Chapter 12

Designing Channel Systems

Prepared By:

Prof. Nishant Agrawal

Learning Objectives

• Understanding customer needs to define channel objectives

• Channel design factors, components, issues, steps and

process

• Method of evaluating various channel alternatives

• How channel partners are: selected, trained and kept motivated

• Principles of vertical integration and electronic channels

Channel Design Factors

• Product mix and nature of the product

• Width and depth of market / outlet coverage planned

• Long term commitments to channel partners

• Level of customer service planned

• Cost affordable on the channel system

Channel Design Steps

• Define customer needs

• Clarify channel objectives

• Look at alternative systems which can meet these

objectives

• Estimate cost of operating the channel system

• Evaluate available alternatives

• Finalize the ‘ideal’ system

Customer Needs

• Lot size – most convenient pack size which the consumer can

buy at a time

• Waiting time – time elapsed between the desire to buy the

product and the time when he can actually buy it – should be

almost zero

• Variety – choice of products, brands, packs

• Place utility – choice of buying where he wants. For a consumer

product it has to be at a location closest to his residence

Channel Design Components

• Revenue generation

• Physical delivery of the goods or services – the logistics part

• The ‘service’ part to take care of after-sales support

• Each part of the system is likely to be handled by a different

entity.

Channel Design Issues

• Who will perform Activity

• Activities relationship to service levels

• Number of channel members required and the relationship

between categories

• Roles, responsibilities, remuneration and appraisal of

performance of channel members

Channel Design Process

Segmentation

Development

Focus

Positioning

Similar to any other marketing task

Segmentation

• Putting customers in similar clusters based on their needs

• Each segment has a different need to be serviced by the

channel

• Gives an idea to the sales manager as to the kind of channel

members he should be planning for.

Positioning

• Its objective is to occupy a clear, unique, and advantageous position in

the consumer's mind.

• A marketing strategy that aims to make a brand occupy a separate position,

relative to competing brands, in the mind of the customer.

• Companies apply this strategy either by emphasizing the unique features of

their brand or they may try to create a suitable image (inexpensive or premium,

luxurious, entry-level or high-end, etc.) through advertising. 

Focus

• It may not be possible to meet the needs of all segments – cost

and practicality considerations (the managerial talent available

for instance)

• The sales manager has to firmly decide which of the segments

he will service

• The competitive scenario also helps in this decision

Development

• At this stage the channel system is being put in place to

achieve the objectives

• Select the best of the alternatives

– Comparison with the most successful competitor could be a good

benchmark

• Channel partners of competitors may be willing to share best

practices of their principals

• For modifying an existing channel, the gap between the ideal

and the existing is to be identified for corrective action.

Channel Objectives

• Defines what the channel system is supposed to do to support

customer service.

• Customer needs could include:

– Lot size convenience

– Minimum waiting time

– Variety and collection

– Place utility

• The product characteristics and the market profile also impact

the objectives.

• Competition could also affect the objectives

Channel Alternatives

• Are planned after deciding the customer segments to be

serviced and the levels of service

– Business intermediaries currently available like C&FAs, distributors,

dealers, agents wholesalers and retailers.

– The number and type of intermediaries required

– Developing new channel types

– Roles of each channel member

Evaluation of Major Alternatives

Cost of operations

Ability to manageand control

Adaptability

Range and volumeto be handled

Criteria for evaluation

Evaluation Critieria

• Cost:

– If existing sales force can be expanded cost effectively, this is the best

alternative

– System with the lowest cost is preferred

• Adaptability – the channel should be flexible to handle different

types of markets and changes in the market conditions

• Volume and range to be handled – Capable even when

business grows or expands

Evaluation Criteria

• Ability to manage and control:

• Distribution network being an extended arm of the company, the

channel partners have some obligations

• Operating guidelines specify these rules

• The channel system should help the company enforce these rules

fairly to all channel partners

• Some of the operating rules are……

• Company trains channel personnel and provides proper product literature

Selecting Channel Partners

• Getting good channel partners is a difficult part of doing

business

• Some of the methods employed to select channel partners are:

– Sales people identify prospects and talk to them

– Press advertising (industrial goods)

– Existing channel partners can give good references

– Competitors’ channel members for reference

Selection Criteria

• Qualitative: willingness, confidence in company products,

willingness to take by company rules, building company image,

innovativeness, , infrastructure, location, customer

relationships, market standing

• Quantitative: financial status present businesses, etc

Training Channel Members

• Starts from the time of recruitment

• Channel member owner and his staff

• Market views channel member as part of the company – he has

to behave in a like manner – hence training assumes

significance

• Training could be on the job field training or classroom training

• Training is an ongoing process.

