Sales Solution, as Taught by Eli Goldratt · Lesson 6 of 9
Conflicts in the market
Special prices for big shops or price discipline for all? Load the shelf or widen it? Visit every week or save the cost? Six conflicts that keep every channel stuck, with the assumptions on both sides, the ones that turn out false, and why schemes can never be the answer.
Kestrel’s regional sales meeting. The new offer is on the screen. The room is not convinced.
Regional manager: “Fine for small shops. But forty per cent of my sales come from twenty big counters. They want a special discount, or they move to the brand that gives one.”
Area manager: “And if I give it, the small shops hear about it the same day.”
Ruth: “So you’re both right. That’s exactly what makes it a conflict and not a mistake. Let’s draw it.”
Goldratt’s rule: when two sensible people want opposite things, don’t look for a compromise. Draw the cloud, write the assumptions behind every arrow, on both sides, and find the one that isn’t true.
Conflict 1: a special price for big retailers
The two false assumptions came from the field. Large retailers seldom retain the extra margin; they pass it to consumers, so the special price mainly lowers the street price and annoys every small counter. And the competitors’ landing prices that buyers quote are conditional, on volumes, period commitments and schemes the retailer often can’t meet.
Why schemes never become an advantage
A scheme looks like the natural answer to every conflict in this lesson. Look at what it is:
- time-bound: the affinity it creates lasts as long as the scheme;
- quantity-dependent: earned only by buying more;
- product-specific: it pushes some items, not the range;
- unsure of consumption: it puts stock in the shop with no idea when it will sell;
- open to anyone, any time: a competitor matches it next week;
- discriminatory: it disturbs price discipline in the market;
- width-limiting: the money it locks up can’t buy more of the range;
- poor for the retailer’s return, because it lowers rotations.
So a scheme can never become a lasting, decisive competitive edge. What would an ideal programme for retailers need?
| Criterion | It should… |
|---|---|
| Return-oriented | support higher rotations and a higher ROI for the retailer |
| Expandable | support adding range |
| Good for the shelf | increase our share of the shelf at the point of sale |
| Performance-agnostic | support every item: weak, non-performing and new |
| Long-term | build loyalty that lasts, not for a quarter |
| Non-discriminatory | address the aspirations of every type of retailer |
Kestrel’s answer was a retailer bonding programme. Every retailer served by a replenishment distributor is in it. No minimum purchase: points start with the first purchase. Points never expire and can be redeemed any number of times a year, up to 80% of the balance at any moment. A retailer who doesn’t redeem in a year gets 10% bonus points on the balance. Points are earned only on invoices that have been paid. And a multiplier rewards three things together: value, the number of different items bought, and regularity.
Why does the multiplier reward the number of different items bought, and regularity, and not just value?
- To make the programme complicated
- To reward the biggest buyers most, since they bring the most sales and deserve recognition
- Width and regular buying are what reach, range and availability need
A loyalty programme measures the retailer. Measure loading, and you get loading. Measure range and regularity, and you get the behaviour the whole solution depends on.
Conflict 2: load the shelf, or widen it?
Four more conflicts, both sides
The same pattern appeared four more times. For each, here are the two needs, the two actions, and the assumptions on both sides, followed by the one that breaks.
Conflict 3: give big counters exclusivity on the full range, or serve every counter with it? (Objective: maximise reach and range.)
| Arrow | Because… |
|---|---|
| To gain counter share of large retailers, we must give them full-range exclusivity | Their sales are much larger than all the small counters in the area combined. Small counters spoil the price. Large counters believe exclusivity is the only way to get a better price and recognition. Walk-ins at large counters are higher. |
| To be available at the maximum number of small retailers, we must serve all counters with the entire range | The total potential of the small counters is not insignificant. Every counter in an area has some potential. A counter without our products is a potential lost sale. |
| What breaks | “Small counters spoil the price.” Lesson 2 showed it is high inventory, not counter size, that pushes prices down. With low stock everywhere, every counter can carry the range. |
Conflict 4: convert large retailers into direct dealers, or not? (Objective: maximise sales.)
