Omni-Channel Distribution or Just Plain Channibalism?

When is an omni-channel strategy considered cannibalization and when is it not?

Well, to define cannibalization in reference to an omni-channel strategy, we might want to first clarify just what an omni-channel strategy is.  In a nutshell, omni-channel selling is a business model that companies use to improve customer experience and capture additional market share by utilizing multiple customer facing order capture methods. An effective omni-channel strategy provides your buyers with the ability to engage with you wherever they are and whenever they’re ready.

Distributors often seek to increase revenue by providing items for sale online in addition to traditional channels like direct call-center sales, resellers or even brick-n-mortar retail establishments.  Online quickly extends to mobile phones, social media sites or content networks.

What could possibly go wrong?

In an omni-channel strategy, it is vital to not cannibalize your distribution business. Below are a few examples of what is, and isn’t, channel cannibalism (Channibalism).

Channibalism:

At your distribution company, your customer normally purchases an item through their existing channel (like your in-house call center). However, a few months ago, you decided to make items available for purchase online at a lower price than the regular channel. Now, that customer can purchase the item directly online – a good and bad thing. The good? They are still purchasing from you. The bad? They are buying the same item and quantity they used to buy from you, but for less money. Unless you have reviewed and adjusted the process and items based on planned margins this can hurt your distribution company’s revenue. This is channibalism.

When you change the method of ordering without increasing the number of items ordered, you are just shifting the orders from one channel to the next – resulting in zero growth. This approach has proven dangerous and costly to many distribution firms that did not consider the effects of cannibalization.

In the case of a manufacturer who decides to apply omni-channel approaches their distributors end up sourcing new vendors because of their frustration.  The distributor then takes  advantage of their relationship with the end user to sell their new product rather than the original vendor’s product. The original vendor ended up experiencing a major drop in business.

Not Channel Cannibalism:

An item is introduced to end users and you  are giving them options to purchase from your web store at a discount if:

1. they include additional line items on the order
2. they purchase a minimum quantity
3. they pay for freight, etc.
4. there is no pricing competition with your distributors.

If the above is true, this is not channel cannibalism. Instead, it is creative Omni-Channel marketing.

This creative approach allows your channel to keep selling while delivering their value-added to maintain their existing customers and avoid price competition avoiding margin degradation.

The net results are simple: more items are ordered. Thus, allowing you to increase sales through a new channel and avoid channel cannibalization.

Think First – Act Later

You created a web ordering experience that reaches out only to new customer accounts providing discounts and buy one, get one free deals (BOGOs). How do you think this will affect existing customers? Well, this approach usually results in a level of dissatisfaction among existing customers. Existing customers will feel they are being mistreated for being loyal and upset they cannot take advantage of the “promotional” pricing. Talk about an easy way to drive them to another distributor’s website in search of “specials” and potentially better treatment…

I often see this methodology in the cable industry and telephone companies – wireless and landline. The strategy usually requires that you maintain a new department solely responsible for customer retention. In these cases, you are adding costs to manage your customers while creating dissatisfaction among your customer base. Seems counter-intuitive to me, and from my experience the net results are increasingly negative for distribution companies.

What you should do:

Create a web ordering experience for new customers as well as your loyal customers. The discounts and BOGOs should be applied to both parties, especially when loyal customers are in line for renewals. By approaching it in this manner, you will gain new customers while increasing loyalty and satisfaction within your existing customer base.

Channel cannibalism is hard to identify as it is usually a result of unintended consequences. Distribution companies do not intentionally start out wanting to upset a hard earned customer base. Many of these instances are caused by management overreacting to a change in the market.

It is important when considering new customer acquisition methods that you consider not just the positive side of the equation, but the negative potential outcomes. Not everything that sounds good will give you the expected positive results. After all, in the distribution industry, just one mistake will result in the likely lose of customers.

The results of deploying a correct Distribution Omni-Channel strategy can mean the difference between maintaining and increasing your margin and losing or growing your industry foot print.  This type of approach needs to be supported by strong software functionality. You need to be aware of margins at the order level as well as the line level. This type of functionality is not available as a standard solution in all software packages. Advanced Revenue Management and Advanced Order Management modules were specifically developed to protect and maintain your margins to support all your business channels.

Are you engaging in channibalism?

Dominic Telaro CFPIM, CIRM
Vice President Industry Solutions, SBS Group

Dominic Telaro brings over 35 years of Manufacturing, Distribution, Software and Consulting experience. Half of his professional career has been in Manufacturing and Distribution from shop floor and warehousing positions to management. During this time he implemented ERP, DRP and Logistics solutions as internal Project Leader. The second half of his career has been in consulting, product management, product development and both consulting and software sales. He has held positions as VP Of Industry Solutions, VP of Product Development, VP of Sales and Marketing and Global Practice Leader for companies like IBIS Inc., IBM, Janis Group, Metamor, Marcam Corp. and more. Presently he is responsible for Industry Product Vision for multiple ERP solutions at SBS Group USA.

APICS Fellow and Certified in Integrated Resource Management, Instructor at Universite de Montreal, Vanier College and Granby CEGEP for APICS certification; Lead instructor for internal APICS training at Bell Helicopter, Avon, Le Groupe Hamelin

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