How to Manage Channel Conflict By Lindsey Anderson

(Note: This was prepared as part of my consulting work at ATG. ATG has granted their permission to share this document.) Are you not selling directly to consumers to avoid potential conflicts with your existing channels? Those conflicts may not be as great as you fear and the benefits of selling direct may be greater than you anticipate. Here are some compelling reasons for you to reconsider selling direct:

Double Digit Growth According to Forrester Research, “Online retailers will continue to experience double-digit growth in the near term, with eCommerce business-to-consumer (B2C) sales expected to top $200 billion in 2009 and grow to more than $270 billion in 2011. Forrester predicts that online retail will comprise a healthy 9% of retail sales by 2011.1” Rising Consumer Expectations The Internet has changed your consumers’ expectations around shopping. Over the years online merchants have improved the shopping experience by adding more and more sophisticated features. Not only have your consumers adapted to these new features, like buying online, they’ve grown to expect those features on all sites. This is the collective unconscious of the Web. You need to keep pace with your consumers’ rising expectations and ATG Commerce is an excellent way to do so. Voice of the Customer When consumers buy online they reveal valuable information about themselves, their wants, and their expectations. By listening to the voice of the customer, you can better target your marketing and product offerings. Fish Where the Fish Are According to Forrester Research, “Consumers in North America now spend more time with their PCs than they do watching TV, listening to the radio, and reading magazines combined.1” You need to be online because that’s where your customers are. Customer Driven Innovation According to Forrester many new products fail and only 15% of new products sell more than $7.5 million in the first year2. By listening to the voice of your online consumers, you can minimize some of the risk associated with new product innovations. First, base your new product concepts on the insights gathered from online purchases and then test those concepts online through special product offerings.

The Long Tail Chris Anderson first introduced the concept of the Long Tail in a Wired magazine article3 and then in his book, The Long Tail. Basically, physical stores are constrained by physical space. Each store only has so much shelf space and consequently can only stock the top sellers. For example, there may be only 1 person within a 20 mile radius of a Barnes & Noble bookstore interested in a particular book, so it doesn’t make sense for Barnes & Noble to stock that title.

Yellow is the long tail

Yet if you divided the United States into circles of 20 mile-radii each, there are probably tens of thousands of such circles. If one person in each circle bought the book, it would sell very well. Now add all the other titles that Barnes & Noble can’t inventory in a store and you are looking at some really large numbers. According to Anderson, “the average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon’s book sales come from outside its top 130,000 titles. If the Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is larger than the market for those that are.3” This is the Long Tail and it’s why Barnes & Noble sells over the Net as well as through its stores. The power of selling through your website is that it enables you to sell apparently slow-moving items that your channel partners can’t afford to physically carry. This can add up to significant sales. One-to-One Merchandising TV represents the age of mass merchandising; the Internet is evolving into the age of one-to-one merchandising. As the Internet evolves it becomes possible to develop deeper insights into your consumers and savvy companies are using those insights to develop more customer segments. Those companies are using personalization technology like ATG’s Adaptive Scenario Engine to increase sales by targeting those segments with well-focused product offerings. More Convenience-Driven Consumers According to Forrester Research, “[The] more lucrative value proposition for online retail is making life easier for time-starved consumers. Nearly 40% of Web

Shoppers say they are pressed for time, and more than 70% find shopping online easier than through other channels.1” Cross-Channel Shoppers We are a nation of cross-channel shoppers. According to Forrester Research 55% of US online shoppers have researched a product online and then purchased the same product offline, representing a staggering $125 billion in offline sales in 2005. But 54% of those cross-channel shoppers have also done the reverse; they’ve researched a product in the store and then bought it online.4 According to Terry J. Lundgren, Chairman of Federated Department Stores, “We know the multichannel customer spends 20% more than the single-channel customer. Seventy-two percent of macys.com transactions come from ZIP codes within 20 miles of a Macy’s store. 5” And according to Doug Rose, Vice President of QVC, “If you’re not online, you’re not in business. We find people gravitate to where they are most comfortable, either on TV or online, and our best customers are shopping across all channels.5”

Your consumers don’t care about your channel conflict. They want to buy what they want where they want. You need to become a cross-channel merchant by selling online. Higher Margins When your consumers buy on your site, your margins are much higher than when your consumers buy through your channel partners. Are your channel partners adding enough value to justify the loss of margin?

Brand Equity Your brand is an investment, instilling your current and potential consumers with a mindset of positive product attributes and expectations. You cannot control all of those expectations; the collective unconscious of the Web has set expectations around buying brands online. If you fail to meet those expectations by not selling online, it will detrimentally impact your brand investment. Your Competitors are Just a Click Away If your consumers want to order your product on your site and you don’t sell online, they’ll go to your competitor’s site and neither you nor your channel partners will get the sale. The Customer is King Ultimately it boils down to the customer is king. You’re in business to satisfy the needs, wants, and expectations of your customers. If you don’t, you won’t be in business for long. Since your consumers are expecting to buy online, you should sell online.

In summary your channel strategy should focus on what your consumers expect, what your competitors are doing, and what value, if any, your channel partners are adding. It is likely that you’ll find selling direct to consumers is your best strategy, but if you still have some reservations about channel conflict, here are some alternatives you can pursue that will mitigate the conflict:

Focus on the Long Tail. Just offer the products that your resellers can’t afford to carry in their physical locations. That’s what Danskin.com did. They focused on plus sizes because their retailers didn’t have the shelf space to carry plus sizes. According to Danskin Inc. CEO Carol Hochman, “Even our biggest retailers can only carry 20 or 30 items at a time. We’re not competing head-to-head, we’re filling needs. The real reason for [Danskin.com] is nobody can carry all of our product.6”

Seasonal Windows If you’re in a seasonal business, let your partners have a temporary exclusive on the new product. Add the old season to your online store just before or after the launch of the next season. Partner Exclusives Even if you’re not in a seasonal business, you can still allow your channel partners to exclusively carry certain products. Brand Merchandise If you’ve got strong brand recognition you may be able to sell brand logo T-shirts, caps and the like. It is a great way to engage your consumers and strengthen your brand. This is what Coke does; though not selling soda online is really more of a function of price and weight than of channel conflict. Other companies sell spare parts and/or product manuals online. By so doing these companies are providing a valuable service for their consumers and removing the burden of handling small transactions from their channel partners. Custom Products By creating a configurator that enables consumers to create and buy custom products online you can build your brand and develop consumer insights without conflicting with your channel partners. For example Nike, through Nike ID sells custom footwear and apparel.

Store Locators You can follow appliance manufacturer, Viking Range’s example, and use store locators to direct business to your channel partners. This is standard functionality built into ATG Commerce.

Support your Channel Create a B2B site where your channel partners can download images and product descriptions to facilitate their online business as well as place their stocking orders online Don’t Undercut your Channel Partners Don’t sell your products online for less than your channel partners’ price. Stick with the suggested retail price.

References 1. Forrester Research: US eCommerce: Five-Year Forecast and Data Overview 2. Forrester Research: The Essentials of Consumer-Driven Innovation 3. The Long Tail: http://www.wired.com/wired/archive/12.10/tail_pr.html 4. Forrester Research: Understanding US Cross-Channel Shoppers 5. Richard K. Miller and Kelli D. Washington: The 2007 E-Commerce Market Research Handbook 6. Marketing Sherpa: How to Avoid Retail vs. eRetail Conflict: 5 Tactics Danskin Uses