Designing Channel Systems Channel Design Factors Channel Design Steps Channel Design Components Channel Design Issues Evaluation of Major Alternatives Selecting Channel Partners Motivating Channel Members Steps for Modifying Networks Vertical Integration Outsourcing Distribution Channel Comparison Factors

1. Chapter 12
Designing Channel
Systems
Prepared By:
Prof. Nishant Agrawal

2. Learning Objectives
• Understanding customer needs to define channel objectives
• Channel design factors, components, issues, steps and
process
• Method of evaluating various channel alternatives
• How channel partners are: selected, trained and kept motivated
• Principles of vertical integration and electronic channels

3. 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

4. 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
• Finalize the ‘ideal’ system

5. 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

6. Channel Design Components
• Revenue generation
• 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.

7. Channel Design Issues
• Who will perform Activity
• 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

8. Channel Design Process
Segmentation
Development
Focus
Positioning
Similar to any other marketing task

9. Segmentation
• Putting customers in similar clusters based on their needs
• 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.

10. Positioning
• Its objective is to occupy a clear, unique, and advantageous position in
the consumer's mind.
• A marketing strategy that aims to make a brand occupy a
separate position, relative to competing brands, in the mind of the
customer.
• Companies apply this strategy either by emphasizing the unique features of
their brand or they may try to create a suitable image (inexpensive
or premium, luxurious, entry-level or high-end, etc.) through advertising.

11. 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

12. 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 corrective action.

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 collection
– Place utility
• The product characteristics and the market profile also impact
the objectives.
• Competition could also affect the objectives

14. 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

15. Evaluation of Major Alternatives
Cost of operations
Ability to manage
and control
Adaptability
Range and volume
to be handled
Criteria for evaluation

16. Evaluation Critieria
• Cost:
– If existing sales force can be expanded cost effectively, this is the best
alternative
– 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

17. 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

18. 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

19. Selection Criteria
• Qualitative: willingness, confidence in company products,
willingness to take by company rules, building company image,
innovativeness, , infrastructure, location, customer
relationships, market standing
• Quantitative: financial status present businesses, etc

20. 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
• Training is an ongoing process.

21. Subjects for Training
• Field training on how the markets are to be worked to achieve
sales, collect payments
• 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

22. 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

23. 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

24. “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

25. 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 etc

26. 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.
– 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.

27. Performance Evaluation
• 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

28. Steps for Modifying Networks
• 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

29. Channel Comparison Factors
Efficiency
Effectiveness
Scalability
Flexibility
Consistency
Reliability
Integrity

30. Non-store Retailing
• Selling door-to-door
• Vending machines
• Tele-shopping networks
• Selling through catalogs
• Other forms of direct selling
• Electronic channels

31. 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

32. 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

33. 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

34. Outsourcing Distribution
• Is the most common 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’ / concentrated distribution.

35. 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

36. 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

37. End of Session