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Regaining Pricing Control in a Multichannel World

How Manufacturers Can Rewrite the Rules of the Game
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  • Selling online can certainly seem appealing to manufacturers, but it can also bring intense channel conflict and powerful threats to their brand and price positioning.

  • At the heart of the issue: large online retailers have much lower operating costs than their brick-and-mortar counterparts, and, consequently, they can much more easily slash prices to fuel faster growth.

  • Companies must differentiate their trade investment by creating incentives for retailers to increase brand support in return for discounts and nonmonetary efforts.

  • Those that lag behind risk destroying the very heart of their business and leaving significant money on the table.

 

Selling online can certainly seem appealing to manufacturers. First, there are the growth opportunities. E-commerce sales already total more than $1 trillion worldwide—about 6 to 8 percent of all sales in major developed and emerging markets. Nearly every retail category is growing rapidly, with double-digit growth rates overall in the U.S., Europe, and mature markets of Asia, and even more impressive growth rates in China (25 percent) and India (57 percent), according to Forrester Research.

Selling online can be quite profitable as well. We estimate that manufacturers typically enjoy up to 10 percentage points of higher margins from e-tailers than from other channels. E-tailers’ focus on growth and their need to ensure supply from manufacturers result in less focus on price negotiations, while manufacturers enjoy a lower cost to serve the online channel.

It’s clear that a company making and selling branded consumer items cannot afford to miss out on this opportunity, which is already transforming the landscape, offering consumers lower prices, abundant time savings, and tremendous breadth and depth of selection from what has been called “the endless aisle.” At the same time, manufacturers must continue to serve traditional retailers, which enjoy much lower growth rates but still represent the bulk of manufacturers’ sales.

These competing needs combine to create intense channel conflict and powerful threats to a manufacturer’s brand and price positioning. At the heart of the issue: large online retailers have much lower operating costs than their brick-and-mortar counterparts, and, consequently, they can much more easily slash prices to fuel faster growth. (See “Digital’s Disruption of Consumer Goods and Retail,” BCG article, November 2012.)

Now more than ever before, manufacturers are selling products in a “multichannel” world made up of e-tailers, marketplaces of third-party sellers, brick-and-mortar stores, and hybrids that combine elements of each model. This commercial reality requires a much more strategic use of pricing and trade investments than was common in the past. Those that come late to the game will see their options narrow dramatically.

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