SALES AND DISTRIBUTION MANAGEMENT

LESSON 25:
CHANNEL DESIGN
Learning Objectives

beachieved by having the channels. All firms seek to realise

certaincommon objectives by having the channel. In addition,
theymay also have some specific objectives depending on
theirunique circumstances.

On completion of this lesson,you should be able to

Explain the concept of channel design
Designing of a channel system
Relationship between PLC and choice of chanel

What is the best marketing channel for a particular product or

service?
This question is well worth asking, given the great expense
ofestablishing (or changing) marketing channel and the high costof
poor decision making in this area. The marketing channelchallenge
involves two major tasks:
1. To design the rightchannel and
2. To implement that design. The design stepinvolves segmenting
the market, identifying optimal positioningresponses to
segments demands, targeting the segmentson which to focus
the channels efforts, and establishing (in theabsence of a
preexisting channel) or refining (in the presence ofa preexisting
channel) the channels to manage in the marketplace.The
implementation step requires an understanding ofeach channel
members sources of power and dependence, anunderstanding
of the potential for channel conflict, and aresulting plan for
creating an environment where the optimalchannel design can
be effectively executed on an ongoing basis.This outcome is
called channel coordination.
Designing a Channel System
We have observed that a firm can take its product to the user
inmore ways than one. It can use different types of
intermediaries;it can also structure its channel in different ways.

Channel Objectives will Decide Channel Design

Channel objectives will determine the channel design the
firmshould adopt.
Objectives, Firms Commonly Seek from Channels
Effective coverage of the target market.
Efficient and cost-effective distribution.
Ensuring that consumers incur minimum exertion inprocuring

the product.
Helping

the firm to carry on manufacturing

uninterrupted,confident that the channels will take care of sales.

Partnering the firm in financing and sub-distribution tasks.

Channel Objectives Differ from Firm to Firm;

Consequently, their Channel Designs Differ
We see that often channel designs of firms differ from
oneanother. Even within a given industry; different firms
havedifferent channel designs. This is so. because their channel
objectives differ. Even in respect of those objectives, which
areby and large common for all firms, we can see variations
inemphasis from firm to firm. For example, intensity of market
coverage sought from the channels and extent of convenienceto
be provided to the customer will vary from firm to firm.
Theweightages will flow from the marketing objectives of
therespective firms.

For example, it can have a single-tier or a two-tier or a threetierchannel structure. It can reach different market segments
withdifferent channel arrangements or with the same channel
arrangement. It can also use different channel arrangements
forreaching a single market segment. The options are indeed many.

Distinctive Characteristics of Industrial Products

How does the firm make the choice? How does itdetermine

Purchased only once ina while, as theirreplacement rate is low.

which one is the best?

Size of at-a-timepurchase is large.

Have high unit value.
They are complex,technical, and often asper buyersspecifications.

Should it go for own channels-company showrooms

anddepots-or prefer conventional intermediaries, i.e.

thewholesale/retail trade? How many levels/tiers shouldthere
be in the chosen channel design. How manywholesale points
should it have to ensure satisfactorymarket coverage? Where
should they be located?
How many retail points should it have? Which are theplaces

where it should have them?

What should be the relationship between the wholesalersand

the retailers?
1. Formulating the Channel Objectives
Formulation of channel objectives is the first step in designinga
channel system. The objectives clarify what is sought to

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Buyers are few.

2. Identifying Channel Functions

Identification of the functions to be performed by the channelis
the next step in designing channel system Channel
designdepends on the functions expected of the channel and
that channel functions must be identified in the specific context
ofthe firm in order to get practical direction in designing
thechannel system.
3. Linking Channel Design to Product Characteristics
Different products require different channel systems. The
firmshould analyse the characteristics of the product and choose
thechannel system that matches the product best. Consumer
and industrial goods, for example, need different channels.
Andwithin the category of consumer goods, different sub-

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Channels for Industrial Products

