CONTROLLING
MARKETING
CHANNELS

Issue No 11

Because marketing channels have been changing so rapidly, we decided to look again at our fist IF View Topic – Distributing Through Agents.

Difficulties in controlling, managing and motivating resellers are common. Today, around the world, loose distributor dealer and agent arrangements are being replaced with more tightly controlled contractual relationships such as franchises. A look at the spectrum of marketing channel structures will help to give a clearer understanding of the issues involved.

Distribution options through marketing channels can be viewed as a spectrum that measures the degree of control over marketing channels and the formality of the relationship.

The spectrum moves from highly controlled, comprehensive relationships such as franchises at one end of the spectrum to looser, less formalized relationships like dealers and agents.

Over the last few years, there has been a marked movement among networks to tighten relationships with resellers to more rigidly controlled and comprehensive relationships driven by a need for more consistent appearance and standards among networks. Also, organisations have moved from company networks to owner-operator networks driven by a need for cost-effective distribution and strong motivation.

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Distinctions among different types of marketing channel relationships are becoming increasingly blurred. The above diagram is a guide only. For example, some agencies now accumulate goodwill (insurance agents are an example) and many traditional dealer networks such as service station networks are ‘business format’ franchise structures – some by law, as in Australia, and some by oil company choice as in the USA.

The table below summarises the historic characteristics for each of the relationship types.

Loosely linked channel relationships are difficult to control. The following characteristics tend to dilute control:

• Fewer rules
• Less commitment
• Less corporation control over operations

For example, agents are often not dedicated distribution outlets. Since agencies are frequently either add-on businesses or parts of existing businesses, the question of divided loyalties can often arise, creating a need to constantly bolster agents’ loyalty, and ensure agents’ time is spent on the principal’s product or service.

Loose channel arrangements typically exhibit the following drawbacks:

• Reseller – no up front payment for the rights to the business, so little commitment.

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• No security of tenure for resellers, further limiting commitment
• No ability to assign, which in turn does not lead to the accumulation of "sanctioned" goodwill, depriving the resellers of a tangible asset and limiting motivation
• Poor controls over the standard of the operation, resulting in low levels of customer service

Loosely controlled networks are usually no the primary marketing channel, and are frequently a ‘second tier’ of distribution, which can create a number of problems:

• Fuzzy delineation among channels
• Crossovers between primary and secondary responsibilities and territories, sometimes leading to too much competition among marketing channels

We see the future likely to bring an increasing formalisation in reseller networks and in many cases complete restructuring along the following lines:

• More rules
• More controls

With change, the accumulation of goodwill or equity for reseller is highly likely. Corporations will be well advised to be pro-active and develop equity programs to control and harness the incentives provided by equity ownership.

Accompanying more comprehensive controls will be more support to resellers, leading to more comprehensive business systems and more structured relationships.

Distribution networks have differing objectives and influences and many considerations are involved in structuring such networks. However, a move to more tightly controlled networks will be a future necessity.

IF View may be reproduced provided IF Consulting is acknowledged.