Nike manages it…but most brands aren’t Nike. So, how can fast-growing brands, with less brand recognition and tighter margins, introduce channels without also introducing loads of conflict? In this article, we look at:
No time to read? What is channel conflict?Channel conflict is when two or more partners in a sales channel oppose each other. For example, when a retailer goes directly to a manufacturer to launch a copycat product. To get a clearer picture here, let’s back up for a minute. A channel is a means of distributing your product. This includes:
Channel partners are the different parties working together to make, list, and distribute the product. A channel partner is often a manufacturer, wholesaler, retailer, reseller, or consumer. Channel conflict is when two or more of these partners are at odds. Harry’s managed to disrupt the men’s grooming industry with a multi-channel strategy. While they started as an online-only shaving subscription service, they’ve since turned into a massively successful men’s grooming brand. Today, they sell their products through a DTC ecommerce store as well as in various big-box retailers such as Target and Walmart. What’s more, Harry’s has largely avoided channel conflict. By maintaining a standard price for their products across all sales channels, they circumvent any price competition between the retailer and manufacturer. But given all the benefits of DTC, why do brands like Harry’s bother with other channels to begin with? They bother because there are many upsides to adding channels:
Marquis Matson, Content Marketer for RugPadUSA, explains, “Big Guys like Amazon simply make it easier to be found. If our site cannot compete with a site like Amazon, then it’s better to list our products there instead of hoping that customers find us organically.” RugPadUSA relies on DTC, as well as Amazon, Wayfair, Walmart, eBay, Overstock, and others. While working with those giants has drawbacks (including environmental and social impact), Marquis notes “these corporations are helping small businesses by footing the marketing and admin bill, while our small business can continue focusing on the business itself.” However, the math isn’t as simple as product + channel = profit. It’s a bit more complicated than that. Why is it (potentially) bad for business?While the benefits of additional channels are notable, so are the costs. The perils of adding channels include:
Unfortunately, that’s not an exhaustive list. There are additional downsides like oversaturation, price wars, and turf wars (more on these just below), which can all have big impacts on your business. What are the different types of channel conflict?To prevent or manage channel conflict, you’ll want to understand the different types, plus strategies for preventing or addressing them to begin with. How does channel conflict come about?Before we get into strategies, let’s look at a normal distribution flow and the different types of conflict that can occur in distribution channels. In the image below, each layer of the flow is dependent on the next. Meaning, even the slightest disruption to this process can create conflict throughout the entire distribution network. Conflict can be vertical, horizontal, or across multiple channels. Vertical conflict, horizontal conflict, and multiple channel conflictThe most common form of channel conflict is vertical channel conflict. This is when two parties at different points in the distribution channel (e.g. a manufacturer and a retailer) have a dispute. Causes of vertical conflict can include:
You can also have horizontal channel conflict. This is when two parties at the same level in a distribution channel (e.g. two retailers) are at odds. Causes and results of horizontal channel conflict include: Loss leader and price wars. Sometimes, one member of the distribution channel significantly lowers the price of a product to drive traffic to their store. (Retailers often use this tactic to bring people into their store.) Then, they upsell more expensive products to customers to make back the margin they lost on the initial discounted product. This creates conflict with other retailers — it pressures them to adjust the pricing of the same product, even if it will have a substantial impact on their profit margin. A common result is a price war. Even if you don’t directly participate in this war, it has negative effects on your brand:
Turf war. Price wars bleed into turf wars, which is when multiple wholesalers or retailers are selling in the same territory. Manufacturers may appoint a few wholesalers to the same region or city, but if territories aren’t properly set, wholesalers will be battling for sales in the same territory. As a result, brands get caught in a war they can’t participate in — their “soldiers” (products) are moved around without you. Lastly, there’s multiple channel conflict. This occurs when a manufacturer has at least two channels competing for sales of the same brands/products. For example, a manufacturer may be selling their products direct-to-consumer (D2C), while also selling to a wholesaler/retailer. This creates conflict because the manufacturer and retailer may be selling the products to the same markets, but at different prices. What is the most commonly cited source of channel conflict?Amazon is its own beast. Selling there involves spending time and resources on:
Let’s take one of the most expensive pieces of that list: ads. Ryan Garrow notes his budget on Amazon ads is five times what is on Google. And that’s just the money piece. There’s also the fact Amazon is a different ballgame. Both Amazon and Google have algorithms. But where Google’s ad algorithm is more defined, Garrow notes Amazon’s “is strange. It takes time and a lot of failure to figure it out.” In short, Amazon is a unique channel. But ecommerce founders are up for challenges. Some brands have developed equally unique ways to leverage Amazon that make it worth the effort. How Tortuga Backpacks uses Amazon to move inventoryIn non-pandemic times, Tortuga Backpacks uses Amazon to move the remaining inventory for discontinued or updated products. So, they’ll list version 3 of an item at full price on their DTC website and version 2 (the older version) for a lower price on Amazon. This approach has a few benefits. It:
Fred Perrotta, co-founder and CEO of Tortuga Backpacks, explained, “We can also offer the [Amazon] link to people who email us asking for discounts or saying they want a Tortuga but can’t afford it.” How to know when a new channel is worth the risk of channel conflictThere are plenty of pros to adding channels…and there are plenty of cons and potential conflicts, too. How do you decide when adding a channel makes sense for your brand? There’s no easy answer here. However, adding a non-DTC channel could make sense if you can check the following three boxes:
Let’s say you do check these boxes and decide to pursue an additional channel. How do you avoid those nasty vertical, horizontal, and multi-channel conflicts?