Industrial products need extensive pre-sale service
(installationand commissioning service ) and post-sale service
(maintenanceservice).Consumer products on the contrary, are
mass products. nontechnicaland least most of them are of a
low unit value; theyare regularly consumed and replaced; and
require nil or limitedafter-sale service. It is in view of these
differences that the twocan need different channel systems.
Only Some Industrial Products are Amenable for
Selling Through Channels
First of all, among industrial products, only some are
amenablefor selling through channels. The firm should check
whether itsitems are appropriate for selling through channels /
distributors.And, if the answer is yes, it must find out which
type ofdistributors will be appropriate for the items under
consideration.Chart below presents some useful guidelines for
testing theamenability of a given industrial product for
marketing throughchannels/distributors.
Need for Specialist Distributors
The firm finds that a givenindustrial product lends itself for
marketing through channels;the firm may proceed to select an
appropriate channel. It must remember that:
i. Industrial products as a general rule require specialistdistributors.
Entrusting the products with the traditionalconsumer product
distributors does not bring in the bestresults.
ii. Different industrial products need different types ofdistributors.
For example, some industrial products have to be
demonstratedto the customers. Here, specialist distributors
with therequired demonstration facility will be more suitable.
Some industrial products are hazardous from the point of
view ofdistribution. Petroleum products, explosives and
certainindustrial chemicals are examples of this category these
productsneed specialised distributors, who command
specialisedtransportation and storage facilities. Similar is the
case ofproducts that require extensive servicing. They need
specialistdistributors, who command the required service
facilities.
Even within Consumer Products, Channel
Requirements of Different Products may Vary
We come across three distinct categories of products
withinconsumer goods-viz.,
i. Convenience goods,
ii. Shoppinggoods, and
iii. Speciality goods.
We have seen that the differentcategories of goods require different
channel systems, sincebuying behaviour and buying habits differ,
depending on thecategory Convenience goods require intensive
market coverageand, therefore, need a comprehensive and high
penetrationchannel arrangement. Shopping goods and speciality
goodsneed lesser intensity of coverage, compared to
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conveniencegoods. Often, in these cases, the number of tiers in

the channelcan be less than those for convenience goods. The
number ofoutlets too can be far lesser. In the matter of location
of theoutlets too, the requirements will be different in respect
ofconvenience goods on the one hand, and for shopping
andspecialty goods, on the other. Obviously, there is a need
forproduct-channel matching. .
The Products PLC Stage too Influences Channel
Choice
We have seen that the concept of PLC helps product
management.PLC also helps channel management. Different
channelsfit different stages of PLC.A product in the
introduction stage will be relatively unknownto the market; its
customer base small; and its sales volume low.At this stage, it
may be advantageous to sell the product directlyto the
customer, dispensing with the channels. Such a move willenable
the manufacturer to get direct market feedback on thenew
product and thereby improve the product as required.
Alternatively, a specilised channel could be used in this stage.
Aspecialised distributor will be in a better position to introducethe
product in the market and also provide the required technical
support to the user.When the product moves into the growth
and maturity stages, the requirements of distribution will be
different. In thesestages, the product is almost an off-the-shelf
item. Now,convenience in delivery and price competitiveness are
more important factors.
Therefore, conventional/general purposedistributors would be
more suitable. Producers usually appointa number of general
purpose distributors at this stage and alsomake more and more
territories non-exclusive. Some pushingbecomes necessary at this
stage and conventional marketchannels admirably suit this
requirement.In the decline stage in the PLC, the market for the
productusually gets reduced to select groups of customers and it
maybe advantageous to revert back to direct marketing to
customersat this stage. Alternatively, the firm may serve the select
groupsof customers through a minimal use of middlemen.
Product Influences Type and Number of Channel Members
aswellProduct characteristics influence not merely the channel
designto be opted for; they often influence even the type and
numberof intermediaries needed. For example, for textiles or
shoes,franchisees, who can run showrooms, may be an effective
type of intermediary. For a product like detergents,
conventionalwholesaler-retailer arrangement may be the
appropriate one.
4. Evaluation of the Distribution Environment
While selecting the channel design, the firm should also takeinto
account the distribution environment obtaining in thecountry/
territory. It should evaluate the vital features of the distribution
environment and ensure that the proposed channeldesign is
compatible with them. Distribution environment inthe broader
sense includes the trade related legal environment aswell. A
mention about the legal environment relating tomarketing and
trade matters has been made in the chapter onThe Marketing
Environment. The legal implications of channeldesign must
be carefully examined before taking a final decision.
5. Evaluation of Competitors Channel Designs

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categoriessuch as convenience goods, shopping goods and

specialty goods may need different channel systems.Industrial
and Consumer Products Need Different ChannelsIndustrial
and consumer products usually need differentchannels as they
differ from each other in several vital respects.

