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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
Channel design factors«.
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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
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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 µideal¶ system
Customer needs«.
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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
Components «
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Channel Design Components
Revenue generation or the commercial
part
Physical delivery of the goods or
services ± the logistics part
The µservice¶ part to take care of after-
sales support
Each part of the system is likely to be
handled by a different entity.
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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
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Channel Design Process
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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.
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Positioning
Defines the channel element required to
service each of the segments
± The sales manager decides the channel partner
who is D" # 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
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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
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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.
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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
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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
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Evaluation of Major
Alternatives
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Evaluation Critieria
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± 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
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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
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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
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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
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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.
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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
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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
otivation«.
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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 powerµ««
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'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
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üole of ü «..
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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.
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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
odifying a network..
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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
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Channel Comparison Factors
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Non-store Retailing
Selling door-to-door
Vending machines
Tele-shopping networks
Selling through catalogs
Other forms of direct selling
Electronic channels
-lectronic channels«
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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
Îertical integration«.
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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
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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
utsourcing..
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Outsourcing Distribution
Is the most prevalent situation as:
± The µreach¶ is better
± The cost may be lower
± The company can exploit the µcore 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 µintensive¶
distribution.
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ey 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
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ey 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 µpower¶ equations
There are different formats of non-store
retailing like catalogues, internet etc
Electronic channels are used to sell products
to consumers directly
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