CHANNELS OF DISTRIBUTION:Components of channel performance, Value thru product benefits

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Brand Management (MKT624)

Lesson 29

CHANNELS OF DISTRIBUTION

The discussion on two companies having two different channels continues. The graphics

show that these

companies have a

Marketing Channels Company x vs. Company Y

set

mixed

Figure 37

systems to reach

their customers.

The one that is

Company X

selling directly is

Company Y

more likely to have

improved margins

(apparently)

than

Mixed System

Company

Direct Sales

Indirect Sales

the

one

with

Outlets

Direct and

Indirect

different systems.

Why both do not

have

identical

Distributors

systems

question

historical

backgrounds, sets of

Dealers

Retailers

circumstances, and

initiatives

their

respective

managements have

chosen to take or

CUSTOMERS

not take at different

points in time.

Channel performance

While assessing the impact on the three strategic areas (product-market make-up, sales revenue,

and profitability) the objective of any company should be to configure its channels in a way

that it improves its performance and offers competitive advantage. The company with all direct

customers seems to be having that advantage, if we refer to the above graphics.

Components of channel performance

Measuring channel performance, therefore, is based on three components1:

1. Customer reach

2. Operating efficiency

3. Service quality

If a company cannot reach its potential customers, it will not register sales.

If the cost to reach customers is too high, then it will adversely affect profitability.

If customers are not served the way they want, then the company cannot retain them.

To have a cost-efficient and customer-effective channel, it is important that the three

fundamental components must work at satisfactory level. Before we can ensure that, we must

decide whether the system should be direct or indirect, in the context of those components.

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Brand Management (MKT624)

1. Customer reach - Direct or Indirect

It is the determination of the most optimal level of cost-efficiency and customer-

effectiveness, which becomes the basis of whether you want direct or indirect channels.

The channels, in other words, must save costs and provide customers value.

Direct channels include

· Direct sales

· Telemarketing

· E-marketing

Indirect channels include intermediaries like

· Distributors

· Wholesalers

· Retailers

2. Operating efficiencies

Once you have decided upon the method of customer reach direct or indirect your

objective then must be to achieve operating cost efficiencies. The costs must not be high

to the point of adversely affecting profits.

Direct channels offer higher margins, but then the responsibility of channel

management costs rests with the company.

E-marketing is fast becoming the norm in the western markets. It is a much cheaper way

of reaching a much bigger customer base in diverse areas. The companies that have

started e-marketing as a supplement to their traditional channels are experiencing higher

levels of sales, in addition to sales from stores. Those that started their business with e-

marketing as the core model are not dependent on any intermediaries.

Indirect channels offer lower margins, but then the channel management costs are

minimal.

3. High level of service quality

Direct marketing assures a good level of service because of a direct interface with the

customer, but it could be expensive for maintaining a direct sales force.

Indirect marketing removes the company from customers and, hence, poses a greater

challenge of providing good level of service.

Companies are dependent upon intermediaries to offer service to customers, and they

are too busy with different lines of products that they handle. Also, intermediaries take

over the ownership of the product and control its distribution, removing the company

away from controls.

Indirect marketing therefore has an inherent disadvantage in not being as responsive to

customers as direct marketing.

It is interesting to note that within what looks like direct channels does carry an indirect

element. Retailers have started e-marketing offering delivery to their customers. This

enhances their level of service to their customers. Manufacturers may not do so for the

limitation of items they produce, whereas retailers having a host of items from various

companies are better poised to directly serve their customers. What is not to be

overlooked is the fact that prior to retailers' direct service to their customers the goods

came from manufacturers, hiding that part to customers. This is the element of

indirectness and a case of B2C channel system, in which retailers stock their items from

different members of the channel and offer a service to the end-users of different

brands.

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Brand Management (MKT624)

Channel system to build value

Whatever is the system, it has to ensure fulfillment of customer needs yet offering good

profitability to businesses! In other words, it must be able to build customer value

through either offering enhanced benefits or lowered costs. This offers competitive

advantage2.

Value thru product benefits

A channel system must make sure that product benefits are offered in the following forms:

1. Product quality:

i. It must deliver the quality according to the one promised in the brand

contract and the one expected by the customer. Perishable items and cold

items nowadays are an excellent example.

You will not like to buy temperature-abused ice cream or meat items, nor

will you be satisfied by a product with quality compromised on any account.

ii.

Inventory management in relation to product ageing has taken on an added

dimension within the concept of supply chain. It forms quality of service that

the product must get. Poor service may result in expired or near-expiry items

escaping system's attention and reaching retail shelves to the detriment of

your brand.

iii.

Regardless of the system direct or indirect the company must be able to

impart knowledge and training to channel members and then ensure that

instructions are being followed for quality inventory and retail management.

2. Product assortment

A channel must be able to provide complete range of products all extensions either

by form, formats, ingredients, tastes, flavors, and any add-on form to achieve a

desired level of customer appeal and product availability. No brand can afford to be

missed out of an important retailer; it detracts customers and, hence, diminishes the

brand value. Complete availability is a must.

Value thru service benefits

In the case a company is dealing in consumer durables or industrial products that require

service along with the purchase of the product, then provision of that service has to be made

through the channel. The company must make sure that the following factors are built into

the channel system:

Need for delivery and installation

Training

Technical support

Repair

Terms of payment

Credit

Easy return

The channel system will automatically offer the following benefits to the customers:

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Brand Management (MKT624)

1. Transaction services

Customers must feel the ease with which the product is delivered and have the

assurance that replacement of faulty parts is guaranteed. Terms of credit also help a

great deal.

2. After-sales service

This includes all services that the company must offer to keep its customers satisfied.

Following are a few examples:

i. 3-S service (sale, service, and spares) in case of cars and bikes.

ii. Installation and repair at your place of air conditioners.

iii. Repair and maintenance of industrial equipment and generators etc.

Each of the benefits (product and service) plays its role. A company with a better product may

not be as successful as its competitor with an inferior product only because the company cannot

meet the service requirements that must back the product. The requirements have to be met

wherever those are expected end user or an intermediary.

The emergence of company-operated service centers is an evidence of such a realization on part

of the companies. This also reduces dependence on intermediaries and gives more seriousness

to the benefit by showing company's commitment to service.

Summary

Depending on the nature of the product, the desired reach and other strategic goals, companies

should decide whether they would be better off with a direct system or an indirect system. This

question must also realistically consider a company's ability to offer value to its customers. A

good channel system builds up value for customers and at the same time ensures profitability

for the company. Doing the twin job of serving customers and the company, a channel system

can be termed as the one performing well. It implies that an effective channel has a decent

outreach that ensures good availability of the product and it offers all requisite services to

customers that meet their expectations. If the system does not involve prohibiting costs, it is

efficient. Such a customer-effective and cost-efficient system has to be evolved keeping the

benefits to customers and value for the company in mind.

Market experience of other players is an authentic guide in making decisions not meaning

that you must follow, rather meaning that you get leads from what could it be that they have not

done so far and if you do will pay dividends.

Generally, direct systems have been found to be expensive, albeit full of control; indirect

systems are less expensive, but offer lower profitability. Indirect systems generally support

volume products. In general, a combination of different systems is the practice, for a

combination offers better coverage of the market. The better the coverage, the bigger the share

of the market, and higher is the leveraging of the brand.

Bibliography:

1. Roger J. Best: "Market-Based Management Strategies for Growing Customer Value

and Profitability"; Prentice Hall (273)

2. Roger J. Best: "Market-Based Management Strategies for Growing Customer Value

and Profitability"; Prentice Hall (283)

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