SALES AND DISTRIBUTION MANAGEMENT

The firm should also study the competitors channel

patternsbefore deciding its channel design. While the firm may
notnecessarily follow the competitors in channel design, it
should analyse the plus and minus of the channel patterns
adopted byeach of its major competitors.Quite a number of
firms dosettle down for a follow the leader policy in channel
design.They find it an easy route. But such an approach may
deprivethem of the chance to score an edge over competition
throughthe channel strategy.
6. Matching the Channel Design to Company Resources
Choice of channel is also governed by the resources availablewith
the organisation.
Firms with Limited Resources Settle for
Conventional Channels
Firms with limited resources and small volume ofbusiness will
normally find it difficult and uneconomical to opt,for own
channels. For such firms, establishing branch showrooms/
depots/retail outlets of their own will result in a highunit cost
of distribution, which they cannot afford. They arebetter off by
depending on conventional channels. In fact, theyare usually
content with a small network of conventionalintermediaries.
Firms with Larger Resources have More Options
Firms withlarger resources and larger marketing operations can
go in forvaried distribution channels. In fact, in India, in
severalbusinesses, firms which are strong in resources, usually
operatetwo parallel channels, one reaching out to the customer
throughcompany depots and showrooms, and the other
through conventional intermediaries. The textile business is a
goodexample of this phenomenon. Firms like Reliance
Industries,Bombay Dyeing, DCM and Mafatlals, have all gone
in for such atwo-pronged channel design. In some cases,
however, evenlarge firms prefer a distribution arrangement
wherein they willnot be required to pump in much of their
resources.
They are content with entrusting their distribution job to some
distributionhouses, appointing them either as the sole-selling
agent oras marketers. Many manufacturers of pharmaceuticals,
machinetools, agricultural equipment, electric motors and
householdappliances have adopted this route.
7. Evaluating the Alternatives and Selecting the Best
With the completion of the foregoing steps, the number
ofalternatives would have narrowed down considerably; the
firmmust evaluate these alternative designs and choose the
best among them.
Keeping the System Flexible
The physical distribution system should also be kept
flexible.Marketing is never static. Thus, in keeping with the
dynamicnature of marketing, the physical distribution system
should remain, flexible. At the same time, flexibility has an
associatedcost. Often, that is why, issue of economy vs.
flexibility is raisedwhile designing a physical distribution system.
Even at the cost of economy; some flexibility must be retained.
It would cometo the help of the firm in the future.Why do we
need to segment, position and target in channeldesign?
Channel Design: Segmentation

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One of the fundamental principles of marketing is

thesegmentation of the market. Segmentation means the
splitting,of a market into groups of end-users who are
1. Maximally similar within each group and
2. Mmaximally different betweengroups. But maximally similar
or maximally different based onwhat criterion? For the channel
manager, segments are best defined on the basis of demands
for the outputs of themarketing channel. A marketing channel
is more than just aconduit for product; it is also a means of
adding value to the product marketed through it. In this sense,
the marketingchannel can be viewed as another production
line engaged inproducing not the product itself that is sold,
but the ancillary services that define how the product is sold.
These value addedservices created by channel members and
consumed by endusersalong with the product purchased are
called service outputs. Service outputs include (but may not be
limited to)bulk-breaking, spatial convenience, waiting and
delivery time,and assortment and variety.End-users (be they
final consumers or business buyers) havevarying demands for
these service outputs. Consider, for example, two different
soft drink buyers: an office employee atwork, looking for a soft
drink during her afternoon coffeebreak, and a family buying
for at-home consumption.
Channel Design: Positioning
When the market has been segmented into groups of
endusers,each of which can be described by a set of service
outputdemands, the channel manager should next define the
optimal channel to serve each segment. We call this exercise
positioningor configuring the channel (positioning to parallel
the segmentation-targeting-positioning paradigm in marketing
management). Just as positioning a product means setting
itsproduct attributes, price, and promotional mix to best fit
thedemands of a particular segment, so also positioning refers
to the design of the distribution channel to meet the
segmentsdemands.
This exercise should be done, even if the channelends up not
selling to some of the segments in the end. The channel analyst
may then discover that some segments simplydo not make good
targets because their demands cannot beadequately met with the
channels current resources. Alternatively,the positioning exercise
may reveal some unexpectedlyattractive segments to target. Unless
the optimal channel isdefined for each segment, it is impossible
to make a thoroughdecision about what segments to target.The
optimal channel is defined first and foremost by thenecessary
channel flows that must be performed in order to generate the
specific segments service output demands.Channel flows are all
the activities of the channel that add valueto the end user. In
enumerating the list of channel flows, we go beyond the concept
of the mere handling of the product toinclude issues of
promotion, negotiation, financing, orderingand payment. For
instance, our office employee looking for a soft drink on her coffee
break (see Above Table) has a highdemand for spatial convenience
and minimal tolerance for outof-stock product. This means that
the channel How of physicalpossession (the physical holding of
inventory) takes on greatimportance for such end-users. Each
product or service-sellingsituation can have its unique set of service
output demands bysegment, implying that the differential

