Success Strategies in Channel Management

Legal Issues

Legal Constraints on Marketing Channel Policies

• The policies addressed below are as follows:

• Market coverage policies • Customer coverage policies • Pricing policies • Product line policies• Selection and termination policies• Ownership policies

Legal Constraints on Marketing Channel Policies

• There are a number of ways in which competition can be threatened:

• Collusion (Exclusive dealing)• Discriminatory pricing• Predatory pricing• Territorial restrictions and customer coverage restrictions• Price maintenance • Tying / full line forcing

Market Coverage Policies

• From a legal perspective, channel intensity is linked to the concept of market coverage, about which there is significant legal concern.

• Selective and exclusive coverage policies have been called "territorial restrictions" by anti-competitive enforcement agencies, because they are used by suppliers to limit the number of resellers in a defined territory.

• In reality, territorial assignments are rewards or spatial allocations given by suppliers adopting selective or exclusive market coverage policies in return for distributors' promises to cultivate the geography they have been given.

Market Coverage Policies• The supplier's objective in instituting territorial and other

kinds of so-called "vertical restraints" is to limit the extent of intra-brand competition

• Absolute confinement involves a promise by a channel member that it will not sell outside its assigned territory. Often combined with such a promise is a pledge by the supplier not to sell to anyone else in that territory, an arrangement known as an exclusive distributorship.

• Airtight territory exists when absolute confinement is combined with an exclusive distributorship.

• Area of primary responsibility requires the channel member to use its best efforts - or to attain a quantified performance level - to maintain effective distribution of the supplier's goods in the territory specifically assigned to it.

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Market Coverage Policies

• Profit pass-over arrangements require that a channel member who sells to a customer located outside its assigned territory compensate the distributor in whose territory the customer is located. Such compensation is ostensibly to reimburse the distributor for its efforts to stimulate demand in its territory.

• A location clause specifies the site of a channel member's place of business. Such clauses are used to "space" resellers in a given territory so that each has a "natural" market comprising those customers who are closest to the reseller's location.

•Restrictions on intra-brand competition are indirectly supposed to result in higher prices and, thus, higher gross margins. Obviously, price competition induced by inter-brand competitors can upset this arrangement.

•Two policies that have a direct effect on price - price maintenance and price discrimination.

Pricing Policies

Price Maintenance• Price maintenance in marketing channels is the

specification by suppliers, typically producers, of the prices below or above which other channel members, typically wholesalers and retailers, may not resell their value offers. Thus, the policy is frequently called resale price maintenance (RPM).

•RPM inhibits competition between stores carrying the same brand.

• Setting minimum resale prices remains a legal activity as long as it is not done as part of a concerted effort among multiple parties.

•Legal control over resale prices by producers is possible under various conditions:•Act unilaterally: Statements and actions should come only from the producer.•Avoid coercion: Don't use annually renewable contracts conditioned on dealer adherence to producer's specified resale price. •Vertically integrate: Form a corporate Vertical Marketing System (VMS).•Avoid known discounters: Establish screening and performance criteria difficult for discounters to meet.

Price Maintenance

Price Discrimination

• Price discrimination by a seller between two competing channel members can be viewed as an attempt to exercise reward power relative to the channel member receiving the lower price.

• It would be enforced on the grounds that this use of coercive power is an unfair method of competition.

• It may also illegal for buyers to coerce favours from suppliers in the form of special promotional allowances and services.

Continue---• Slotting allowances could be illegal. • Slotting allowances are fixed payments made by a producer to

a retailer for access to the retailer's shelf space. They are used predominantly in grocery retailing, but have also been observed in the software, music, pharmaceutical, and bookselling industries.

• Slotting allowances are not illegal in and of themselves. However, they could be construed as illegal under certain conditions. Slotting allowances could be challenged if competing retailers agreed on the amount of slotting allowances or the allocation of shelf space to producers.

• The practice could also be challenged if used as part of a conspiracy to monopolize trade or if used to exclude certain producers from retail shelf space.

Promotional Allowances and Services

• In order to entice channel members to advertise, display, promote, or demonstrate their wares, suppliers use all sorts of monetary inducements.

• Various regulations may prohibit a seller from granting advertising allowances, offering other types of promotional assistance, or providing services, display facilities, or equipment to any buyer unless similar allowances and assistance are made available to all purchasers

• Because buyers differ in size of physical establishment and volume of sales, allowances obviously cannot be made available to all customers on the same absolute basis. Therefore, the law stipulates that the allowances be made available to buyers on "proportionately equal terms."

Functional Discounts.

• A functional discount is the use of reward power by the manufacturer.

• It provides for a set of list prices at which value offers are transferred from the producer to a downstream channel member, plus a list of discounts off list price to be offered in return for the performance of certain channel flows or functions.

Product Line Policies

• For a wide variety of logical reasons, channel managers may wish to restrict the breadth or depth of the value offer lines that their channel partners sell.

• The related four policies are:• Exclusive dealing• Tying• Full-line forcing• Designated value offer policies

Tying• Tying exists when a seller of a value offer that buyers want

(the "tying value offer -product"), refuses to sell it unless a second ("tied") value offer (goods and services) is also purchased, or at least is not purchased from anyone other than the seller.

• A tying agreement in effect stops competing sellers from the opportunity of selling the tied commodity or service to the purchaser.

• However, certain types of tying contracts are legal. There have been rulings that if two value offers are made to be used jointly and one will not function properly without the other, a tying agreement is within the law. (Shoes are sold in pairs, and automobiles are sold with tires.)

• In other cases, if a company's goodwill depends on proper operation of equipment, a service contract may be tied to the sale or lease of the machine.

Full-Line Forcing

• A seller's power with a value offer is used to force a buyer to purchase its whole line of goods. This policy is illegal if competitive sellers are unreasonably prevented from market access.

• Therefore, the presumption against tying arrangements is not quite as strong as the per se rule against horizontal price-fixing conspiracies.

Designated Product Policies

• A producer may want to sell some portion of its product line only through a limited number of resellers, whereas its other resellers may sell a different subset of the company's value offers.

• Such a policy can help preserve the producer's exclusive brand name and prevent its erosion through overly broad distribution through outlets with an insufficiently high-quality image or service provision capabilities.

• Further, this effectively gives resellers reasonable profit-making opportunities. If the reseller has at least some value offers for which there is little or no competition, it can confidently invest in customer service and promotional activities, secure in the knowledge that its efforts will not fall victim to free riding by other resellers.