Subscribe to our newsletter to get more just like it, sent straight to your inbox every week. 4 strategies for preventing channel conflictBelow are two high-level recommendations and two specific tactics for preventing channel conflict. Let’s look at the high-level approaches first. 1. High-level: Build leverage for a watertight contractAs we mentioned earlier, building your DTC brand before adding a channel helps you negotiate better contracts. And when you can negotiate a watertight contract, you can better hedge against the potential cons of adding a channel — poorer customer experience, lower margins, and contracts that favor the retailer. Build leverage (aka a strong brand consumers want) and gain more control over the narrative of what, where, and how your products are sold through retailers. 2. High-level: Start small, then ramp upIf this is the first time you’re working with a retailer, don’t go “all in” from the start. Instead, start small, negotiate strong terms for that start, and then ramp up if you experience success. Once you do that, there are tactical ways to thrill customers by participating in direct sales – without angering or alienating your distributor base. 3. Tactical: Offer exclusive productsOffer products on your ecommerce site that are exclusive to you. Examples are shoes customized to the buyer’s feet, a unique hydration bottle design, a specially branded tent, or extended sizes (like Jon’s size 15 shoes) that can only be purchased on your site. Why it works: Exclusive products create buzz, build demand, and show off your brand. This tactic avoids channel conflict with your retail outlets and other sellers. That’s because you aren’t directly competing against them, and you’re not undercutting them on price. You’re simply offering a unique product; you’re keeping part of your production in-house, but there’s still plenty else to sell. Chaco (see below) will make sandals to match your school colors. Retailers can’t carry every conceivable combination, but the manufacturer can. It’s a win-win-win situation. NikeiD, an online service that lets customers create their own designs, is another good example. Want a custom Nike shoe? You’re going to have to go through Nike for that one. Of course, providing product customization isn’t doable for all brands, but most manufacturers can provide a unique option only available on the brand site. You don’t have to go big to generate sales. You only need to be creative. 4. Tactical: Use bonuses (not discounts) such as product giveawaysInstead of authorizing a price reduction for retailers, offer a gift with purchase or some other add-on. For example, a free pair of socks with shoe purchase. Why it works. Consumers love free stuff. With this tactic, you create value for your consumer (“Buy a ski jacket at the regular price, get your choice of gloves free”) without undercutting your retailers. Your fans will love it, and your entire sales channel will benefit from the added exposure and marketplace chatter. It’s a win-win-win: The customer, the manufacturer, and the rest of the sales team all benefit. It’s common knowledge Apple typically doesn’t offer discounts on their products. Nor do their retailers. What Apple does offer are gift cards with purchase (or an iPod some years) which they time up with specific buying seasons: beginning of the school year, holidays, and at the end of a product run. Without explicitly offering a discount (which would tend to upset large box retailers), Apple can save their customers $100 and more on Apple products. And there’s nothing to stop retailers from doing the same thing. A variation of this tactic is to add on services or extend the warranty. Another option for providing extra value without slashing prices is creating bundles and kits for your products. This can grow sales, help your customers get more of your goods, and allow you to (once again) discount products without the appearance of a discount. For example, check out Gerber’s apocalypse kit idea below. The Gerber team once came up with the brilliant idea of bundling some of their most popular products into one kit for those who want to get ready for the “zombie apocalypse.” The kit, which retailed for $435, included six knives (that can be purchased separately), plus a zombie apocalypse carrying case to ensure buyers can easily take all their knives into the walking dead wilderness. Let’s dive into some other ecommerce brands and how they’ve navigated multiple channels. First-hand accounts of channel conflict from notable ecommerce brandsBelow are three brands succeeding with their channel strategies. But you’ll notice something interesting here — none of them have the same approach. One added Amazon as a channel, dropped it, and experienced more success sticking with DTC. Another started on eBay and added DTC later, along with a myriad of other channels. And the third built a notable DTC presence then added Target. Why the conflicting stories? As you no doubt know, there’s rarely a one size fits all solution to big questions like these. So, instead of giving you a “7-step formula for channel conflict,” we’ve opted to provide something far more useful — context and stories that help you choose what’s best for your brand and customers. BeardBrand stopped selling on Amazon — and increased business 20%A few years ago, you could find BeardBrand products on Amazon. In fact, Amazon sales made up about 10% of their business. But if you Google “BeardBrand + Amazon” today, you’ll find this notice this page in the search results. What changed? Founder Eric Bandholz explains it came down to maximizing what BeardBrand does well, and that’s DTC — not selling through Amazon. “One of the lessons we’ve learned is you need to do the things you do well and continue investing in those things until you’ve maxed out your capacity,” he explained, “and then you pivot from there.” Bandholz felt his team hadn’t maximized their own platform, beardbrand.com, so they stopped selling on Amazon and redirected resources to DTC. It was a smart move for BeardBrand. “Everyone says you have to be on Amazon and you’re leaving money on the table,” he noted, “but we actually found the opposite to be true.” Yes, they lost the 10% they were selling through Amazon, but that’s not the end of the story. Ultimately, they saw a 20% increase in business. Bandholz attributes this to:
