Vertical channel conflict is a situation when there is a disagreement between different levels within a distribution channel. In this type of channel conflict, the channel's manufacturer and its distributors (normally wholesalers and retailers) disagree on who is authorised to resell and how the product is advertised and priced. This can lead to competitors within the channel, as distributors have an incentive to buy products directly from the manufacturer, undercutting the existing competitive prices within the channel and making it difficult for retailers to remain competitive.
Typically, there are three main types of vertical channel conflict, each with its own set of guidelines and best practices:
1. Geographic conflict: This type of conflict occurs when different distributors in different regions are responsible for selling the same product, but they are not allowed to cross regions. This is because the manufacturer wants to ensure that the price of the product keeps the same, and that it is being sold in the same way throughout all regions. To avoid this type of conflict, it is important to ensure that the manufacturer and distributors agree on the same pricing and marketing strategies across all regions.
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2. Price conflict: This type of conflict occurs when distributors want to cut prices to attract customers. In theory, having lower prices would mean more sales and a higher profit margin, but if prices are cut too drastically and too often, then manufacturers risk losing money as retailers and wholesalers will be unable to make profit. As such, manufacturers need to be careful and careful negotiation is required to ensure that all parties can agree on a shared set of prices that maximises their profits and minimise the risk of conflict.
3. Product conflict: This type of conflict occurs when distributors want to differentiate their product from those of the competitors. As such, the distributor may modify the product, or want to sell it under a different brand. In such cases, it is important to ensure that the manufacturer and distributors come to an agreement about the sale of the product and its promotion, as that it does not negatively impact the sales of the manufacturer's channel. It is also important to ensure that the modified product is legal and compliant with the standards of the channel.
In order to avoid all types of vertical channel conflict, it is important to ensure that all parties in the distribution channel come to an agreement and have written contracts. Doing this will ensure that all parties involved have clear guidelines and expectations. Additionally, manufacturers should consider offering incentives to distributors who are successful in selling the product, as this will discourage any form of unauthorized reselling. Finally, manufacturers need to stay up to date with any changes in the market, as this will ensure that they are able to negotiate prices in a way that is beneficial for all parties.