Chapter

12
Designing Channel Systems

SDM- Ch 12 1
 Learning Objectives
• Channel design factors, components, issues,
steps and process
• Understanding customer needs to define
channel objectives
• 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 2
 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

Steps….
SDM- Ch 12 3
 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 – cost effective

SDM- Ch 12
Customer needs….
4
 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 – door
delivery, credit etc would be added benefits

Components …
SDM- Ch 12 5
 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 after-
sales support
• Each part of the system is likely to be
handled by a different entity.
SDM- Ch 12 Design issues…. 6
 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 7
 Channel Design Process
Similar to any other marketing task

Segmentation

Positioning

Focus

Development
SDM- Ch 12 8
 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 9
 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 10
 Focus
• It may not be possible to meet the
needs of all segments – cost and
practicality considerations (the
managerial talent available for instance)
• The sales manager has to firmly decide
which of the segments he will service
• The competitive scenario also helps in
this decision

SDM- Ch 12 11
 Development
• At this stage the channel system is being put in
place to achieve the objectives
• Select the best of the alternatives
– Comparison with the most successful competitor
could be a good benchmark
• Channel partners of competitors may be willing
to share best practices of their principals
• For modifying an existing channel, the gap
between the ideal and the existing is to be
identified for remedial action.

SDM- Ch 12 12
 Channel Structure Factors A

• Market related – reflected in customer service

expectations
• Product related – physical characteristics
• Company related – size, nature of products,
financial strength and management capability
• Intermediary related – availability and cost
• Environment related – factors beyond the
direct control of the company
SDM- Ch 12 13
 Channel Objectives
• Defines what the channel system is supposed
to do to support customer service.
• Customer needs could include:
– Lot size convenience
– Minimum waiting time
– Variety and assortment
– Place utility
• The product characteristics and the market
profile also impact the objectives.
• Competition could also affect the objectives

SDM- Ch 12 14
 Hybrid channels A

• Companies which use multiple channels are

considered to have hybrid channels
– Partly managed by the company and partly
outsourced
– Example – selling directly on the internet and
also through channel partners
• The objective is to manage different kinds of
customers in a manner most appropriate to
them.

SDM- Ch 12 15
Hybrid Channels - Advantages
A
• Increase reach through own efforts and
local strengths and relationship of channel
partners
• Company can negotiate better directly with
key accounts
• Healthy competition between company
direct sales and intermediaries
• Limit the dependence on channel partners
• Company also has access to correct
market feedback
SDM- Ch 12 16
 Channel Alternatives
• Are planned after deciding the customer
segments to be serviced and the levels of
service
– Business intermediaries currently available like
C&FAs, distributors, dealers, agents wholesalers
and retailers.
– The number and type of intermediaries required
– Developing new channel types
– Roles of each channel member

SDM- Ch 12 17
 Evaluation of Major
Alternatives
Cost of operations

Ability to manage
and control

Adaptability

Range and volume

to be handled

Criteria for evaluation

SDM- Ch 12 18
 Evaluation Critieria
• Cost:
– If existing sales force can be expanded cost effectively,
this is the best alternative
– Cost of alternatives at different volumes can only be
estimated for comparison
– System with the lowest cost is preferred
• Adaptability – the channel should be flexible to
handle different types of markets and changes in
the market conditions
• Volume and range to be handled – Capable even
when business grows or expands

SDM- Ch 12 19
 Evaluation Criteria
• Ability to manage and control:
• Distribution network being an extended arm of
the company, the channel partners have some
obligations
• Operating guidelines specify these rules
• The channel system should help the company
enforce these rules fairly to all channel partners
• Some of the operating rules are……
• Company trains channel personnel and
provides proper product literature
SDM- Ch 12 20
 Selecting Channel Partners
• Getting good channel partners is a difficult
part of doing business
• Some of the methods employed to select
channel partners are:
– Sales people identify prospects and talk to them
– Press advertising (industrial goods)
– Existing channel partners can give good
references
– Competitors’ channel members for reference, not
poaching

SDM- Ch 12 21
 Selection Criteria
• Qualitative: willingness, confidence in
company products, willingness to abide
by company rules, building company
image, innovativeness etc
• Quantitative: financial status,
infrastructure, location, present
businesses, customer relationships,
market standing etc
SDM- Ch 12 22
 Channel Selection Factors
A

• Product and market related – nature of the

product and desired customer service
• Company characteristics and objective of ‘reach’
• Channel considerations of availability and ability
to deliver desired customer service
• Environmental factors – competition, socio-
cultural and economic.
– Same as in the channel structure

SDM- Ch 12 23
 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 to behave in a like manner
– hence training assumes significance
• Training could be on the job field training or
classroom training or both
• Training is an ongoing process.

SDM- Ch 12
Subjects….. 24
 Subjects for Training
• Field training on how the 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 shares
• Special meetings for new product launches
• Submitting reports and maintaining records
• Statutory compliance

SDM- Ch 12 25
 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 26
 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
“power”……
SDM- Ch 12 27
 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 28
 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 29
 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.
– Calculated as net margin as a percentage of the investment
in the business
– 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 30
 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 6 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 31
 Evaluation of Effectiveness A
• Volume and profit generated by each channel
partner
• Exclusivity and aggressiveness of the channel
• Support to promotional and advertising efforts
• Placing adequate orders for all SKUs promptly
• Doing business ethically
• Extent of customer relationships being built

SDM- Ch 12 32
Steps for Modifying a Channel
Network
• Service level desired and willing to deliver
• Activities required to deliver service level, who
will do 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 33
Channel Comparison Factors
Efficiency
Effectiveness
Scalability
Flexibility
Consistency
Reliability
Integrity

SDM- Ch 12 34
 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 35
 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 36
 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 37
 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

Outsourcing..
SDM- Ch 12 38
 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 39
 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 40
 Key Learnings
• Channel structure is influenced by the company, its
markets, its products, the kind of intermediaries
available and the environment
– These factors are relevant in selection of channels also
• Companies prefer to use multiple channels to reach
different sets of customers – hybrid channels.
• Some of the parameters for evaluation of channels
are: volume and profits generated, extent of
exclusivity, aggressiveness, support for promotional
activities, integrity and ability to build relationships.

SDM- Ch 12 41
 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 42
 End of Notes – Chapter 12

SDM- Ch 12 43