Tuesday, March 1, 2016

Four Methods of Avoiding Channel Conflict

Channel conflict occurs when companies try to reach end customers through multiple channels and those channels compete with one another. Most carriers or cloud service providers use a direct sales force, a wholesale channel, and a partner channel.

As you know, I come from the partner channel so it should be understood I have a bias. Direct vs. partner conflict is referred to as vertical channel conflict. Channel conflict can also occur among participants in the same channel, such as the partner channel wherein participants are independent. This is known as horizontal channel conflict. Occasional channel conflict is a good indication the service provider has adequate market coverage. Constant conflict means the provider may have saturated the market and the consequences can be dire.
Managing channel conflict is critical for a multi-channel sales organization because if left unmanaged channel conflict will hurt the customer experience, erode profit margins, and cause channels to disengage.

RULES OF ENGAGEMENT

avoid channel conflict.pngThe best way to avoid channel conflict is to have only one channel. Because that isn’t an option for companies that seek greater market coverage, the next best way to minimize channel conflict is to establish clear rules of engagement. No matter how good or bad those rules may be, published rules will set clear guidelines for conduct and channel participants will have an understanding of what they can expect.

Rules of engagement indicate which channel may sell to which customer and under what terms. Channel participants can deal with rules that aren’t ideal and determine whether or not they will engage, but partners are quickly disaffected when an expectation is set or simply assumed and that expectation is not met.
Clear and published rules of engagement allow partners to decide upfront whether or not they will pursue a particular customer and avoid disappointment.

MECHANISMS FOR MINIMIZING CHANNEL CONFLICT

The following are mechanisms I find favorable in the IT services channel:

  • Pricing consistency. This minimizes competition based on pricing which affects vertical and horizontal channel conflict. Channels all seek the easiest way to gain a customer and if one channel can use superior pricing to win a customer, they’ll do it. This generates lower margins for the provider and also alienates the channel that isn’t able to offer the superior price. Maintain consistent pricing for channel parity.
  • Dual compensation. Creating a mechanism to compensate both channels helps eliminate conflict and encourages channels to work together. Dual compensation doesn’t necessarily mean “double compensation.” It means more parties will participate in getting credit and/or compensation for the sale. As long as the mechanism doesn’t cause the channels to over engage, seeking to maximize compensation, this can be a very effective method to eliminate conflict.
  • Activity-based compensation. Increasing compensation based on sales volume encourages focus among channel partners and helps to differentiate channel participants. This creates an advantage for the partner and for the provider.
  • Constrained distribution. Selling through fewer channel participants creates a perception of exclusivity and encourages channel partners to invest. When services are overly distributed, channel partners will not lead with the product because it’s doesn’t make them unique in the eyes of the customer. Overly distributed services tend to suffer price erosion because this is the basis on which channel participants will compete.

The following are mechanisms I find less favorable to the IT services channel:

  • Deal registration. Accounts get locked and this isn’t always favorable. This may become necessary if multiple channels have access to the active opportunity through internal systems, but isn’t preferable for smaller opportunities. This should be used only on larger opportunities. Smaller opportunities should be on an “ink wins” basis.
  • Named accounts. Providers often want to reserve large accounts for their internal teams. It’s understandable a provider would want to do this, but restricting an independent sales partner from servicing a customer with which they may have a pre-existing relationship causes the partner to seek an alternate service for the customer and locks the provider out of the opportunity to engage the partner in winning or saving the customer.
  • Geography. Limiting sales geography, much like a franchise, is a method used to manage conflict, but this is increasingly rare as services are not restricted by geography and partners likely have customers in multiple regions.
Ultimately the customer will decide how they want to use your service and favor one channel over another. It’s easy to decide one channel is better than another, however companies that favor one channel without considering the customer’s buying preferences risks missing significant opportunities. Operating multiple channels and working to minimize the resulting conflict maximizes a provider’s opportunities to attract and retain both customers and channel partners.

The blog titled Four Methods of Avoiding Channel Conflict originally appeared on Telarus.com on January 21, 2015 http://www.telarus.com/blog/the-top-four-methods-of-avoiding-channel-conflict.php

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