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May 12, 2020

Are Common Business Practices Fueling Your Product Diversion Problems?

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To succeed in the online marketplace era, brands must take control of their online sales. Unfortunately, there is a great deal of confusion over how best to do so. It is common for brands attempting to achieve control over online sales to first attempt various half-measures that quickly prove incapable of solving the problem, like relying solely on MAP policies, price monitoring software and ineffective “scary” letters that are promptly ignored. Instead, brands that desire to solve their online sales control problems should implement a comprehensive eControl program that combines business, legal and technology systems working in an integrated manner to deliver the right business outcomes needed by the brand. One of the critical components of an effective eControl program involves identifying the root cause of product diversion.

There are a number of sources of product diversion. For some companies, diversion problems can be tied back to authorized resellers. For more information about this type of diversion, read our recent blog post, “Stopping Product Diversion In Your Authorized Sales Channels.” However, for some companies, the root cause of diversion is found in the brand’s own business practices. The following are common business practices that fuel diversion:

1. Outdated Channel Strategy

Many brands still sell to and through as many sales channels as possible without putting any expectations or limitations on their resellers. Brands must evolve to ensure that their channel strategy is consistent with the market dynamics at play today. This involves having a defined go-to-market strategy that has been clearly communicated to channel customers. Some key aspects of a channel strategy include:

  • An online marketplace strategy that is precisely defined, that squarely aligns with the brand’s overall business strategy, and that is aggressively enforced. Brands that do not have such a strategy are likely to face a chaotic reseller environment with multiple unknown 3P sellers, poor consumer experience and products in the channel, harmful intrabrand competition and an overall disincentive for customers across the channel map to invest in the brand.
  • A strategy for defining and managing a brand’s authorized sellers in other channels and ensuring that they understand that this strategy. Brands should strengthen their policies that clearly define how, where and to whom authorized sellers may sell. Brands should also communicate their policies and expectations to their authorized sellers, explaining the problems caused by product diversion and the importance of preventing it.
  • Continuous monitoring of the brand’s channels to identify likely sources of diversion, and appropriate action against violators. These actions can range from limiting product supply, reducing or eliminating trade allowances or terminating the relationship altogether.

2. Outdated Pricing and Promotional Practices

The various ways that brands manage and incentivize their customers can also promote diversion and harm brand equity in today’s market. For example, pricing differentials between markets or channels can facilitate product diversion as products intended for one market or channel are diverted into another. Volume discounts and incentives can also be a source of diversion, as they incentivize distributors to purchase at levels beyond that which natural demand supports. This overstock becomes the primary source of diversion for many brands. Promotions are also a frequent cause of product diversion, especially when unlimited quantities and/or compounded couponing are at play.

3. Supply Chain Practices and Oversight

Unauthorized sellers are frequently able to obtain products through a brand’s supply chain issues, including international re-routing and theft. For example, brands often sell products to distributors for resale abroad. These products are often sold at lower prices than U.S. products in alignment with the economic dynamics of the intended foreign market. Such pricing differentials can present an alternative arbitrage opportunity, with products intended for foreign markets never leaving port – or even traveling around the world and back – and ending up on Amazon. Brands should carefully evaluate and monitor their international distributors to ensure that products are being sold where intended. If this is not possible, brands can look into regional or national product segmentation or variation strategies so that it is clear that the products at issue were manufactured for foreign markets, or look into means of enforcement through customs.

4. Internal Misalignment

Many online sales control issues can be traced back to a lack of internal alignment. For example, the brand’s sales team may be selling to known diverters at the same time that its eCommerce team is attempting to enforce against unauthorized sellers. Indeed, cooperative sales teams are a key factor for success here. Problems quickly ensue when unauthorized sellers easily obtain products because sales teams are content to sell to anyone in an effort to more expediently retire their quotas.

5. Lack of Diversion Impact Knowledge

A brand’s efforts to assert greater sales control and stop diversion are more likely to succeed if internal champions are able to measure key metrics and tie their efforts to overall business success. These metrics may include the percentage of sales revenue captured by authorized and unauthorized sellers on marketplaces, MAP and MSRP compliance across key SKUs, buy box share, margin chargebacks from retailers, suppressed listings, and overall sales volume. By agreeing upfront on meaningful metrics to track and measure, the brand can evaluate the effectiveness of their programs, making any necessary adjustments along the way to increase program effectiveness.

Read more about this topic and others related to identifying and helping to stop the root cause of diversion in our recently published white paper: https://econtrol.vorys.com/rootcausewhitepaper.