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Abstract
As more and more products are distributed through independent channel resellers, suppliers find it increasingly difficult to craft highly
motivational incentive packages. Instead, many suppliers product lines are neglected by resellers in deference to more compatible incentive
offers. This paper studies the many aspects of incentive rejection and incentive compatibility and prescribes a four-step, theory-based process
to help suppliers craft attractive incentive programs. The process involves identifying resellers performance needs, recognizing how each
need suggests a different basis for incentive rejection, and designing an incentive package such that the incentives support specific reseller
needs. Also, unique channel conditions are considered.
D 2003 Elsevier Science Inc. All rights reserved.
Keywords: Channels of distribution; Incentives; Governance; Cooperation
1. Introduction
Firms that sell through distribution use many different
governance mechanismssuch as incentive programs,
monitoring processes, and enforceable contractsto try to
control their independent resellers. Of the many mechanisms available, the channel incentive is generally recognized as the one most likely to motivate specific reseller
action (see Williamson, 1991). This is because incentive
arrangements can be crafted such that the reseller will
comply with the supplier in order to receive remuneration
of some kind. Because channel incentives are so closely tied
to specific performance, they play a key role in allowing
many suppliers to maintain productive relationships with
channel members.
On the other hand, suppliers often propose incentive
programs that fail to motivate resellers, causing the offered
incentive to be rejected outright (Narus & Anderson, 1996).
The rejection of an incentive is problematic because a
suppliers potential to control its channel cannot be realized
until the reseller accepts the offer and performs as specified
(Frazier, 1999). Unfortunately, the problem described,
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Table 1
Examples of reseller inventory overcrowding
Reseller
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Table 2 (continued)
End-user encouragements
Risk reduction programs
Programs that allow customers to kick the tires before committing to
purchase, mentoring programs ensure customer experience is positive
Table adapted from Gilliland (2003).
90
Goal attainment
Integration
Pattern
maintenance
Adaptability
Table derived from Kumar et al. (1992) and Quinn and Rohrbaugh (1983).
Table 3
Incentive compatibility matrix
Reseller performance
concern
Salient incentive
control category
Examples of particularly
appropriate (inappropriate) incentivesa
Goal attainment
Incentive magnitude,
incentive immediacy
Output
Integration
Destabilization
Activity
Pattern maintenance
Capability, pledge
Adaptability
Pledge, capability
. High-Powered Incentives
. (capability-based Market Development Support;
Supplemental Contact)
. Market Development Support;
Supplemental Contact
. (End-user Encouragements)
. Credible Channel Policies, Supplemental Contact;
capability-based Market Development Support
. (High-Powered Incentives)
. End-User Encouragements;
Credible Channel Policies
. (activity-based Market Development Support)
In this column, capitalized words represent examples of specific incentives from Table 2.
To accomplish Step 1, the supplier identifies the resellers primary concern for performance. Resellers that are
doing poor financially are likely to focus on attaining
economic goals, those that suffer from a lack of coordination (the integration concern) may attempt to stabilize their
marketing systems, those that encounter high-channel conflict (the pattern maintenance concern) need to restore
system harmony, and resellers that face technological uncertainty may focus on adaptability.
91
92
Table 5
Incentive control categories
Control category
Theoretic precedence
Examplesa
93
94
adaptability. Pledging incentives, such as those that demonstrate the suppliers willingness to invest in and continue
to support the indirect selling model, encourage adaptability
because they bind the parties together, providing an additional resource for the reseller as it attempts to negotiate an
uncertain future. Capability incentives promote adaptability
by increasing the resellers overall base of knowledge that
can be applied to unexpected situations.
Activity incentives tend to be incompatible with adaptability because they restrict learning and the acquisition of
knowledge. Instead, activity incentives compel the reseller
to pursue a standardized set of tasks, encouraging conformance instead of flexibility.
8. Final considerations
One may wonder why the supplier would not simply
offer an incentive package that covers the spectrum of
possible reseller performance concerns. Then, a reseller
could select the incentive that addresses its particular
situation, ignoring others on the menu until its performance
needs change. In fact, recent research implies that suppliers
are expanding the breadth of incentives offered (Gilliland,
2003; Narus & Anderson, 1996). While this may be a
worthwhile strategy in some cases, two important issues
should be considered.
First, managing many different incentives burdens the
supplier, particularly if the incentives promote opposite
behaviors. For instance, if a supplier simultaneously encourages the reseller to focus on short-term selling activities and
the long-term acquisition of expertise, confusion may result.
The supplier should be aware that many incentives, such as
providing personal assistance in the field and comarketing,
require the investment of a good deal of money and effort. It
is unlikely that a supplier could devote adequate resources
towards an incentive package that is overly broad.
A more important consideration may be the incentive
programs potential effect on supplier performance. Because
of the control characteristics inherent in channel incentives,
suppliers can craft incentive packages to address their own
performance concerns. For instance, a supplier concerned
with goal attainment may offer high-powered incentives in
hopes that resellers will immediately pursue short-term
selling activities. If the concern is adaptability, an incentive
can be offered to motivate the reseller to expand into new
markets. Thus, if a full range of incentives is offered to
resellers, it is likely that some would detract from the
suppliers own effort to achieve high performance. Thus,
the incentive package should carefully consider both the
resellers and suppliers performance concerns.
The four-step process described herein offers a framework for suppliers to craft compatible incentive packages
with independent resellers. By linking an incentives control
characteristics to a resellers performance requirements, the
reseller rejection problem may be diminished.
Acknowledgements
The author would like to thank Steve Kim for his helpful
comments on an earlier version of this manuscript.
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