Marketers have never been more challenged to find the right mix of channels. Seeing the choices clearly will make that challenge less daunting. This author has sound advice for developing clear channel vision.
Very few areas of business have undergone as much complex change as marketing channels. Products and services that once found their way to markets through one channel, have moved into a multi-channel environment, often in the extreme. For example, greeting cards, once sold only in specialty card or gift retailers, are today also sold in grocery, drug, department, variety, discount and convenience chains. Cards can also be found in secondary sellers such as bookstores, record/music stores, florists, newsmagazine outlets, airport shops, Web sites – in fact, you name it. And for products sold both in the business-to-business and consumer markets, such as a personal computer, or cellular phone, there can often be more than a dozen important channels. Even controlled channel players such as Eddie Bauer have 3 channels — their stores, their catalogues and their Web site. These circumstances make it essential that executives develop better mental maps, the better to see which are the most sensible channel structures for their respective business, and how these channels could form a coherent network and optimize channel alignments. In this article, I will suggest what managers can do to develop those clear mental maps.
Channel breadth of vision
The first key in developing channel vision is to consider how broad your network needs to be to span different customer segments. When cellular phone service was considered a specialty service used only by real estate agents, construction contractors, and sales forces, the phones required a far narrower band of channels than they do today, when the fastest growing segment is teenagers. Firms also need to consider whether their target customers are likely to use more than one type of channel when making a buying decision. A great many customers show multi-channel patronage behaviour for the identical product, and so it becomes essential to expand channel choices. This is especially the case for products or services that can be a destination purchase or an impulse buy, such as a compact disk, pet food, a picture frame or stationary supplies. The combination of micro-market segmentation and channels crossing over into new markets (for them), such as an automotive distributor chasing industrial accounts, forces suppliers to broaden their channel breadth vision and consider widening their networks.
A channel-mix vision
Once a firm gets a handle on how broad its ideal network ought to be (vs. where it is currently) it needs to think through which channels will be primary and which will be secondary. This conditions the channel investment strategy, since supports are finite and must ensure that the primary channels receive priority, and that secondary channels are not ignored. These secondary players may simply need a lower-cost resourcing support strategy, such as telesales assistance vs. in-person reps making personal calls. Peripheral channels may get less in-depth training, less frequent merchandising promotions, or lower levels of market development funds more in keeping with their role as supplemental channels. In essence, companies must consider differently structured business models by channel – whether independent/arm’s length or controlled, such as a bank with 4 channels-branches, ATMs, phone banking or Webbanking. Part of the assessment process in looking at a potential mix requires a firm to consider the functionality of its channels, since some will be full service, some limited service, and some, such as electronic channels, almost completely self service. The care and feeding levels for such varied channels requires great creativity so that each channel gets the supports it needs without eroding the profitability of other parts of the channel matrix. In addition, operating a multi-channel set-up must consider how to give the end-user customer uniform brand experiences across channels, so that if they buy from more than one channel they get consistent treatment on product warranties, returned goods and the like.
Channel density vision
Once you’ve figured out your best breadth and mix opt ions for the channel network, you must then determine how much density is required in the channel matrix to cover geographic regions. Some firms deliberately overlap channel outlets so that they compete in regions. This is practiced by the likes of Tim Horton’s, where on some city blocks, there might be an outlet on 3 or 4 corners, albeit in the guise of a full service store, possibly a drive-thru only and a mini-outlet in a gas bar. Firms who practice deliberate overlap believe that the more outlets, the greater the market growth/penetration.
The second view involves deliberate underlap, where the firm sets up its channels in such a way that each of its dealers/resellers can expand before encountering another channel selling the firm’s wares. Such controlled coverage, the thinking goes, allows resellers to coexist without any conflict between locations. Ikea and Home Depot follow this density strategy.
Both underlap and overlap can work. In the former case, the benefit is less conflict while the drawback is a dependence on the network to be aggressive and expand to fill all areas with market potential. Overlap, of course, has less risk of under-servicing any pocket of demand. But if competition between outlets or even different channels of the same firm gets out-of-hand, lots of conflict can result.
Channel choices often fall into 3 possibilities — nationals, regionals, or locals. In framing a channel vision, companies should consider the best mix of these types. Nationals often have sophisticated capabilities in logistics, or selling/marketing. Of course, they are often more difficult to influence, given their scale and buying clout. Locals are often fast on their feet, entrepreneurial and easily influenced, though they also have limited management depth and shallow equity structures. Regionals fall somewhere between the national’s skill sets/clout and the local’s responsiveness to a specific market.
A network of locals only is very expensive to train, supervise and support because of the sheer number of these independents. Any network of nationals suffers from not necessarily covering all geographic zones, since such chains often set up in populous urban areas and can be extremely demanding in terms of listing fees, slotting allowances and returned goods. Most solid multi-channel networks are a blend of some nationals, select regionals and locals in areas that the national or regional chains have not penetrated. In select markets there may even be choices for international channels — such as Walmart, Toys ‘R Us — Grainger, where the channel choice may open up markets in Mexico, Japan and Europe. While such choices are appetizing for their reach, coordinating efforts with multinational channels takes considerable skill and foresight. As a result, these should not be entered into without the capabilities to succeed across the channels’ entire geographic reach.
A capabilities vision for your channels
Having sorted out the structure of channels, it now is essential to think through which reward portfolio is appropriate for a particular channel. All channel reward decisions involve both hard dollar rewards such as coop plans and volume discounts as well as softer rewards such as training, sales leads or tech service assistance. Within the reward mix, a firm must decide how much to reward functions vs. loyalty, or growth. Pure volume-based incentives often reward mere bigness vs. performance, such as support for new products or the pursuit of new markets. Pure performance-based incentives can run the risk of not recognizing the differences between channel members’ capabilities such as E.D.I. order processing, or advanced inventory handling systems. Functionally based incentives allow a firm to tier its channels so it could have selling dealers only, servicing dealers only and full service dealers who do both sales and after-sales service. These differently functioning dealers would be given different margins or other incentives, dependent on their breadth of capabilities. This is done in small appliance markets with dealers. Functional discounts also allow dealers to be rewarded for customer satisfaction scores – a big issue in some markets such as auto sales.
A channel measurement/dialoguing vision
Rewards and structure are not all it takes to run complex networks of middlemen well. A company should also figure out how it will measure each of its channels against key goals like growth, market penetration, key account servicing, sales per outlet, new product successes by channel and repeat business by channel. This allows a company to compare and contrast both separate and very different channels, and to do this for individual companies in the same channel. A PC manufacturer could contrast how its value-added reseller channels compare to electronic superstores, as well as contrast individual VARS against each other.
Having measured channels, a company can then implement two important channel communications initiatives: It can review these results quarterly to get the channels’ input on its successes and challenges. As well, it can set in motion joint planning efforts to customize supports so they are more relevant to the channel’s needs (to the extent that the competition act allows this across competing channels). Measuring channels and dialoguing with them is the hallmark of a number of great channel-handling firms such as John Deere and Caterpillar. This sort of dialogue allowed Daimler to recently combine its dealership brand offerings between the Dodge and Chrysler brands (formerly separate) with its dealers as its former brand-dealer separation policy lost validity with dealers as auto markets softened.
Most astute senior executives can articulate a vision for their market-share goals, new product direction, global scope and partnering thrust. But envisioning channel networks is far more complex and challenging. It is a multivariate equation involving breadth, channel mix and type, preferred densities, reward exchanges the system of measurements needed, and an intensity and frequency of dialogue that makes sense. The result is clear and effective channel vision.