Abstract: This study investigates the issue of supplier channel encroachment strategies with horizontal and vertical quality differentiations considering product quality design cost. Four Stackelberg models of supplier encroachment are proposed, including no encroachment, horizontal differentiation-based encroachment, vertical differentiation-based encroachment, and hybrid horizontal and vertical differentiation-based encroachment. Using backward induction, the equilibrium outcomes and optimal strategies for all participants are analyzed and derived across different scenarios, and the impact of product quality design cost on supplier encroachment strategies is examined. Results show that both the horizontal and hybrid differentiations may be the optimal strategies, with the choice of encroachment strategy highly sensitive to product quality design cost. Different levels of quality design cost lead to different strategy choices, and differentiation-based encroachment is not always the optimal. Suppliers adopt encroachment only when the profit from the direct sales channel reach a threshold. Therefore, suppliers should develop encroachment strategies according to product quality design cost. Under differentiation-based encroachment, a win-win outcome between suppliers and retailers may be achieved.