Sales without channel diversion are not thriving sales. Sales with excessive channel diversion are very dangerous sales.
"Development and stability are the two major goals of enterprise sales work. Salespeople first seek development, continuously opening new markets to ensure rising sales volumes. However, without stability there is no development. To establish a firm foothold in the market, enterprises must control channel diversion and price dumping to stabilize the market. If market chaos results from channel diversion and dumping, sales work cannot proceed smoothly. Development is the absolute principle, but stability is an even harder principle. A market that cannot be stabilized is a market without a future; a salesperson who cannot manage the market well is an unqualified salesperson." At a sales work conference of a certain company, the sales manager earnestly admonished the salespeople.
Channel diversion, a concept not found in marketing textbooks, is nonetheless a headache-inducing problem in sales practice. Why do many products that are selling like hotcakes suddenly vanish? Why do good-selling products not make money, while profitable products do not sell well? An important reason is that the market has problems. Currently, the two major chronic ailments in enterprise sales work are channel diversion and price dumping. Price dumping occurs in two situations: first, price dumping between different regional markets; second, price chaos caused by dealers competing for customers within the same regional market. Price dumping between different regional markets is caused by channel diversion. In other words, channel diversion is the chief culprit leading to market chaos.
Channel diversion, also known as cross-selling or market flooding, refers to selling products outside one's designated territory. Sales management expert Yao Houliang classifies channel diversion into the following categories:
1. Malignant channel diversion. This is the act of dealers deliberately dumping products into markets outside their own territory to obtain abnormal profits. Dealers often sell at prices lower than the manufacturer's stipulated selling price to non-territory areas.
2. Natural channel diversion. This occurs when dealers inadvertently sell products outside their territory while earning normal profits. There are usually two manifestations: first, mutual diversion near the borders of adjacent territories; second, in circulation-oriented markets, products flow to other regions along with logistics. The consequences are: first, the channel profits of second-tier distributors in border areas decline, affecting their enthusiasm, which can escalate into malignant diversion among second-tier distributors; second, products flow to other regions with logistics, and if the volume is large, it can affect the channel price system in those regions, causing a decline in channel profits.
3. Benign channel diversion. This occurs when, in the early stages of market development, an enterprise intentionally or unintentionally selects dealers in markets with strong circulation, causing products to flow to non-key operational areas or blank markets. For example, an enterprise's channel plan designates the Central Plains region as a finely cultivated area, but it selects a dealer in Langfang, Hebei (a circulation market), and as a result, 60% of the product sales in that region flow to Northeast China, western Liaoning, Inner Mongolia, and other areas. The results are: first, the enterprise can increase the absolute sales volume while saving transportation costs; second, without investing a penny in blank markets, it raises brand awareness, but the channel price system remains in a natural state, to be integrated later when key operations begin.
Malignant channel diversion causes enormous harm to enterprises: it disrupts the channel price system, greatly reduces channel profits, dampens dealer enthusiasm, and destroys the sales network that the enterprise painstakingly built.
The causes of channel diversion are diverse: It may be due to market saturation in certain regions; or excessive advertising pull without corresponding channel construction; or imbalances in channel development between regions due to insufficient capital or manpower; or differing preferential policies given to channels, leading distributors to exploit regional price differences for diversion; or differences in transportation costs, where some dealers pick up goods themselves at lower costs than manufacturer delivery, enabling them to divert products.
Mr. Gao Dequan, Sales General Manager of Yangzhou Xinxin Food Company, provided a profound analysis of dealer channel diversion. In the early stages of market development, due to limited resources, enterprises often entrust products to dealers for agency sales. Since different dealers have different strengths and regional markets develop unevenly, demand in Area A may be greater than in Area B, leading to supply shortages in A and sluggish sales in B. Moreover, enterprises often assess dealers in charge of the two areas only on hard indicators (sales volume, payment collection rate, market share), neglecting soft indicators (product awareness, brand reputation, customer loyalty). Salespeople and dealers in each area, for their own interests, will find ways to complete sales quotas. A common practice is for the dealer in Area B to resell products to distributors of the dealer in Area A at cost or even lower prices, while the salesperson in charge of Area B is usually unaware (even if aware, sometimes pretends not to know). The dealer and salesperson in Area A, knowing that others are diverting products and harming their interests, complain to the company. The company first criticizes the salesperson in Area B, but treats the dealer with "careful methods": requiring solid evidence and ensuring no large receivables are in the dealer's hands, otherwise, if relations sour, it could affect the manufacturer-dealer relationship, and in severe cases, the dealer might "hold the goods payment to coerce the manufacturer." Dealers with a better attitude express that they will not repeat the mistake and strive to correct it (though many strive but do not correct). The manufacturer, considering that dealers are hard to find and goods are hard to sell, issues a symbolic warning and imposes a small fine. If the dealer in Area A is dissatisfied with the manufacturer's response, they may "return a plum for a peach" and counterattack by dumping at even lower prices. In today's highly developed information society, price and product information spread extremely fast. As Areas A and B go back and forth, dealers in neighboring Area C, seeing the bottom-level prices in the market, begin to suspect that the manufacturer has introduced new policies or treats dealers unfairly. More seriously, they find that their second-tier distributors are changing supply channels. To win back their distributors, dealers in Area C also start slashing prices (this often happens with dealers who owe the manufacturer large amounts of money), planning to negotiate the losses with the manufacturer at year-end. The dealers hold a principle: if others can sell at low prices, so can I; once sales volume is up and I control the manufacturer's payment, negotiations will be easy. Thus, the manufacturer falls into a trap of price wars among dealers, often extinguishing one fire only to see another start; stabilizing the south only to see chaos in the north. As a result, the enterprise will swallow the bitter fruit: Sales illusions lead to market shrinkage or degradation amid false prosperity, giving competitors' brands an opportunity, and re-regulating and nurturing the market will require enormous costs.
Many instances of channel diversion are caused by the enterprise itself. Some enterprises set excessively high sales targets for branches and salespeople, who then dump products at low prices into adjacent markets to meet targets. Some enterprises have imperfect internal management, allowing salespeople to compete for markets through diversion for personal gain. One salesperson jokingly called himself a master of channel diversion.
To control channel diversion, enterprises have devised many methods, such as printing different codes on products shipped to different markets to trace who is diverting. But dealers have a simple response: tear off the labels. Some manufacturers require dealers to pay market deposits, but many dealers refuse to acknowledge them. Especially when dealers owe the manufacturer money, if the manufacturer tries to penalize them, the dealers threaten to withhold payment. Faced with these problems, what should enterprises do?
A key reason channel diversion is difficult to control is that manufacturers are soft-hearted with dealers, many of whom are long-time customers, making it hard to take tough measures. When manufacturers are lenient, dealers become even more reckless. More importantly, the manufacturer's policies toward dealers are unreasonable. Many manufacturers reward only the "biggest" dealers—those with the highest sales volumes receive the most favorable business policies, rebates, and promotional expenses. For some dealers, channel diversion is an important way to increase sales volume. In fact, enterprises not only need the biggest dealers but also the best dealers—those who can cooperate and support the manufacturer. To control channel diversion, manufacturers must change their policy orientation toward dealers and guide them to become the best dealers.
In summary, channel diversion must be controlled because it means destroying sales and destroying the market. However, controlling channel diversion is very difficult. Enterprises must make firm resolutions and invest significant effort to rectify it, with some companies even establishing a dedicated anti-cross-regional sales department.
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