A primer to start shutting down discounting

If you are a brand owner and are facing the scenario where your products are being discounted online, you probably have a serious problem.

Think about market share like a pie. Distributors and retailers all take a slice of the pie; some slices are bigger than others, and we all know that is how it should be. However, a brand should not be focused on how many slices are in the pie or how big the slices are. No, a brand should be focused on making the pie bigger (increasing revenue).

Discounting does not make the pie bigger. It merely changes the number of slices in the pie and the sizes of those pieces.  Essentially, it just shifts sales away from retailers that are playing by the rules to those who are willing to cut their margin. The ramifications of this are not small. I have seen many companies destroyed by this kind of activity, largely because of the ruined relationships with previously loyal distributors and retailers that start seeing their sales lost to discounters.

Shutting down discounting is both hard and easy. For the most part, it is easy. Basically, to stop most discounting, you just have to show up and take a stand. Discounters are generally not loyal to your brand. They are looking for easy money and if you start putting pressure on them, they will move on. If they are entrenched and seeing success with your brand, you may have to push harder.

Ideally, you would end discounting simply by shutting down the offending distributor, but that is usually a pipe dream. Why? Because it is rare that you can even determine which of your official distributors is behind the activity. In many cases, a distributor you may not even suspect is diverting inventory to other companies that are selling it online at a discount. Sometimes, the product is changing hands multiple times before it gets to the discounter.

If you can play detective to try to track the discounting back to the distributor buying from you, go ahead. You can always get information about the company selling you the product and sometimes sniff out the chain. However, if the entities you are dealing with are clever, you will have a hard time connecting the dots.

So how do you shut down these kinds of rogue distributors when you cannot really identify them? Like I said, show up and take a stand. Make it uncomfortable and not easy for them to continue dealing with your product. In essence, you need to shoo them out of your life and let them bother someone else.

To start, contact rogue distributors with strongly worded letters that lay out a legal case for why you can shut them down in court. There are certain legal approaches that are used over and over which I will discuss briefly here:

  • Altered product. If the discounter alters the product label in any way, they are on legally shaky ground, especially if they try to sell the product as new.
  • Lack of quality assurance. Discounters almost always represent their product as new and some brand owners attack that representation with the claim that because the product is outside the authorized channel, the quality assurance that comes with all new products does not exist. Therefore, the product is being misrepresented which in turn weakens the brand.
  • No warranty/return policy. Discounters often are selling diverted product that does not come with a brand owner warranty and is not eligible for brand owner returns. Therefore, it is materially inferior to the product sold inside authorized channels. Thus, the product is being misrepresented when it is claimed to be in new condition, which in turn weakens the brand.
  • Some other deficiency exists in the discounted product. This is essentially the same claim as the last two. Brand owners try to find something that exists in the sales process in authorized channels that is not available to the discounter. For example, a cosmetic company claimed that only authorized retailers had access to certain tools that helped customers pick the right color of lipstick.

In addition to these approaches, very often, discounters engage in careless practices that open themselves up to further legal liability. For example, if a discounter is stealing your product pictures to sell your product, you should be able to use legal threats as leverage against them.

Above all, discounters need to know that you are willing to take them to court and that court will be very expensive (hundreds of thousands of dollars). They also need to know that even if they win, they are not likely to still have the opportunity to buy diverted product because you are going to shut down their sources.

Believe it or not, relentless pressure through credible, legal letters will shut down the majority of your discounting problems. At some point, you may have to involve attorneys and in some cases, you may even have to sue. However, while such litigation is expensive, your chances of winning are high and in discovery, you can likely force the discounter to reveal their sources which you can then cut off. Another advantage of litigation is this: discounters keep track of such litigation and if you have a track record of fighting discounters in court, they will look for easier deals.

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