Subjects for Training

• Field training on how the markets are to be worked to achieve

sales, collect payments

• Class room training on company products, competition and how

to tackle it to gain market shares

• Special meetings for new product launches

• Submitting reports and maintaining records

Subjects for Training

• Care of company products

• Technical specifications and answering FAQs of customers

• For technical and industrial products – recognition of specs,

installation procedure, repair and maintenance and effective

demonstrations

• Servicing of automobiles and other engineering products

Motivating Channel Members

• Ambitious volume and growth targets – continuous motivation

required to achieve

• Motivation includes:

– Capacity building programs

– Training

– Promotions support

– Marketing research support

– Working with company personnel

– Incentives

“Power” of Motivation

• Reward – positive support

• Coercion- threat of punitive action

• Referent – positive effects of association

• Legitimate – enforcing a contract

• Expert – support of special knowledge

• Support – additional benefits for performers

• Competition – pitting against peers

Channel Members Evaluation

• Effectiveness of the distribution channel determines the

success of the company

• Company would like its channel partners to perform at the

highest standards possible

• Need to constantly evaluate performance on sales targets,

coverage, productivity, inventory holdings etc

ROI as a Measure

• Leading FMCG companies feel that an ROI of 30% for a

distributor is healthy and is a fair indication that he is performing

well.

– If the ROI is more, additional tasks are given

– If the ROI is less, the company may provide additional support

• Post evaluation tasks include counseling, retraining and

motivating. In extreme cases it may result in termination.

Performance Evaluation

• Specific targets on periodical basis are set.

– Targets on volume and outlet productivity could be for a week or a

month

– Targets relating to increasing market shares or total outlet

coverage could be for 6 months

– Different weightages could be given for each of the parameters for

evaluation

• The performance appraisal is open and transparent

Steps for Modifying Networks

• Service level desired and willing to deliver

• Activities required to deliver service level, who will do it and at what cost

• Derive ideal channel structure and compare with existing to know gaps by

evaluating based on standard parameters relating to effectiveness and

efficiency

• Action to bridge the gaps and put modified channel system into place

• Define key performance indicators

Channel Comparison Factors

Efficiency

Effectiveness

Scalability

Flexibility

Consistency

Reliability

Integrity

Non-store Retailing

• Selling door-to-door

• Vending machines

• Tele-shopping networks

• Selling through catalogs

• Other forms of direct selling

• Electronic channels

Retailing on the Internet

• Unlimited assortment

• Items may not be on hold

• No product touch or feel

• More information makes the customer a better shopper

• Comparison shopping possible

• Consumer has to plan purchases ahead

• No need to handle cash – payment can be on-line

• Shopping is 24X7

Vertical Integration

• This means owning the channel. The company does the work

of production, branding and distribution.

• Downstream integration means the producer of the goods also

does the distribution – Eureka Forbes, Bata

Vertical Integration

• Upstream integration means the seller also produces the goods

– private labels of modern retailers.

• If the organization does the work of production, branding and

distribution, it is said to be vertically integrated.

• Vertical Integration provides better control over the distribution

function

Outsourcing Distribution

• Is the most common situation as:

– The ‘reach’ is better

– The cost may be lower

– The company can exploit the ‘core competence’ of its channel partners,

which is distribution

• Vertical integration is a choice which will become long term and cannot be

easily changed once the resources have been committed.

• However, direct distribution (owning the channel) is still the best solution for

‘intensive’ / concentrated distribution.

Key Learnings

• The nature of distribution channels required in different situations is

based on a number of factors

• Channel design takes into account all the service deliverables required

by customers

• Intensity of distribution determines the number of intermediaries required

• Distribution can be in-house (vertical integration) or out-sourced

• Channel design alternatives are assessed primarily on effectiveness and

efficiency

Key Learnings• Channel alternatives are evaluated on cost, ability to control, adaptability

and capability to handle range and volume.

• Training of channel partners can be in the class room or on the job and

is a continuous process

• Motivating channel partners can be done using different ‘power’

equations

• There are different formats of non-store retailing like catalogues, internet

etc

• Electronic channels are used to sell products to consumers directly

End of Session