Analysing Channel Strategy Options - Part 1

This post is the first part of a series focused on the evaluation of a channel strategy.

An approach to the analysis of strategy options for marketing channel models is portrayed in the following diagram.

Current Situation

To begin, it is necessary to assess the current state of the channel strategy in place. This includes the structure of the channel, the economics of the system, competitors' strategies, market share, market size and growth, industry trends, and idiosyncrasies. The current situation should discuss issues and opportunities that the current strategy is not achieving.

Future Situation

Against this current assessment, the desired situation should be made explicit. This could be framed as a plan, budget or forecast in quantitative terms. Perhaps a targeted channel share required by management for a new channel such as on-line sales. Out of this desired state comes the ability to highlight a performance gap.

Performance Gap

The gap, then, quantifies the extent of the problem. Is it big or small? Widespread across the firm, or confined to a particular channel partner? For a particular product range, or all products? By identifying where the gaps exist, changes to channel strategies can be formulated and evaluated.

Strategy Options

Strategy options should be identified and their key characteristics noted. For example, a possible channel strategy could be adding franchised retail outlets in addition to company-owned stores to expand market coverage. The characteristics of franchised operations should be made explicit so they can be contrasted with current operations.

Each of the potential strategies should be identified so they may be evaluated against the current situation

Program Elements

After the strategy options are identified and characterised, the program elements should be examined and costs/benefits identified. For a proposed franchise system there will be additional efforts required to define and support the franchisees, including recruitment, training, branding, management, evaluation, etc. Costs for these activities will need to be included as well as the revenue expected from implementation of the program in order to evaluate this option.

The economics of the channel partner also need to be examined to ascertain that a change will positively impact the channel partners. For example, a proposed referral system to direct prospects to resellers will require development costs as well as communication, training and support costs that will be borne by either the company or by the channel partners (or both). The model should account for these costs, as well as the anticipated increase in revenue from the implementation of the referral program.

This approach, then, is to identify and model the key activities undertaken in the value chain so that any strategic change to an activity can be quantified regardless of who is performing the activity. This allows the evaluation of any change and highlights who is paying the cost/achieving the benefit of a change.

Evaluation

The quantification the revenues and costs of the strategic options are considered in a similar fashion until all are quantified. At the conclusion of this quantitative phase, all strategic options should have a score or ranking in terms of a profitability or return on investment measure.

Notes on modelling

This approach is enhanced through the use of a financial model as a means for objective measurement of the current state and to simplify the quantification of any strategic changes to achieve the desired state. It is also possible to use qualitative tools to augment quantitative analysis in the evaluation phase, as financial factors cannot always be derived for all variables impacting a strategy. This will be discussed in the next part of this series.

The level of aggregation in the financial model is dependent upon the objective of the analysis. For a channel strategy evaluation, the firm's activities would at least need to be aggregated down to the channel level with sales revenues and costs allocated to each distinct channel. Below this level the modeller might choose to disaggregate to:

• Region - region, country, state, territory, city etc.
• Channel member type - chain or store
• Product/service - product group, brand, SKU
• Organisation - business group, division, factory

If a retail network strategy is being evaluated, the model could be structured at the store level. However if it is felt that on average all stores are similar and are performing similarly, the cost of modelling at this level would probably not be worthwhile. The point is that the research intent should guide the level of modelling.

The structure of the model should provide pro forma financial statements for the current situation and for each of the strategy options. Timeframe is also a structural choice. Most strategic options are multi-year plans and should attempt to forecast results for a multi-year timeframe. This type of model shouldn't be employed to evaluate tactical decisions with short duration.

Proforma financial statements should include P&L, balance sheet and cashflow statements. Where multi-year strategies are being evaluated, discounted cashflow techniques could also be calculated to account for the time value of money.

In the next part of this topic I will discuss bringing qualitative analysis into the evaluation process and continue with the strategy selection, implementation and review steps of the process. Comments are welcome.

Marketing Channels 101 - Channel Conflict

Traditionally, channel conflict was characterised by two or more channels targeting same customer segments for the same product. For example, in the diagram at the left, the producer is selling directly to consumer segment 5, in competition with channel group 4, who also sells the producer's product. In this diagram other channels also compete for the business of customer segments 2, 3 and 4.

A typical example of this concept is the sales of a product in both a high turnover, low margin channel such as mass retailer with the same product in a high margin specialty retailer. Often the specialty shop which provides advice and shares detailed product knowledge educates the consumer, who can then turn to a discounter to obtain the lowest price on the product. This type of conflict is reduced by restricting products to specific channels but cannot always be mitigated.

So, is this necessarily bad? Not all channel conflict is destructive. Competition between channel members sometimes reflects increasing market coverage or the emergence of new channels such as the internet. Excessive competition has the potential to reduce margins to the producer as well as the channel partners and should be dealt with through a structured channel management program.