So, would every brand see a similar 20% increase? Not necessarily. Here’s how Bandholz thinks about whether or not Amazon is a good distribution channel for an ecommerce store:
BeardBrand falls into the first category. They have video editors, an art director, influencers, and other creative talent they regularly work with to build the brand. “All those things are useless on Amazon,” Bandholz explains. “So those are resources we would be spending money on that wouldn’t be helping us grow on Amazon.” And then there’s the expense of getting set up and driving traffic to the channel. That, as we mentioned earlier, is expensive. This is why Bandholz cautions other brand-heavy ecommerce leaders to consider moving off the platform, too. “…more likely than not, the amount of sales you would be cannibalizing is far higher than the amount of sales you would be capturing on Amazon,” he cautions. “If you’re paying for ads, you might as well pay to drive people to your website and own that customer, own that address, own that data.” How Three Ships successfully launched at Target…in the middle of a pandemicThree Ships started in 2017 with a chemical engineer, a business grad, $4,000, and an apartment kitchen. That, by the way, was in Canada. And while the Three Ships team has successfully been growing their brand there, co-founder Connie Lo notes, “raising broad US awareness has always been a challenge, and at the forefront of our marketing efforts.” So, they partnered with Target. This made sense for several reasons:
But Three Ships didn’t just launch with a retail giant (notable in itself!) — they launched with a retail giant in the middle of a pandemic when fewer Americans were walking through stores. To deal with this curveball, Lo says they “pivoted from in-store marketing efforts like temporary price cuts (TPC’s at-shelf) and sampling, to focusing more on Target.com marketing.” Sponsored placements and enhanced product pages helped Three Ships capture the at-home shopper as well as boost sell-through. As a result, Three Ships is reaching more of the American audience while also experiencing what Lo calls the halo effect — “we’ve had many mass retailers reach out (in both the US and Canada) after discovering us at Target, which has greatly benefited our distribution rollouts.” Her advice to other ecommerce leaders considering a new channel?
Subscribe to our newsletter to get more just like it, sent straight to your inbox every week. WheelerShip strengthens marketplace sales with DTC in a historically skeptical industryWheelerShip a leading provider of factory-replica wheels and other automotive products. And they have no shortage of ways to get those products to customers. Their channels include Amazon, eBay, a native DTC site, online wholesalers, drop-shipping…“We basically run three websites and two marketplaces in addition to our human sales structure,” Kate Cannova, Chief Business Officer explains. Their journey isn’t conventional. WheelerShip started (and continues as) a family shop in 2010. Their initial sales channel was eBay because it afforded the fastest ramp-up from not-selling to selling. At that time, WheelerShip could become an authorized seller, list good photos, and abide by the marketplace requirements with more ease than creating their own ecommerce store. But to successfully combat the stigmas of the automotive industry, WheelerShip realized they needed a way to develop strong brand equity, and that (as Eric Bandholz from BeardBrand notes) wasn’t something the marketplaces were suited for. “There is a lack of customer and consumer confidence in the industry altogether,” Kate explained, mentioning used car salesman tropes and idioms. To build credibility, WheelerShip pursued DTC in 2015. She says, “there was an impetus to feel more in control of the sales experience, to be paying less in fees, and to have to abide by other people’s rules less.” Turns out, investing in DTC and brand integrity has strengthened their marketplace presence, as well as positively influenced the B2B side of their business. The B2C improvements, Kate says, are “having a pretty significant halo effect on the B2B side.” They’ve created a clear, beautiful, and straightforward user- experience on the wholesale side, which makes it easier for wholesalers to run their business. “And that means they come to us more frequently because it’s so much easier for them to track their invoices and manage their own shipping because they can easily see everything that they need to see in a very clear way.” So, what can you learn from WheelerShip’s decade-plus experience with channel management? Here’s Kate’s advice and caveats to other ecommerce founders:
Channel conflict can be a big opportunity for your brandConflicts are a normal part of running any business, including an ecommerce business. And adding channels beyond DTC doesn’t make sense for every brand or brand stage. However, store-owner looking to expand the ways they distribute can minimize potential conflicts by:
Channel conflict isn’t inevitable and it doesn’t have to wreck your sales or margins. With some careful planning and preparation, you can avoid it and maximize the benefits other channels offer. Questions? Reach out Jon MacDonald via Twitter or LinkedIn for help.
Laura Bosco is our Lead Content Marketer at The Good and a phenomenal freelance writer. She helps us translate our thoughts, opinions, and client experiences into written products that are both entertaining and educational. You can learn more about her background and her services at www.laurabosco.com. |