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The other main element of the channel structure is the decisionof

how many of each type of channel member will be in thechannel.
This is the channel intensity decision. In particular, should the
channel for a consumer good include many retailoutlets (intensive
distribution), just a few (selective distribution),or only one
(exclusive distribution) in a given market area? The answer to this
question depends both on efficiencyand on implementation
factors. More intensive distribution may make the product more
easily available to all target endusers,but may create conflict among
the retailers competing tosell it.The channel structure decisions of
types, identity, and intensityof channel members all should be
made with the minimizationof channel flow costs in mind. That
is, each channel member isallocated a set of channel flows to
perform, and ideally theallocation of activities results in the reliable
performance of allchannel flows at minimum total cost. This is a
nontrivial task,particularly because it involves comparing activities
acrossdifferent companies who are members of the channel.
Intuitively,an activity-based costing (or ABC) sort of analysis
isuseful to establish the best allocation of channel flowsThis exercise
results in one channel profile for each segment thatis identified in
the market segmentation stage of the exercise.Each of these
channel profiles is called a zero-based channel,because it is designed
from a zero base of operations that is, asif no preexisting channel
exists in the market. The concept of azero-based channel means
1. That the segments service outputdemands are met and
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2. That they are met at minimum total channel cost.

Channel Design: Targeting
At this stage of the analysis, the channel manager is equipped
todecide what segments to target. Note carefully that this
alsomeans that the channel manager is now equipped to decide
what segments not to target! Knowing what segments toignore
in ones channel design and management efforts is
veryimportant, because it keeps the channel focused on the
keysegments from which it plans to reap profitable sales.Why
not target all the segments identified in the segmentationand
positioning analyses? The answer requires the channelmanager
to look at the internal and external environment facingthe
channel. Internally, managerial bounds may constrain
thechannel manager from implementing the zero-based
channel.For example, top management of a manufacturing firm
may beunwilling to allocate funds to build a series of regional
warehousesthat would be necessary to provide spatial
conveniencein a particular market situation. Externally, both
environmentalbounds and competitive benchmarks may
suggest somesegments as higher priority than others. For
example, legalpractices can constrain channel design and hence
targetingdecisions. Many countries restrict the opening of large
massmerchandisestores in urban areas, to protect small
shopkeeperswhose sales would be threatened by larger retailers.
Such legalrestrictions can lead to a channel design that does not
appropriatelymeet the target segments service output demands,
andmay cause a channel manager to avoid targeting that
segmententirely.
Of course, the corollary of this statement is that when
superiorcompetitive offerings do not exist to serve a
particularsegments demands for service outputs, the channel
manager may recognize an unexploited market opportunity and
create anew channel to serve that underserved segment.
Meetingpreviously unmet service output demands can be a
powerful competitive strategy for building loyal and profitable
consumerbases in a marketplace. But these strategies can best be
identifiedwith knowledge of what consumers want to buy, and
importantly,how they want to buy it, and the necessary response
interms of channel flow performance and channel structure.We
have now identified a subset of the markets segments thatthe
channel plans on targeting, using the segmentation andpositioning
insights derived earlier.
Channel Design: Establish New Channelsor Refine
Existing Channels
Now, the channel manager has identified the optimal way
toreach each targeted segment in the market, and has
alsoidentified the bounds that might prevent the channel from
implementing. the zero-based channel design in the market.
Ifno channel exists currently in the market for this segment,
thechannel manager should now establish the channel design
that comes the closest to meeting the target markets demands
for,service outputs, subject to the environmental and
managerialbounds constraining the design.If there is a
preexisting channel in place in the market, however,the channel
manager should now perform a gap analysis. The differences
between the zero-based and actual channels on thedemand and
supply sides constitute gaps in the channel design.Gaps can

