The power of distribution channels in customers’ purchase decisions

A leading company in the Colombian paint market, whose market share has been decreasing in recent years, has been concerned to see that out of every ten people who enter the points of sale (POS) asking for its brand, only three end up buying it. How is this change in the purchase decision possible? The answer lies in the immense power sellers have to influence the final customer’s decision. If the channel does not receive adequate remuneration, the seller will do everything possible to convince the buyer to choose the competitor’s brand, from which they will obtain the profit they expect.

The power of incomplete information
There are also cases in which the seller manages to change the purchase decision by omitting important information from the customer. One example occurs in travel agencies when a plane ticket is requested. The agency usually sends a quotation with the prices of two or more airlines, and the customer ultimately decides which one to fly with. What often happens is that agencies, knowing the different fares airlines have for the same flight, quote the highest fare from the airline that gives them the lowest margin, thus ensuring that the buyer chooses the “cheapest” option, generating greater profit for the agency.

This other one is better
But when the simple argument of a product being “superior” is not enough to change the buyer’s decision, the POS advisor may even transfer some of the additional margin by selling the cheaper product. This was the case for two friends who went to trade in their low-end French car for a new mid-range car from the same brand. They changed their purchase decision at the dealership and ended up buying Korean cars because the advisors convinced them of their functional superiority over the French ones, in addition to the discounts and incentives they were willing to offer if they switched brands.

The power of GMROI
When defining commercial margins, it is important for manufacturers to think about the profit each product leaves for the retailer multiplied by its sales potential. The result is the profitability of the retailer’s inventory, better known as GMROI. Ideally, the manufacturer’s products should leave the channel with the same GMROI, as this guarantees the listing of a large part of the portfolio and prevents one product from appearing as a better investment than another at first glance, since lower turnover is compensated with a higher margin and vice versa. In other words, if a product has low turnover because it requires a high outlay, is not well known to customers, or requires significant sales advice, it should have a higher commercial margin than one that requires a low outlay, is familiar to customers, and needs no sales assistance.

It is also essential to monitor the competition’s behavior, as it is normal for a leading company’s sales to decline as new competitors enter the market. This may be due to the channel no longer finding it profitable to sell the company’s brands. New players adopt generous compensation policies, causing their products to be pushed at the POS. As market share begins to fall, commercial margins must be reviewed, as a drop in sales reduces GMROI, and it becomes more profitable for the channel to sell the competitor’s products.

This does not mean manufacturers should offer their channels margins similar to those of the competition. When a recognized brand is sold, simply having it on the counter generates traffic (customer flow) to the POS, and it is much easier to sell something the customer asks for than to convince them to buy a different brand. Thus, the more top-of-mind a brand is, the higher its turnover and the lower the margin the channel should receive. In the example of the two friends who bought a car, the traffic to the POS was generated by having the French brand available, but due to the higher margin offered by the POS for the Korean brand, the latter was promoted more.

In summary...
The key is GMROI. Manufacturers should not offer margins so low that channels prefer selling competitors’ products over theirs, nor compensate them with margins so high that money is left on the table, as the same sales effect could be achieved with a lower compensation. It is necessary to monitor channel margins periodically, as market conditions constantly change, and what was profitable for a channel yesterday may no longer be profitable today, and vice versa.