Cannibalization and channel conflict

A millennial chose to watch netflix at home on her 70" TV (for which she paid around $500) instead of paying $17.69 for a bad seat in a crowded movie theater. What makes this remarkable?

In Walgreens near Union Square, San Francisco, a customer asked for information on a prepaid Verizon phone. The Walgreens associate sent them next door to the Verizon store to get more information–then they came back, to buy the phone for less at the Walgreens. 

Is this painful to read? I'm just getting to the good ones.

A SaaS company launched a self-service tool on their website, because their cost of acquiring a customer through their sales team was thousands of dollars. The next month, $1mm in sales pipeline turned into $75k in self-serve signups and $0 for their sales team. 

 

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A prospect got your marketing email and clicked through to buy the product you promoted. But they didn't, and what you don't know is, they cut-pasted the name of the product into Amazon and bought it there with 2-day free shipping. But thanks for your marketing email–you created demand, Amazon fulfilled it. 

Do any of these stories sound familiar? 

All of these stories center on channel conflict. Channel conflict is where an offering in one channel takes demand away from another channel, unintentionally. In some industries, Porter's Five Forces make this inevitable and unavoidable: a company, like a small retailer, is simply at a weak point in the value chain and will always struggle to compete. 

But in others–such as software-as-a-service, distributorships, events, ticketing, hotel, airline, and many others–the damage done is entirely self-inflicted and avoidable. 

5 signs of channel conflict

Channel conflict can be hard to diagnose; for example it may just look like underperformance of certain sales reps, or a "problem" with the website. Here are the 5 telltale signs of channel conflict.

  1.  A sudden change in close rates or conversion rates, without other reason. Amazon sold a record number of Xbox 360s at launch, but their second shipment sold painfully slowly–because competitors had matched their price. 
  2. Competitor's prices are lower. It seems obvious but many companies fail to keep an eye on the competition. 
  3. A promotion performs worse than previously. Companies run the same promotions over and over–because they work. If a promotion that used to work, suddenly stops working, look at channels. Are those customers buying from elsewhere, for less?
  4. Traffic drops. Before you lose sales, you lose traffic. If emails stop driving the same level of traffic, or if your site starts getting less traffic, look first at your channels and competitors. 
  5. Sales prospects go dark. A major SaaS vendor of optimization software pulled their self-serve product down because huge prospects would go dark–and then the next month turn up as monthly subscribers. Why talk to sales about a $100,000 deal when you could just pay $399 a month?

How to fix channel conflict

Sadly there is no "one size fits all" solution to fixing channel conflict. However a few general frameworks can be applied to great effect. 

  1. Know your segmentation.  This applies even moreso to SaaS companies: if your self-serve product cannabalizes enterprise sales, figure out what features or characteristics your enterprise customers cannot live without–and remove them from the self-serve version. 
  2. Know your channels. If you sell through a retail channel, know why. And if that channel isn't performing, cut it off, as Coach and Michael Kors recently did.
  3. Control pricing absolutely. Uber does not have to worry about channel conflict: it has no channels. But the airlines do, with many different sites selling their wares. This is one reason why Southwest has outperformed: by refusing to work with online travel agencies ("OTAs", like Expedia.com) they have kept a clean channel.

Conclusion

Cannabalization reduces revenues, margins and overall profit. Channel conflicts, a likely cause of cannabilization, need to be dealt with quickly and completely in order to maintain a healthy business. Without a clean channel, it can be difficult to formulate or measure an effective pricing strategy. 

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