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importance of different sets of channel flows depends on the

segment.Further, the channel analyst must identify the optimalchannelstructure to produce the necessary channel flows,
whichthemselves, of course, result in the generation of the
requiredservice outputs that are demanded by a particular segment
ofend-users in the market. The design of the channel structure
involves two main elements. First, the channel designer mustdecide
who are to be the members of the channel. For example,will a
consumer packaged-goods manufacturer sell its groceryproducts
through small independent retailers with in-citylocations, or
through large chain stores that operate discountwarehouse stores?
Or will it use an outlet such as Indiangrocer.com, an on-line seller
of Indian food andhousehold products that operates no retail
stores at all? Movingup the channel from the retail level, decisions
must be made whether to use independent distributors,
independent salesrepresentative companies (called reps or rep
firms),independent trucking companies, financing companies,
export management companies, and any of a whole host of
otherpossible independent distribution channel members that
couldbe incorporated into the channel design.Beyond this decision,
the channel manager must also decide theexact identity of the
channel partner to use at each level of thechannel. For example, if
it is deemed advisable to sell a line offine watches through retail
stores, should the outlets chosen bemore upscale, such as Tiffanys,
or should they are familyownedlocal jewelers? The choice can have
implications both forthe efficiency with which the channel is run
and the imageconnoted by distributing through a particular kind
of retailer.In a different context, if a company seeks distribution
for its products in a foreign market, the key decision may be
whichdistributor is appointed to carry the product line into
theoverseas market. The right distributor may have much better
relationships with local channel partners in the target marketand
can significantly affect the success of the foreign marketentry.

SALES AND DISTRIBUTION MANAGEMENT

exist on the demand side or on the supply side.

On the demand side, gaps mean that the service outputdemands
is not being appropriately met by the channel. Theservice output
in question may be either undersupplied or oversupplied. The
problem is obvious in the case of undersupply:The target segment
is likely to be dissatisfied becauseend-users would prefer more
service than they are getting. Theproblem is more subtle in the
case of oversupply. Here, targetend-users are getting all the service
they desire-and then some.The problem is that service is costly to
supply, and therefore,supplying too much of it leads to higher
prices than the targetend-users are likely to be willing to pay. Clearly,
more than oneservice output may be a problem, in which case
several gaps mayneed attention.On the supply side, gaps mean
that at least one. flow in thechannel of distribution is carried out
at too high a cost. Thisnot only wastes channel profit margins,
but can result in higherprices than the target market is willing to
pay, leading toreductions in sales and market share. Supply-side
gaps can resultfrom a lack of up-to-date expertise in channel now
managementor simply from waste in the channel The challenge in
closing a supply-side gap is to reduce cost without
dangerous])reducing the service outputs being supplied to target
end-users.When gaps are identified on the demand or supply
sides, several strategies are available for closing the gaps. But once
achannel is already in place, it may be very difficult and costly
toclose these gaps. This suggests the strategic importance ofinitial
channel design. If the channel is initially designed in ahaphazard
manner, channelmembers may have to live with asuboptimal
channel later on, even after recognizing channel gapsand making
best efforts to close them
Channel Implementation: Identifying Power Sources
Assuming that a good channel design is in place in the
market,the channel-managers job is still not done. The
channelmembers now must implement the optimal channel
designand indeed must continue to implement an optimal
designthrough time. The value of doing so might seem to be
selfevident,but it is important to remember that a channel is
madeup of multiple interdependent entities (companies,
agents,individuals). But they mayor ma) not all have the
sameincentives to implement the optimal channel
design.Incompatible incentives among channel members would
not bea problem if they were not dependent upon each other.
But bythe very nature of the distribution channel structure and
design,specific channel members are likely to specialize in
particularactivities and flows in the channel. If all channel
members donot perform appropriately, the entire channel effort
suffers. Forexample, even if everything else is in place, a poorly
performingtransportation system that results in late deliveries
(or nodeliveries) of product to retail stores prevents the channel
fromsucceeding in selling the product. The same type of
statementcould be made about the performance of any channel
memberdoing any of the flows in the channel Thus, it is
apparent thatinducing all of the channel members to
implement the channeldesign appropriately is critical.How, then,
can a channel captain implement the optimalchannel design, in
the face ofinterdependence among channelpartners, not all of
whom have the incentive to cooperate in theperformance of
their designated channel flows? The answer liesin the
possession and use of channel power. A channelmembers
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power is its ability to control the decision variablesin the

