Evaluating Channel Performance

Measurement of Channel Performance

Performance may be define as the sum of all processes that will lead managers to taking appropriate actions in the present that will create a performing organisation in the future or in other words, doing today what will lead to measured value outcomes tomorrow

Macro or societal perspective Micro or managerial perspective

Macro
Does distribution cost too much? Are there people who are disadvantaged by the current distribution system?(inner city & rural areas) How do channel members at various levels of distribution compare, in aggregate, in terms productivity per employee? Has productivity been increasing more rapidly in manufacturing, wholesaling, or retailing?

Measuring channel performance

Performance Measurement

Performance measures

Effectiveness

Equity

Efficiency

Performance Measurement

Channel performance
Effectiveness : Providing the required service most cost effectively. a. Delivery : A short term, goal oriented measure of on time delivery e.g Number of times the order was serviced OTIF. b. Stimulation of demand: What are the efforts made by the channel member to increase customer base or increase the usage of the product. example: The cross marketing effort of Khimji & Sons, Kalamandir & Panda enterprises in Marriage season. Selling Maruti through Nalco Co-operative by Orbit Motors.

Performance Measurement

Channel performance
Equity : Extent to which marketing channel serves problem ridden markets and market segments, such as disadvantaged or geographically isolated consumers. Examples: Providing sales & after sales service to remote places like Malkangiri by CD distributors ( even at credit ). Higher freight Payout by the manufacturer & greater effort by distributor. Providing After sales service to the Coke ( NCFC ) refrigerators required tremendous training effort & investment in infrastructure.

Performance Measurement

Channel performance
Efficiency: Output / Input 1. Productivity : The efficiency with which the output is generated from the resources and inputs. Operational efficiency. a. Manpower productivity: Productive call % Sales volume per call b. Productivity of vehicle: Number of outlets covered 2. Profitability: Essentially financial efficiency w.r.t R.O.I. a. Stock turns & margins b. Control on overhead costs c. Cost & use of funds

Measuring performance of marketing channels Normally tracked by H.O.

1. 2. 3. 4. 5. Productivity tracking of manpower ( call reports, DSR ) Profitability tracking ( branch level contribution / prod. Mix ). Market Penetration tracking ( Network expansion objectives ) . Market share tracking ( ORG studies, internal reports ). Budget Vs actual.

Performance Measurement

Internal data analysis. Dependence on market research. Objectivity of measurement.

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Micro
Question here focus on profitability & cost relative to figure out Which channel member are solid run Which channel seems to produce highest returns Which suppliers/intermediaries will help the firm generate the greatest end user satisfaction which of the marketing flows is best performed by specific channel member

Managerial point of view We look at how an individual channel member should go about evaluating its own performance How the channel member (Manufacturer)will evaluate the performance of another channel member (wholesaler) How an individual channel member might measure & compare the various channel it employs

Measuring financial performance

Cost, revenue, & distribution channels can be used by a firm to determine the relative profitability and financial performance of channels As a result of the financial analysis one or more appropriate managerial action may be taken. May be seek operational changes that would result in changes in profitability.
Changes in frequency of sales calls, the size of minimum order, promotional expenses might lead to changes in profitability.

Distribution channel segmentation

(a) Corporate Profitability

Channel segmentation Direct channel Indirect channel

Product A

Product B

Product C

Product A

Product B

Product C

(a) Segmentation analysis by channel & product category

(b) Corporate Profitability Channel segmentation Direct channel East Territory segmentation West East Indirect channel West

C A B Product segmentation

(b)Segmentation analysis by channel, territory and product category

Revenue Cost Analysis

Revenue and cost associated with each segment must be analyzed Direct selling cost Indirect selling cost Advertising Sales promotion Transportation Storage and shipment Identify the cost Order processing associated with serving specific channels,
territories, and products

Contribution margin approach

CMA requires all cost be identified as fixed or variable according to behavior of the cost

Income statement in the CMA method of analysis can be prepared that identify probability for each segment by determination of fixed, variable, direct and indirect cost

Contribution Margin Income Statement By Channel Segment Health care channel Retail channel Total company

Revenue Less: Variable Cost of goods sold Variable Gross Profit Less: Variable direct cost Gross segment contribution Less: fixed direct cost Net segment contribution Less: indirect fixed cost Net profit Net segment contribution

100,000 42,000 58,000 6,000 52,000 15,000 37,000

150,000 75,000 75,000 15,000 60,000 21,000 39,000

37%

26%

250,000 117,000 133,000 21,000 112,000 36,000 76,000 41,000 25,000 30.4%

Net profit approach

Net profit approach to financial assessment of segments requires that all operating costs be charged or allocated to one operating segment. all of company's activity exists to support the production and delivery of goods & services to customer. Furthermore most of the costs that exists in a firm are, in fact, joint or shared cost. In order for the true profitability of a channel, territory, or product to be determined, each segment must be charged with its fair share of these costs.

Profits by commercial distribution channel

Contract Industrial suppliers 10284 Government OEM Total commercial

Gross profit Selling expenses Commissions Advertising Catalog Co-op advertising Sales promotion warranty Sales administration Cash discount total General & Admin expenses

27371

136

2461

40256

Operating profit Operating margin

Strategic profit Model

SPM is an analytic tool frequently used to determine ROI in a business firm. It is a tool that incorporates both income and balance sheet data and demonstrates how these data relate to each other to result in RONW (return on net worth)& ROA (return on assets)

Strategic objective of a firm is ROI

Gross margin Net profit

Sales

(-)
Cost of goods sold

Net profit margin

%
Net profit/ net sales Return on net worth

sales Total expenses Variable expenses

(+)
Financial Leverage Return on assets Fixed expense

=
Net profit/net worth Total assets / net worth

%
Net profit/ total assets Sales Assets turnover Inventory

Net sales/ total assets Total assets

Current assets

(+)
Accounts receivable

(+)
Fixed assets

(+)
Other current assets

Strategic Profit Model

Net profit margin- is defined as % net profit divided by net sales how ever net profit margin actually measures the proportion of each sales rupees that is kept by firm as net profit Asset turn over- is a ratio of total sales divided buy total assets. It actually measures the efficiency of management in utilizing assets. Its shows how mush money in total sales volume is generated by each dollar that the firm has spent. Leverage the result by multiplying net profit margin percentage times asset turnover ratio in return on assets(ROA). For OR, ROA is a critical measure of performance because it especially tells how well they have used all the resources at their disposal to achieve profit