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.

Please feel free to leave comments or email me directly if you wish to discuss these posts and sign up to get an email of my posts as they occur by providing your email address in the form on the right sidebar.

Thanks,

Charles
cdjones.melb@gmail.com