A brand’s ability to control its online sales is critical to its ability to maximize profitable e-commerce channel growth, preserve brand equity, and prevent damaging e-commerce conflicts with its brick-and-mortar business. Brands of all types continue to struggle with how to best achieve the control necessary for success, and there is a great deal of confusion around what does – and does not – work. In our work with hundreds of brands across many different B2B and B2C verticals, we have determined that there are a number of critical pillars to a brand’s ability to appropriately control online sales and to leverage that control to drive true commercial value, the first of which is channel management.
A key element to optimizing growth and preserving brand equity on online marketplaces like Amazon is limited distribution. That is, brands want as few sellers as possible – ideally one on online marketplaces like Amazon (whether that is Amazon, the brand itself, or an exclusive seller). This reality poses an initial challenge for brands, as many – save for the likes of Louis Vuitton, Chanel, and co. – have relentlessly pursued widespread distribution for years, wanting their products out in the market as far and wide as possible. Accordingly, many products across numerous business-to-business and business-to-consumer verticals are easily sourced and sold online by unauthorized sellers, leading to massive intra-brand competition in the online marketplace channel.
This, in turn, leads to diminished sales, diminished return on marketing investments, potentially poor quality products, negative reviews, and significant erosion of brand value – both in the online marketplace channel and across the brand’s other channels of trade.
Brands Must Take a Holistic Approach
This brings us to the first rule of channel management in the online marketplace era – online sales disruption starts below the water line in the brand’s traditional challenges, not on the marketplaces, themselves. Many brands mistakenly focus solely on enforcement on online marketplaces, such as Amazon, without addressing the issues in their traditional channel practices that are fueling the unauthorized online sellers. This leads to the proverbial game of “whack-a-mole,” which is not a winning strategy.
Developing & Implementing an Effective Authorized Reseller Program
Given this reality, the first channel management step that most brands need to take is to: (1) clearly define their authorized selling channels; (2) make clear that customers may sell only in their authorized channels; and (3) stop marketplace sales that occur without the brand’s express permission.
This is often accomplished vis-à-vis an authorized reseller program – that is a program whereby the brand issues policies to its customers explaining where and how products can be sold in an authorized manner. Retailers and distributors are very accustomed to receiving these types of policies and, in many instances, welcome them. Without such a program in place, there is no governance whatsoever regarding who can and cannot sell on online marketplaces, and chaos soon ensues in the marketplace channel. Accordingly, implementation of an authorized reseller program is a key initial channel management step that allows brands to restore order to their channels and prevent online marketplace disruption fueled by their authorized sellers.
Effectively Monitor Authorized Channels for Compliance & Root Causes of Disruption
As brands implement their authorized reseller programs, they next should carefully monitor online marketplace activity to understand where and how products are leaving their authorized channels. Almost invariably, there is some business practice on the part of the brand that is fueling diversion and, ultimately, unauthorized sales. The culprit could be; too many distribution incentives; international pricing differentials; excessive retail margins; or some other practice that makes it possible for products to be diverted from authorized channels and sold online at a profit.
These underlying practices are “root causes.” Brands that are most successful in controlling online sales will have worked to identify the root cause(s) of their unauthorized online sales. This is a pivotal step at ending the “whack-a-mole” game and ensuring that online sales are made by the seller and in a manner consistent with the brand’s go-to-market strategy. Among some of common root causes of unauthorized online sales are limited to no channel controls; generous and/or uncoordinated promotions; pricing differentials between competing channels; unmanaged liquidation and return practices; excessive retail margins; international arbitrage; volume discounts and incentives; and employees compensation misalignment or theft.
Channel management is the first of four pillars of online sales control, along with stopping unauthorized sales; pricing and promotional activities; and brand protection. It is often the first pillar that we recommend brands tackle in their online sales control journey, as the root cause of online sales disruption regularly resides in channel management practices. Brands should educate internal stakeholders on this reality, implement an authorized reseller program to mitigate channel chaos, and then work to understand and, eventually, mitigate the root cause of their unauthorized sales as much as possible. Stay tuned for our next post on the second pillar of online sales control: stopping unauthorized sellers.
Daren Garcia is a partner and member of the Vorys eControl team, where his practice centers on the representation of manufacturers and brands and involves the implementation of thought-leading strategies and enforcement systems designed to protect brand value by controlling online sales.