Channel Conflict: How to Manage When It All Goes Wrong

Channel partners are an integral part of a business's operations — but maintaining channel partnerships isn't always straightforward. Channel conflicts are almost bound to happen, and every company that leverages this strategy will face unique challenges that warrant equally unique solutions.

Channel conflict can manifest in several different ways. Your resellers could find out about each other, or they could start targeting the same customers. Your strategic partner might also start offering a lower price than you. What a mess.

In this article, I'll explain exactly what channel conflict is, the different ways it manifests, examples of what it might look like, and tactics to solve and avoid these issues altogether.

When manufacturers disrupt their established intermediaries’ ability to sell their products directly to consumers, its affiliated distributors, retailers, agents, and other channel partners lose out on revenue opportunities — and channel conflicts tend to arise as a result.

There's no single, catch-all category of channel conflict. Since distribution channels exist at different levels and cover various types of outlets, there's room for a variety of channel conflicts to occur. Let's take a look at four of the most prominent ones.

Types of Channel Conflict

Vertical Level Conflict

A vertical level conflict occurs when two or more channel members — operating at consecutive levels of a distribution channel — have a dispute. For example, if a wholesaler consistently fails to deliver the proper volume of a manufacturer's product to a retailer, a vertical level conflict between the two parties might arise.

In that case, the manufacturer would need to take a closer look at its output to ensure it's delivering the proper quantity to its wholesaler, the wholesaler's operations to ensure it's sufficiently supplying the retailer, and whether the retailer's agreement with the wholesaler justifies the grievances it's airing.

Horizontal Level Conflict

Horizontal level conflict occurs when two channel members, operating at the same level of a distribution channel, have a dispute or disagreement that impedes the flow of the broader operation.

For instance, let's say your business distributes your product to two wholesalers, covering retailers in separate regions. If one of those wholesalers decided to encroach on the other's territory, you might see a horizontal level conflict arise.

In that case, you would need to intervene to settle the dispute. If you didn't the conflict could compromise every facet of the distribution channel — from your manufacturing operations to the retailers those wholesalers ultimately supply.

Inter-Type Channel Conflict

Inter-type channel is similar to horizontal level conflict in that it occurs when two channel members at a similar level have a disagreement. However, where horizontal level conflict involves two or more similar businesses, inter-type channel conflict occurs when two channel partners of different sizes or nature have a dispute.

For example, a manufacturer might supply a large retailer and a small retailer with different items from its product line. If the large retailer was to expand beyond its typical product range and encroach upon the small retailer's segment of the product line, an inter-type channel conflict might arise.

Multi-Channel Level Conflict

Multi-channel level conflict occurs when channel partners at various levels of the distribution chain compete with one another by selling to the same market. For instance, if a brick and mortar retailer was to sell a brand's products at a lower-price point than an ecommerce outlet, a multi-channel level conflict might arise.

Now that we've established the potential nature of channel conflicts, let's take a look at some more involved examples.

Channel Conflict Examples

Example #1: Discount Conflicts

A vitamin brand distributes products exclusively to an online retailer and affiliate partners. The brand had a surplus of vitamins and sold the products to the retail partner for a discounted rate. The eCommerce partner then sold the vitamins at a lower price, creating a channel conflict with affiliate partners.

Elaborating on this example, the eCommerce partner began targeting individuals who previously purchased the products from affiliate partners through online advertising. Unfortunately, this created a channel conflict because the online retailer and affiliate partners began targeting the same customers, with one partner having an advantage in selling more products at a lower price.

Example Resolution for Discount Conflicts

By empowering the eCommerce partner to sell to consumers at a discounted rate, the retailer can now potentially cut into earnings for their affiliate partners who rely on the ability to sell their products at retail value. There is also the risk of customers being able to stock up on discounted products during the flash sale, which could impact their willingness to buy from affiliate partners for months to come.

Example #2: Excess Retailers and Wholesalers

A shoe brand allows too many retailers or wholesalers in a specific territory to sell their shoes. When this happens, you have an excess of retailers or wholesalers, which hurts sales and promotes negative competition in the channel.

