Chapter 12, designing channel systems. After studying this chapter you will be able: 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.
Chapter 12 Designing Channel Systems SDM Ch 12 Tata McGraw Hill 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… SDM Ch 12 Tata McGraw Hill 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 control requirements of the company SDM Ch 12 Tata McGraw Hill Steps… 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 • Finalise the ‘ideal’ system SDM Ch 12 Tata McGraw Hill Customer needs… 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 Components … SDM Ch 12 Tata McGraw Hill Channel Design Components • Revenue generation or the commercial part • Physical delivery of the goods or services – the logistics part • The ‘service’ part to take care of aftersales support • Each part of the system is likely to be handled by a different entity SDM Ch 12 Tata McGraw Hill Design issues… Channel Design Issues • Activities required and who will perform • 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 SDM Ch 12 Tata McGraw Hill Channel Design Process Similar to any other marketing task Segmentation Positioning Focus Development SDM Ch 12 Tata McGraw Hill Segmentation • Putting customers in similar clusters based on their needs – Doctors who prescribe medicines – Chemists who dispense medicines – Hospitals and nursing homes who use them • 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 SDM Ch 12 Tata McGraw Hill Positioning • Defines the channel element required to service each of the segments – The sales manager decides the channel partner who is ‘ideal’ to meet the expectations of the segments – The number of each category of intermediary is also decided based on the number of customers to be serviced in each segment – The service objectives and flows for each channel partner are also frozen SDM Ch 12 Tata McGraw Hill 10 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 Motivation… SDM Ch 12 Tata McGraw Hill 22 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 SDM Ch 12 Tata McGraw Hill “power”…… 23 French & Raven “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 SDM Ch 12 Tata McGraw Hill 24 Role of ROI… 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, attending to servicing requests etc SDM Ch 12 Tata McGraw Hill 25 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 SDM Ch 12 Tata McGraw Hill 26 Performance Evaluation • On pre-agreed tasks only No surprises • 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 months – Different weightages could be given for each of the parameters for evaluation • The performance appraisal is open and transparent Modifying a network SDM Ch 12 Tata McGraw Hill 27 Steps for Modifying Networks • Service level desired and willing to deliver • Activities required to deliver service level, who will 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 SDM Ch 12 Tata McGraw Hill 28 Channel Comparison Factors Efficiency Effectiveness Scalability Flexibility Consistency Reliability Integrity SDM Ch 12 Tata McGraw Hill 29 Non-store Retailing • • • • • • Selling door-to-door Vending machines Tele-shopping networks Selling through catalogs Other forms of direct selling Electronic channels Electronic channels… SDM Ch 12 Tata McGraw Hill 30 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… SDM Ch 12 Tata McGraw Hill 31 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 SDM Ch 12 Tata McGraw Hill 32 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 SDM Ch 12 Tata McGraw Hill 33 Outsourcing Outsourcing Distribution • Is the most prevalent 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’ distribution SDM Ch 12 Tata McGraw Hill 34 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 SDM Ch 12 Tata McGraw Hill 35 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 SDM Ch 12 Tata McGraw Hill 36 ... markets are to be worked to achieve sales, collect payments and ensure the right kind of merchandising • Class room training on company products, competition and how to tackle it to gain market... SDM Ch 12 Tata McGraw Hill 19 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... Servicing of automobiles and other engineering products Motivation… SDM Ch 12 Tata McGraw Hill 22 Motivating Channel Members • Ambitious volume and growth targets – continuous motivation required