Relationship Issues in Channels

An appropriate distribution strategy takes into account not only marketing decisions, but also considers how relationships within the channel of distribution can impact the marketer’s product. In this section, we examine three such issues:

Channel Power

A channel can be made up of many parties each adding value to the product purchased by customers. However, some parties within the channel may carry greater weight than others. In marketing terms, this is called channel power, which refers to the influence one party within a channel has over other channel members. When power is exerted by a channel member, they are often in the position to make demands of others. For instance, they may demand better financial terms (e.g., will only buy if prices are lowered, will only sell if suggested price is higher) or demand other members perform certain tasks (e.g., do more marketing to customers, perform more product services). Channel power can be seen in several ways:

  • Backend or Product Power – Occurs when a product manufacturer or service provider markets a brand that has a high level of customer demand. The marketer of the brand is often in a power position since other channel members have little choice but to carry the brand or risk losing customers.
  • Middle or Wholesale Power – Occurs when an intermediary, such as a wholesaler, services a large number of smaller retailers with products obtained from a large number of manufacturers. In this situation, the wholesaler can exert power since the small retailers are often not in the position to purchase products cost-effectively or in as much variety as what is offered by the wholesaler.
  • Front or Retailer Power – As the name suggests, the power in this situation rests with the retailer who can command major concessions from their suppliers. This type of power is most prevalent when the retailer commands a significant percentage of sales in the market they serve and others in the channel are dependent on the sales generated by the retailer.

Channel Conflict

In an effort to increase product sales, marketers are often attracted by the notion that sales can grow if the marketer expands distribution by adding additional resellers. Such decisions must be handled carefully, however, so that existing dealers do not feel threatened by the new distributors who they may feel are encroaching on their customers and siphoning potential business. For marketers, channel strategy designed to expand product distribution may, in fact, do the opposite if existing members feel there is a conflict in the decisions made by the marketer to increase the number of resellers. If existing members sense a conflict and feel the marketer is not sensitive to their needs, they may choose to stop handling the marketer’s products.

Need for Long-Term Commitments

Channel decisions have long-term consequences for marketers since efforts to establish new relationships can take an extensive period of time, while ending existing relationships can prove difficult. For instance, Company A, a marketer of kitchen cabinets that wants to change distribution strategy, may decide to stop selling their product line through industrial supply companies, who distribute cabinets to building contractors, and instead sell through large retail home centers. If, in the future, Company A decides to once again enter the industrial supply market they may run into resistance since supply companies may have replaced Company A’s product line with other products and, given what happened to the previous relationship, may be reluctant to deal with Company A again. As another example of problems with long-term commitments, building contractors may be comfortable purchasing kitchen cabinets from industrial suppliers. If Company A decides to change their reseller network to retail home centers, they may find it difficult to retain the building contractor customer base, who may continue to purchase from the industrial suppliers. Considering these potential problems, Company A may have to give serious thought to whether breaking their long-term relationship with industrial suppliers is in the company’s best interest.