This example showcases a type of channel conflict called vertical channel conflict.

Example Resolutions for Excess Retailers and Wholesalers

Let’s now consider some real-world examples of brands that have navigated this specific channel conflict.

1. Tortuga Backpacks

Tortuga Backpacks is an example of a company that has managed to solve this potential channel conflict. It does this by selling its most expensive items on its eCommerce website while selling cheaper items on Amazon, which targets different demographics.

2. Harry’s

Harry’s takes a different approach to the potential price problem. Instead of selling at different prices, the company sells its products at the same price regardless of the channel. This tactic has helped the company avoid price competition between marketplace retailers.

3. Skinny & Co

While great for the consumer, discounts undercut retailers and can cause channel conflict. One brand that has prevented this conflict is Skinny & Co. The organic cosmetics brand bundles different products into a travel kit. Doing this gives extra value to customers without cannibalizing sales or shortchanging retailers.

4. BeardBrand

BeardBrand identified channel conflict between selling on Amazon and selling on its website. It solved this by moving completely off Amazon and focusing resources on selling through its DTC channel. The result? A 20% increase in sales!

These examples show what channel conflict could look like and how some brands have avoided them. Next, let’s look at some common conflicts your brand might face and how to avoid them.

To avoid channel partner conflict, set clear boundaries on customer targeting. From the beginning, define which customer segments your partners shouldn’t target. It’s also important to be transparent about who you’re working with and why. Create a quarterly review cadence to keep this information top of mind.

Conflict 1: Market saturation

If your product helps your partner sell their existing products more effectively, it’s in their best interest to pursue a market penetration strategy. This means they will target a broad pool of customers and potentially go after your existing prospects. After all, it’s less about the sale of your product and more about starting their relationship with a new customer to sell their whole suite of products.

This leads to your product winding up in the hands of bad customers (wrong market segment) with the potential of cannibalizing existing deals. So, how do you avoid winding up with this issue from an overly aggressive channel partner?

Solution 1: Set clear boundaries on customer targeting.

Are there certain regions or customer types you'd rather your partners not target? Setting clear boundaries in the contract will ensure your internal sales and marketing unit can function without worrying if your partner will swoop in and take over the relationship.

You should also add qualification criteria for when you’ll accept and reject a deal. Bad customers will create problems for your support team and, ultimately, impact you more than your partner with their churn. This is why having the final sign-off before a prospect gets approved for the product makes sense for your team.

Conflict 2: Partners Comparing Pricing

There’s nothing wrong with having multiple resellers for one product. It’s easy to split them up by region or even customer type (mid-market vs. enterprise). It might even stand to reason you get them different splits on revenue depending on what they bring to the table (tier one support, installation services, etc. … ). But, what if they talk about your product and realize someone is getting a better deal?

Solution 1: Create transparency around who you work with today and why.

Horizontal channel conflict is hard to manage, especially with companies considering themselves competitors. The only way to mitigate the risk here is to lay all your cards out on the table during the contracting process.

Tell your potential partner who you are working with, their restrictions (i.e., geography, market segment, etc.), and lay out your typical channel relationship terms. If you make an exception for a partner, make sure you’re getting extra value.

Ask yourself, if another partner found out about their deal and offered the same value, would you provide the same terms? That’s a good sign you’re on solid footing to partner with both companies.

Solution 2: Schedule a quarterly review cadence.

Partnerships need to change as businesses change. Get face time with your partners several times a year to see how they’re doing and if there are ways you can help them be more successful. In turn, this helps you get in front of potential conflicts and accelerates your relationship.

Have a standing quarterly meeting and at least one face-to-face meeting annually to keep the relationship on good terms. Don’t be afraid to ask for an amended contract if things come up. A built-in annual review helps here as well.

Manage Channel Conflict Like a Pro

As true partners, you win and lose together. By establishing clear boundaries, having an open conversation around who you work with, and setting terms for the partnership, you put yourself on the path to success. Reviewing the relationship regularly will also ensure you won’t fall out of it.

Editor's Note: This piece was originally published in 2018 and has been updated for cohesiveness.