What Is Channel Conflict (And How To Manage and Prevent It)
Updated December 19, 2022
Channel conflict describes an issue that arises between two or more parties within a business agreement, such as a retailer and a distributor. When a business is expanding, channel conflict is a problem you might confront. If you handle relationships with third parties, knowing how to manage friction can positively affect the success of your employer's business.
In this article, we discuss what channel conflict is and how to manage it, plus share tips for preventing channel conflict for a business.
What is channel conflict?
Channel conflict refers to any dispute, disagreement or other similar issues that may occur between two or more channel partners. A channel partnership is a collaboration between a company that produces or manufactures various products, services or technologies and another one that markets and sells them. In a channel partnership, the decisions and actions of one partner affect the other's business metrics, such as profit, sales or market share, which may lead to channel conflict.
Any company that creates its own products may need a distribution and marketing channel that exposes the respective products to a wide audience, ensuring sales and profitability. These channels are often complex and involve additional partners and intermediaries. Any issue between these partners is a channel conflict.
Types of channel conflict
The different types of channel conflict are:
Vertical level conflict: A vertical level conflict represents a conflict between two parties at different levels in the distribution chain. For example, if a manufacturer stops using a distributor and sell directly to consumers, it's a vertical-level conflict.
Horizontal conflict: Horizontal conflict is a conflict between two partners who operate at the same level in the distribution chain. A common example is when multiple retailers or wholesalers operate in the same geographical area, creating an imbalance between supply and demand and unproductive competition.
Multi-channel conflict: A multi-channel conflict occurs when two or more channels of the same manufacturer compete in the same market and sell the same product at different prices.
Causes of channel conflict
Some of the most widely encountered causes of channel conflict are:
Different goals: When the manufacturer and its partners don't have aligned goals, each of them operates with different objectives in mind, creating a channel conflict.
Role ambiguity: If a certain partner's role isn't properly determined and understood by other partners, channel conflict may occur.
Different marketing or strategic approaches: If two partners who sell the same product promote it in different ways, it can cause channel conflict by creating different customer perceptions of the same product.
Resistance to change: Another potential cause of channel conflict is one party's resistance to a change another partner wants to make with the sale or distribution of the product.
Different views of the market: When the manufacturer has a certain view regarding the potential market for its goods or services and how to capture that market, it may differ from that of its distributors, creating a channel conflict by reducing the distributor's incentive to enter that market.
Geographic or demographic distribution misalignments: When the potential customer base is relatively low, but the manufacturer allows multiple distributors for its goods or services, the lack of a large potential profit may affect the distributors' motivation to succeed in that market.
How to manage channel conflict
Consider following these steps to manage a channel conflict:
1. Establish a minimum advertised price
Since a significant number of channel conflicts arise because of ambiguous pricing, creating a minimum advertised price is typically the first step you can take to manage potential channel conflicts. This can motivate distributors by ensuring them you're not planning to compete with them by selling the products online. You can use your brand to enforce minimum advertising prices across the markets in which your company operates, creating a sense of consistency and trust among channel partners.
2. Reduce your distribution channels
After ensuring price consistency, take control of your products' distribution. Although it may be tempting to work with as many distributors as possible, this might dilute the market, making partnerships harder to manage and ultimately affecting your supply chain. A reduced distribution that aims to cover the market's potential through as few partners as possible gives you more control and limits the odds of a channel conflict occurring.
3. Control your supply chain
Working to limit your supply chain to authorized distributors is an effective way of managing channel conflicts. An uncontrolled supply chain may cause unauthorized distributors to sell your products.
Ensuring that only authorized distributors are selling your employer's products can help create less competition between other parties the company partners with. It also limits the number of distributors that can legally sell the company's product, which also decreases your chances of encountering channel conflict.
4. Strengthen your brand by offering exclusive products
If you help build a powerful brand for your employer's company, you may reduce the chance of channel conflicts occurring. A way to do this without undermining your distributing partners is by launching certain exclusive products on your e-commerce site. This way, you strengthen your own brand and avoid creating a channel conflict because you're not selling the same products as your partners.
Tips for preventing channel conflict
Here are tips to help you prevent channel conflict:
Negotiate effective contracts. Before you begin working with a new channel partner, it's helpful to create an effective contract that protects each party from channel conflict. In this contract, consider highlighting policies for pricing, communication, marketing and other facts that may affect sales.
Establish a trial period. When working with a new channel partner, create a contract that's effective for a shorter period of time at first. This can help you establish a trial period in which you can determine if the company for which you work and the other party mutually benefit from the partnership.
Create clear communication practices. Establishing an effective communication method between the company for which you work and its channel partners may help reduce misunderstandings, which consequentially can prevent channel conflict.
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