Multi-Channel Distribution Channel Strategies: Exploiting Direct and Indirect Sales without Channel Friction

More than 25% of Middle Market companies identify customer acquisition through new channels and markets as their number one source of growth, according to research by the National Center for the Middle Market. With 31% of these businesses involved in manufacturing or wholesale, there exist excellent opportunities to reach new customers through direct sales over the Internet. For consumer-products companies, however, this creates channel friction, as suppliers increasingly compete with their wholesale customers to get everything from ice cream to televisions into the hands of consumers. As boundaries blur between vertical suppliers and horizontal competitors, companies are forced to reevaluate their channel strategies.

Anil Arya and Brian Mittendorf, fellows of The National Center for the Middle Market conducted extensive mathematical modeling to determine the optimal approach for suppliers trying to leverage new distribution channels. Their research demonstrates that by making strategic accommodations for wholesale customers while promoting their own direct-sales channels and the overall brand, suppliers can boost sales for all parties. Here are their recommendations on how to best leverage a multi-distribution strategy:

1. Do not respond to negative advertising.

When a supplier starts selling direct, its wholesale customers naturally want to fight back. They won’t demonize the brand, which they still represent. Instead they go after the channel, typically denigrating things like service—an obvious target in online environments. The supplier will want to counter that negative marketing. But wholesale profits derived from retail partners’ increased demand will tend to balance the hit taken by direct-sales profits. Rather than counter-attacking wholesale customers, it is in the supplier’s best interest to allow negative marketing to take place. This also holds true for suppliers with their own catalogs and brick-and-mortar stores.

2. Invest in brand promotion.

While wholesale customers defensively engage in negative channel marketing, the supplier should continue to promote its own channel. More importantly, it should invest in positive brand marketing, which encourages wholesale customers to stock its products. Provided enough consumers prefer a traditional shopping experience, all channels will benefit from the brand’s increased exposure.

3. Lower wholesale prices.

Pure competitors delight in driving up one another's operating costs. Supplier-competitors are in a perfect position to do so by raising wholesale prices. But suppliers also want to raise retail partners’ demand for their goods. And they are aware that, as a result of the new competition, those retail partners may be overly sensitive to price increases. Consequently, suppliers may choose to lower wholesale prices instead.

4. Create unique channel strategies.

Including exclusivity Suppliers can adjust the products and prices offered online both to soften the blow to retail partners’ demand and to reduce direct competition with retailer partners. For example, they can create different products for the direct sales channel, set higher prices on some products sold online, and keep some products off the website altogether. Being the single source for a hot new product can produce significant profits. Suppliers should consider granting retail partners windows of exclusivity in which they alone distribute some new offerings. This strategy takes the traditional first-to-market advantage and turns it on its head.

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