Supply Chain Challenge: Internet Sales Profitable But May Alienate Existing Customers

Selling directly to customers via the Internet can seem like a dream come true — you reach larger markets at higher margins with no middlemen. But according to Grant Thornton’s Strategic Source and Sell: Channel Diversity Survey, the dream can easily turn into a nightmare if customers in existing channels become confused or angry over new pricing models that exclude them.

So why take the risk? It’s simple. Channel diversity can improve profitability.

Roughly a third of all organizations derive sales from all three primary channels (direct to customers, through retailers/dealers, and through distributors). Organizations that sell via all three primary channels reported average profit before interest and taxes (PBIT) of 16.9%, vs. 12.8% for those selling into two channels and 13.6% for those selling into one channel.

Online sales in particular are a strong driver of profitability. The survey found that for businesses with no online sales, the average PBIT was 13.3%, compared to 14.9% for those selling through their own or third-party sites, and 17.7% for those selling via both their own website and others’ websites.

Online selling is a fast and easy way to deliver value to customers and a boost to the bottom line. Retailers in particular are leading in online sales. On average, 19% of sales for all three business types we surveyed are made via the company’s website, and another 10% via third-party websites.

Perhaps surprisingly, however, 39% of businesses are not yet selling online. Elliot Findlay, senior manager in Grant Thornton’s Transaction Advisory Services practice, says businesses know that an online platform opens them up to new revenue streams, but executing an efficient and effective system can be difficult and daunting.

“To move sales online, a company typically needs a capital or debt infusion that adds additional risk, and this is something that few businesses are willing to do,” he adds.

Cannibalizing current channels is another reason for low online sales adoption. “Businesses are invested in their existing channels and are concerned about alienating their customers,” says Brian Murphy, national managing partner in Grant Thornton’s State and Local Tax practice. “If you’re thinking about adopting an online sales strategy for your business, you need to consider its impact on the existing channels.”

Here are a few other reasons why Internet sales are risky:
Sales visibility can be limited due to decentralized reporting systems and third-party involvement.
Unexpected surges in demand can strain production facilities and supply-chain partners.

Internet sales often have different pricing structures, complicating relationships with customers buying via other channels.
Businesses interested in selling online are also faced with the uncertain fate of the Marketplace Fairness Act of 2013, which would allow states to collect tax on Internet sales. “If the act becomes law, companies that want to sell online will have to deal with a complex issue,” says Murphy. “For instance, you’ll have to build the tax collection into the order acceptance process and program your system to apply the correct tax base accurately. And if you’re not familiar with multistate tax collection, you expose your business to many risks.”

Internet sales main source of channel conflicts

Approximately 22% of businesses indicate that channel conflict (i.e., sales to one channel conflicting with sales agreements in another) is a major or moderate issue for them. Internet sales in particular are problematic: 50% of organizations that sell via their own website and third-party websites report that channel conflict is a major or moderate issue.

Channel conflicts are especially dangerous for organizations as they seem to affect customer retention. For example, retention rates are an average of 79% among participants that have no issues with channel conflicts. But for organizations in which channel conflicts are a moderate or major issue, rates drop to 60% and 47%, respectively. “Customers have an emotional connection with their purchases, and if they can’t trust the vendor over pricing or service, they’ll take their business somewhere else,” notes Findlay.

Although channel conflicts can put a drag on sales, executives can apply the following strategies to minimize the negative effects:

Avoid product-offering overlap; instead, offer exclusivity within each channel.
Establish clear agreements with customers that detail their scope of control over products and brand names in given markets.
Be open with partners about channel distribution and explain why you’re taking this approach.
Make certain that specific brands are sold via wholesale and others via retail.
Create contractual agreements with each user/customer that are made to order based on product releases.

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