Cross-region selling, also known as channel stuffing, occurs when distributors dump products below market price in other regions. As downstream players in the value chain, distributors have limited influence and bargaining power, so they can only operate within their own regions according to manufacturer strategies, and their profits are extremely limited. Meanwhile, merchants have seen too many manufacturers describe their market strategies, only to have them fizzle out. Most distributors started from wholesale, accustomed to taking profits and leaving, lacking patience for overly long-term goals. At the same time, feeling helpless in their local markets, they are highly interested in sales opportunities in other regions. Some distributors, to earn a 200 yuan profit, will sell 10,000 yuan worth of goods from Guangzhou to Zhengzhou. This is no exaggeration.
Manufacturers hope distributors will intensively cultivate their own regions, but cross-region selling has no practical effect on overall sales; it's merely a transfer of sales. Most manufacturers do not want cross-region selling because it disrupts the market price system, making distributors hesitant to stock up due to price instability; it also allows other distributors to seize market share, causing losses and reducing enthusiasm, eventually leading to price wars where no one profits.
Most distributors take pride in their ability to sell across regions; in fact, large distributors are often the biggest offenders. A distributor who cannot sell across regions is not a good distributor. Cross-region selling is divided into natural and malicious types; the former is a natural phenomenon of commercial circulation, while the latter is deliberate misconduct.
Motivations for Distributors Engaging in Cross-Region Selling
When distributors have excessive inventory affecting cash flow, they may sell at low prices to other regions to free up capital. For example, sometimes due to manufacturer promotions, merchants stock up heavily but cannot digest the inventory.
When products approach their shelf life and the manufacturer refuses or is irresponsible about returns, distributors may dump products at rock-bottom prices in other regions to reduce losses.
When distributors cooperate with manufacturers and are required to make large initial purchases, but find market development hopeless, they may sell at low prices to other regions.
To achieve predetermined sales targets and obtain rebates and rewards, distributors may sell at low prices in other regions to compensate for shortfalls in local sales.
When product prices or sales rebates are affected by sales volume, distributors often dump products in other regions to obtain better prices or higher rebate coefficients for greater benefits.
To increase product variety and gain multiple benefits, distributors may engage in barter transactions with business partners in other regions, resulting in cross-region selling. However, such volumes are usually small, and price reductions are limited.
Competitors of a distributor may refuse to buy from them and instead use business relationships to source from other regions, objectively causing cross-region selling, which is occasional in nature.
When distributors abandon cooperation with manufacturers and their demands for returns or other issues are not met, they may resort to channel stuffing as retaliation.
Some manufacturers, due to insufficient funds, use products to offset promotional expenses and supplier payments. Advertising agencies or suppliers without sales channels can only dump products at low prices, leading to cross-region selling.
In some companies using regional agency systems, agents are responsible for market development and advertising, so their purchase prices are low. Some poorly performing agents hoard products and then sell them at prices below market in booming regions for huge profits, dealing a devastating blow to the impacted markets.
What Breeds Cross-Region Selling?
As the saying goes, no one gets up early without profit. Distributors operate to make money, and they work hard at cross-region selling for profit. Cross-region selling, after deducting transportation and communication costs, is no cheaper than local sales. For cross-region selling to succeed, distributors must have considerable pricing flexibility. The following factors give distributors the conditions for cross-region selling.
Regional Price Differences Foster Cross-Region Selling
Some manufacturers have uneven market development across regions; mature markets have large scale and low prices, so low-priced products flow to weaker markets, making it harder to develop those markets.
Some manufacturers' ex-factory prices do not include freight, and distributors arrange their own transportation. This makes local distributors' prices lower than the actual purchase prices of distant distributors, enabling cross-region selling.
Price or Rebate Fluctuations Lead to Cross-Region Selling
Some companies offer tiered pricing based on purchase volume to encourage sales; others have year-end rebates that vary with sales volume. Large customers, due to their existing scale, have price advantages and can dump products at purchase price or after deducting part of future manufacturer discounts.
Product Price Adjustments Cause Cross-Region Selling
Some merchants anticipate or learn in advance of upcoming price increases, hoard large quantities, and then sell at prices below market after the increase. Or when products are heavily unsold, they cut prices before the manufacturer does and sell in other regions, then falsely report inventory to obtain price adjustment compensation.
Promotional Expenses Cover Cross-Region Selling Costs
Some manufacturers entrust distributors to pay promotional expenses on their behalf. With lax monitoring, distributors may fold promotional expenses into product prices and sell at low prices in other regions. Although local market share does not increase, from the manufacturer's macro perspective, it seems promotions boosted sales. This case illustrates this situation.
Excessive Channel Price Space Leads to Cross-Region Selling
When the gap between the manufacturer's specified selling price and purchase price is large, distributors can deduct cross-region selling costs and still profit from low-price sales, prompting them to act. For high-value products with relatively low logistics costs, cross-region selling is easy.
Business Commissions Subsidize Cross-Region Selling
In some traditional industries like pharmaceuticals and some new small enterprises with poor benefits, to motivate sales staff, they set high sales commissions. Salespeople give part of their commissions back to distributors to support cross-region selling. In this case, the salesperson played a key role in enabling the distributor's cross-region selling.
Products Offsetting Payments Lead to Cross-Region Selling
Some manufacturers, when cash-strapped, use their products to offset advertising expenses or supplier payments. Suppliers and advertising agencies without sales channels cannot consume such large quantities, so they dump products at low prices, causing cross-region selling.
Alternative Profit Models Cause Cross-Region Selling
A little-known secret is that many distributors are also suppliers to manufacturers. Their profits from product distribution are far lower than those from supplying products. Buying from distributors is often another form of reward from manufacturers. To enhance their status and secure larger orders, distributors often sell products at a loss, compensating through other channels with substantial gains.
How to Cut the Chain of Cross-Region Selling?
Having studied the motivations and conditions for cross-region selling, we can formulate effective measures to prevent and combat it.
Set Product Identification:
Print the sales region on the product packaging box; Print a serial number on the outer packaging; for GMP-certified companies, this is easy. In this case, the company quickly detected cross-region selling due to its product identification methods.
Establish a Comprehensive Monitoring System:
Set up a dedicated department for market management supervision; Plan regular product surveys of regional merchants and retail terminals; Establish a scientific customer management system: Forecast regional sales capacity and growth potential; Require customers to maintain safety stock; Moderately control customers' purchase scale; Require customers to provide product flow and volume; Require customers to report inventory regularly.
Change Incentive Methods
Moderately increase sales staff base salaries and reduce sales commissions; Change the model linking price and rebate margins to sales volume; Shift from result-based rewards to process-based rewards; Shift from cash rewards to physical rewards;
Change Payment Methods
Do not use products to offset other payables; Do not have distributors pay promotional expenses on behalf; Adopt a delivered pricing system to ensure price uniformity.
Strictly Enforce Penalties
Cancel the offending distributor's qualification; Impose fines; Cancel rebates on cross-region sold products and count them as sales in the impacted region; The above are some solutions to cross-region selling, requiring market managers to have comprehensive market management planning awareness, and the execution also depends on the product's market influence. Customers may bully the store, and the store may bully customers; control and counter-control between manufacturers and distributors are based on strength. In this case, the company's products lack distinctiveness, and it relies heavily on distributors, so it lacks deterrence. Even when catching distributors red-handed, it dares not act rashly. However, if incentive design is reasonable, cross-region selling can still be avoided.
Zunliang believes that absolutely avoiding cross-region selling is impossible and unnecessary. If a woman has never been harassed, she is not beautiful; if a product has never experienced cross-region selling, it is certainly not a best-seller.
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