| Arrow | Because… |
|---|---|
| To gain a high counter share of large retailers, we must make them direct dealers | Large counters believe dealing directly with the company brings a better price and recognition. The company earns a higher margin dealing directly. Walk-ins at large counters are higher. |
| To ensure the distributor follows the secondary sales process fully, we must not add direct dealers in his area | Losing even one large retailer leaves a big dent in the distributor’s profit. One such case erodes his trust, and he cuts costs to protect his profit: skipped beats, batched deliveries. Every counter has potential, and the small counters together are not insignificant. |
| What breaks | “The company earns more dealing directly.” On one counter, yes. Across the territory, the distributor’s beat to every counter is what produces reach, range and availability. Give the large counter recognition through the loyalty programme instead. |
Conflict 5: visit every counter weekly, or not? (Objective: maximise range and reach.)
| Arrow | Because… |
|---|---|
| To exploit the retailer’s limited capital, we must visit weekly | Retailers have limited capital. A product not on the shelf is a lost sale. Faced with uncertain supply, retailers buy more of the “safe” products instead of spreading their money over the range. Regular service is what wins the confidence of new retailers, and of new range in existing ones. |
| To exploit the distributor’s resources, we must not visit every counter weekly | Every visit costs money. Small retailers will order even without a visit. They can hold more days of stock. A salesperson covers more large counters in a day. Unavailability at small counters isn’t a significant loss. Time at small counters is taken from the large ones. |
| What breaks | “Unavailability at small counters isn’t a significant loss” contradicts the arithmetic of the area: together, the small counters are not insignificant. And once a shop is activated, many weekly orders can be taken by phone, keeping the visit for what needs a visit. |
Conflict 6: bind retailers into period schemes, or not? (Objective: maximise selling opportunities.)
| Arrow | Because… |
|---|---|
| To ensure continuous business from the retailer, we must bind him into period schemes | A retailer pushes the brand he has committed to. His capital is limited, so committed capital can’t go to competitors. Retailers focus on brands that give a higher margin in the short term. |
| To ensure the best ROI to the retailer, we must not bind him into period schemes | Any reasonable businessman will focus on the brand that gives him the best return. At the end of every period scheme, retailers are left with extra stock, which cuts their return. |
| What breaks | “Committed capital is the only way to protect our share.” Width with low depth, and a better return, protect it more durably. |
Exercise: from the six clouds, which assumptions hold up, and which turn out false once replenishment is fast?
- Nobody knows when a customer will buy, what, or where.
- Small counters spoil the price.
- Large retailers keep the extra margin.
- The retailer’s capital is limited.
- Unavailability at small counters isn’t a significant loss.
Check your understanding
Answer all five. Get four right to complete the lesson.
1. In the differential-pricing cloud, which assumption turned out false?
- Large retailers account for a significant share of sales in every area
- Large retailers keep the extra margin; in fact they mostly pass it to consumers
- Small and large retailers coexist
- Price fluctuations hurt confidence
So the special price mostly lowers the street price.
2. Why can a scheme never be a lasting competitive edge?
- It is too expensive for the company to keep running all year
- Retailers dislike it
- It is illegal
- It is time-bound, quantity-dependent and easy for anyone to copy
And it hurts the retailer’s return by lowering rotations.
3. The injection for “large quantity or small quantity” is…
- Increase width, decrease depth, through frequent replenishment
- A bigger scheme
- Sell only to large retailers, who can hold large quantities
- Raise prices
The same capital carries more of the range.
4. Why does the loyalty programme give points only on paid invoices?
- To save money
- Because of tax rules
- So it rewards real business, not stock loaded on credit
- To slow down redemption so the programme costs less
It must reward the behaviour the solution needs.
5. Goldratt’s way with a conflict like these is to…
- Find a fair compromise
- Write the assumptions on both sides and break one that isn’t true
- Let the senior manager decide which side matters more
- Try both actions in turns
Compromise satisfies neither need; breaking an assumption satisfies both.