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May 4, 2020

Stopping Product Diversion In Your Authorized Sales Channels

stopping product diversion

Commerce has been irrevocably transformed in the age of online marketplaces, driven in large part by the rise and dominance of Amazon.com. One of the most disruptive aspects of the Amazon platform is the rampant presence of unauthorized 3P sellers. These 3P sellers are often fueled by product diversion – i.e., the siphoning of product from authorized channels of distribution for resale in an unauthorized manner. While product diversion has existed for as long as modern retail itself, it has surged in its frequency and capacity for disruption with the explosive growth of online marketplaces. When brands are susceptible to diversion and confronted with numerous unauthorized 3P marketplace sellers, erosion of brand value, margin chargebacks, CRaPed products and reduced profitability soon follow. Brands seeking to protect themselves from these harms should implement a comprehensive eControl program that, among other important components, includes an authorized reseller program and the ability to diagnose the root cause of diversion.

An authorized reseller program involves implementing agreements or policies with all authorized sellers, across all channels of distribution. These agreements and policies will establish rules on where, how and to whom the brand’s products may be sold, allowing the brand to exert sufficient control over the sale of products in its authorized channels. Companies that invest upfront in training key internal stakeholders and customers on the purposes of the authorized reseller program realize better results and more satisfied channel customers. Companies can also align their key stakeholders and customers by clearly communicating the purposes of the program and highlighting the key features of each policy or agreement applicable to them or their channels. Most authorized resellers will comply with an authorized reseller program when they understand that the purpose is to reduce diversion and protect brand equity, which, in turn, protects authorized resellers’ businesses.

To further augment the effectiveness of their eControl programs, brands should work diligently to identify and correct the root causes of product diversion. For some companies, diversion problems will inevitably be tied back to their authorized resellers – even with an authorized reseller program in place. This scenario can be managed in several different ways. If the company wishes to maintain its business relationship with the reseller, the best first step is to engage the reseller directly to explain that it is clear that they are a source of diversion; that the long-term health of both the brand and the reseller depend on stopping harmful diversion; and that the reseller’s authorized status is in jeopardy if it does not cease sales to diverters. Many resellers will come into line when approached in this manner. Indeed, some may not even know that they are fueling diversion.

If, on the other hand, it appears that the authorized reseller will not comply or the company wishes to terminate its business relationship, the reseller’s authorized status can be revoked. Assuming there are no contractual or other legal limitations on terminating the relationship, the company can cut off the customer, revoke its authorized status, and stop sales to the customer by placing the customer on a Do Not Sell list. This approach has been very effective for many companies in stopping diversion and has allowed them to focus more time, attention and resources on those resellers truly committed to the brand’s success.

Companies often express concerns over confronting their channel customers about compliance with the authorized reseller program. However, the reality is that most companies’ resellers respond favorably once they fully understand the reasons why the company has implemented and enforced its authorized reseller program, and that the company does not wish to take away their business.

Read more about identifying the root cause of product diversion and what steps you can take to help stop it in our recently published white paper: https://econtrol.vorys.com/rootcausewhitepaper.