marketing strategy of another member in a given channelat a
different level of distribution. These sources of channelpower
can of course be used to further one channel
membersindividual ends. But if channel power is used instead
toinfluence channel members to do t_ jobs that the
optimalchannel design specifies that they do, the result will be a
channelthat more closely delivers demanded service outputs, at
a lowercost.
Channel Implementation: Identifying Channel
Conflicts
Channel conflict is generated when one channel
membersactions prevent the channel from achieving its goals.
Channelconflict is both common and dangerous to the success
of distribution efforts. Given the interdependence of all
channelmembers, anyone members actions have an influence
on thetotal success of the channel effort, and thus can harm
total channel performance
Channel conflict can stem from differences between
channelmembers goals and objectives (goal conflict), from
disagreementsover the domain of action and responsibility in
thechannel (domain conflict), and from differences in
perceptionsof the marketplace (perceptual conflict). These
conflicts directlycause a channel member to fail to perform the
flows that theoptimal channel design specifies for them, and
thus inhibit totalchannel performance. The management
problem is twofold.First, the channel manager needs to be able
to identify thesources of channel conflict, and in particular, to
differentiatebetween poor channel design and poor performance
due tochannel conflict. Second, the channel manager must
decide onthe action to take (if any) to manage and reduce the
channel conflicts that have been identified.In general, channel
conflict reduction is accomplished throughthe application of
one or more sources of channel power.
Forexample, a manufacturer may identify a conflict in its
independent-distributor channel:
The distributorship is exerting toolittle sales effort on behalf of
the manufacturers product line and therefore sales of the product
are suffering. Analysis mightreveal that the effort level is low because
the distributorshipmakes more profit from selling a competitors
product than from selling this manufacturers product. There is
thus a goalconflict. The manufacturers goal is the maximization
of profitover its own product line, but the distributorships goal
is themaximization of profit over all of the products that it
sellsonlysome of which come from this particular manufacturer.
Toresolve the goal conflict, the manufacturer might use one of
thefollowing strategies:
1. It might use some of its power to reward the distributorby
increasing the distributors discount, thus increasing theprofit
margin it can make on the manufacturers productline. Or
2. The manufacturer may invest in developing brand equityand
thus pull the product through the channel. In thatcase, its
brand power induces the distributor to sell theproduct more
aggressively because the sales potential forthe product has risen.
In both cases, some sort of leverage or power on the part ofthe
manufacturer is necessary to change the distributorsbehavior
and thus reduce the channel conflict.

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Channel Implementation
The Goal of Channel Coordination
Now channel has been designed with target end-user
segmentsservice output demands in mind, and channel power
will beappropriately applied to ensure the smooth implementation
ofthe optimal channel design. When the disparate members ofthe
channel are brought together to advance the goals of thechannel
rather than their own independent (and likely conflicting)goals,
the channel is said to be coordinated. This term isused to denote
both the coordination of interests and actionsamong the channel
members who produce the outputs of themarketing channel,
sand the coordination of performance of channel flows with the
production of the service outputsdemanded by target end-users.
This is the end goal of the entirechannel management process. As
conditions change in the marketplace, the channels design and
implementation may needto respond; thus, channel coordination
is not a one-timeachievement, but an ongoing process of analysis
and responseto the market, the competition, and the abilities of
the membersof the channel.
Questions
What are the steps in channel design?
How does product life cycle influence channel choice?
What do you mean by segmentation, positioning and

targeting in channel design?

How do you refine existing channel?
How is channel conflict managed?

Notes:

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