A channel strategy should be developed to reduce destructive channel conflict. The strategy should understand and align the customer segment needs, purchase triggers and influencers with partners that can provide the specialised skills and functions to service the segment.

Co-operation is generally required to maximise the value of a marketing channel system. Roles and responsibilities of the members of the system should be established through partner agreements and these agreements should be monitored and managed. A communication strategy can be used to reinforce desired behaviours that have been designed to align producer and channel partner business goals. Pricing mechanisms and incentives can be also be used to aligned behaviour.

Another way of dealing with channel conflict is to develop products or services that are only available to specific channels or to align channels to particular market segments based on the skills required to service those customers.

Marketing Channels 101 - Cost, Control and Coverage

Yesterday's post was all about the basic structures of marketing channels and the activities that they perform in taking a product or service from producers to consumers.

Today we will focus on three key attributes of channel partners: coverage, control and cost, from the perspective of a producer. In general, a producer will try to maximise both his coverage of the market and his control over the channel, while minimising his costs.

The graphic to the left shows a set of trade-offs that producers face in determining how their products or services are distributed to consumers through various channel structures.

These trade-offs are useful in highlighting different ways to build a channel strategy. A producer who is intent on protecting his brand image may consider control to be the most important criteria, and therefore might prefer a direct sales strategy, although it comes with a high cost to build, reward and retain a top performing salesforce.

A producer with limited capital, but high coverage goals would likely consider paying agents or dealers a commission to sell on his behalf, although this implies less control over the selling process.

All channel partners do not provide the same functions or provide the same results. There are choices to be evaluated in defining an optimal channel strategy and many questions must be considered:

• How much coverage does the channel partners provide? Is it sufficient to achieve targets? Are multiple channels required?

• How much control can be exerted over the channel partners? Who are the leaders within the channel? How are they influenced? What is the level of loyalty in the channel?

• What is the cost of distributing through this type of channel partner? What functions are performed by the channel partners and what is the reward for performing these tasks?

There is not a unique channel strategy that will work for all producers. A number of factors will determine the optimal mix of channel partners in any particular case. Quantifying the relative importance of each factor, then scoring and ranking each strategy combination can help determine the optimal channel strategy.

Marketing Channels 101 - Channel Structures

I'll start with a review of the basics over the next few posts.

Marketing channels, also known as distribution channels, are the conduits between a producer and a consumer. These conduits can be individuals or organisations that provide the services post production that are required to fulfil a consumer demand. These services typically include, but are not restricted to:

• Consumer access
• Physical distribution
• Warehousing
• Disaggregation
• Configuration and customisation
• Technical support
• Sales and marketing services
• User education
• Warranty and returns
• Finance
• Consumer research

Marketing channels are important because they facilitate the availability of products in the right quantities, in the right place, at the right time. Specialisation, then, allows manufacturers to provide products to mass markets, through its channel partners, without having to engage with each end consumer directly.

These activities add significant cost to the end consumer of the product. Competitive advantage can gained by optimising the delivery of these activities with channel partners.

Channel models

Typical channel models are differentiated by the use of third-party partners to deliver the services outlined above.

• Direct - the producer provides the services directly to its end consumer groups
• Indirect - the producer utilises single or multiple third-party partners to provide the services to its end consumer groups
• Hybrid - the producer uses both direct and indirect channels

Direct channels can include producer-owned:

• web sales sites
• field salesforce
• telemarketing
• mail order

Indirect channels are characterised by the number of level or tiers between the producer and the end consumer. Examples of some typical models are:

• Single tier systems: Manufacturer - Retailer - Consumer
• Two tier systems: Manufacturer - Wholesaler - Retailer - Consumer
• Three tier systems: Manufacturer - Broker - Wholesaler - Retailer - Consumer

The hybrid model combines one or more of the indirect channel models with one or more of the direct models.

References:

Distribution Channels: Understanding and Managing Channels to Market, Julien Dent, 2008.

Marketing Channels: A Management View, Bert Rosenbloom, 1999.

Marketing Channels, Anne Coughlan, Erin Anderson, Louis W, Stern and Adel El-Ansary, 2006.

Welcome to Customers and Channels!

This blog has been set up to share my work on marketing channels and customer management strategy and solutions gained over the past 15 years.   I will be providing analyses of current current customer and channels issues with possible approaches for their resolution.  Current tools, techniques and solutions will also be published.

My work in this field has ranged from employment as a senior manager with world class organisations and through consulting engagements undertaken as well as formal studies.  I have worked in strategy formulation, implementation and operational management.

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Thanks,

Charles
cdjones.melb@gmail.com