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The Challenge of Branded Channels
Distributor and dealer relationships can be critical to the success of manufacturers that serve business markets. Yet the potential for conflict is enormous, particularly when one organization has greater leverage. It is conflict that often gets in the way of the opportunity for both organizations to create and capture value. Across B2B industries, increasingly, instances of conflict have involved what we call branded channels — channel partners that have developed abilities, attributes, and associations linked to the channel itself versus the products that it sells, thereby gaining leverage over their suppliers. To avoid or overcome these situations, suppliers need to constantly reassess their value creation and capture strategies, as well as reassess their overall channel strategy in the process.
Channel Evolution and the Rise of Branded Channels
Blue Canyon’s work on supplier-channel conflict has clearly suggested that the potential for conflict exists in virtually every type of distributor and dealer relationship. The issue is not limited to certain product lines, vertical markets, firm demographics or other factors. The nature of branded channels is not where the issues arise; rather, it is the shift in power that occurs as the branded channel builds its position in the marketplace.
In discussions with clients, we often hear one of the following pair of statements in the context of manufacturer-channel organization interactions:
- “They know how important our product is to them. Our products bring a lot of customers to them.” – Spoken by a manufacturer
- “They know how important our channel is to them. Our firm attracts the customers that are candidates to buy their product.” – Spoken by a distributor or other channel organization
While both statements are true to some extent—based on certain occasions and particular customer segments—in the vast majority of instances, one of the two statements is far truer than the other. That truer statement is the elephant in the room—the reality that dominates conversations, negotiations, pricing and margins, and relationships. The imbalance between the two statements is often the foundation for the conflict that arises between the two organizations. Furthermore, the rise of branded channels has also caused a shift in balance that has existed in many B2B markets.
In our experience, we observe far more instances in which the first statement is more accurate. To a great extent, that reflected the imbalance that existed in the size and reach of the two organizations. Manufacturers enjoyed national (or even global) positions and made significant investments in their brands. Channel organizations, on the other hand, operated largely on a local basis, often only serving a modest number of end customers in their city or region. Today, however, we find the balance has shifted considerably towards the latter statement being more accurate due to channel consolidation, which created the opportunity for the growth of branded channels in business markets. These branded channel organizations are often large, frequently have national (or even global) reach, and invest significantly in their brand.
A familiar example of this change draws upon the automotive industry. Not too long ago, every car ad on television or in the newspaper was product centered, communicating why a certain brand of car was the one to buy. Today, you can see a television ad for CarMax, AutoNation, or even some of the major “auto malls” that never mention a single make or model. Rather, these businesses promote themselves as the place to go to buy your next car. Times have indeed changed. Channel organizations have learned that end customer ownership is key and that such ownership translates into leverage when the profit pie is divided.
With distributors and other channel partners now having greater brand recognition, there comes considerable leverage in negotiations and pricing with suppliers (and ultimately a greater ability to command a greater share of the profit pie). Even more concerning to many manufacturers is the fact that such channel organizations have the ability to successfully introduce other products that compete with those produced or branded by the manufacturer itself. Increasingly, we see private labeled channel brands being introduced to compete at the “Better,” and sometimes even the “Best” positions on the Good-Better-Best spectrum, creating even more momentum in terms of capturing the profits earned from the targeted end customers.
What Should Suppliers Do?
Manufacturers and other suppliers, working with or considering working with, organizations that have strong branded channel positions must recognize that the elephant in the room will be wearing a banner that reads, “You know how important our channel is to you, that our firm attracts the customers that are candidates to buy your product.” The implication for profitability is significant. Product profitability declines as the channel commands a greater share of the pie. The loss of control over end customer relationships potentially further compounds the problem. The need to assess value creation and capture strategies by manufacturers that go to market through branded channel relationships is clear and must be a key priority in today’s planning agenda.
Solving this issue is far from easy, and for many manufacturers, the bottom line involves accepting the implications of a shift in the balance of power between them and their branded channel partners, as difficult as that may be. We have seen the full spectrum of responses to this reality. On one extreme, manufacturers refuse to sell their products through branded channels. And the other extreme, manufacturers have renegotiated agreements, transferring product brands to their branded channel partners in the process.
Among the efforts that fall between these two extremes are ones that work to strengthen the manufacturer’s relationship with the end customers. One firm, recognizing the importance of product safety in the markets it served, has built a strong competence in that arena providing training programs and on-line tools for its end customers, often involving its channel partners in such efforts. Another firm has taken advantage of technology to make its equipment smarter and built a community of end customers that are provided best practice information and other insights. While such initiatives don’t blunt the branded channel’s power directly, it somewhat restores the importance of the manufacturer’s brand across all of the channels through which they sell.