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IF View - Issue No. 26

MARKETING
CHANNEL
TOOLS

Issue No 26

Marketing Channel Strategy Consultants
USA - EUROPE - AUSTRALIA - BRAZIL - HONG KONG
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Marketing Channel Tools

Fifteen years ago, channels were rarely thought of as a marketing concept.  Brand management was the byword in consumer goods and companies measured effective distribution by the number of reseller they had.  They gave little thought to reseller efficiency, satisfaction or motivation.

The emergence of the computer industry and PC’s, in particular, led to massive commercial change.  Manufacturing became increasingly efficient and the cost of almost all manufactured goods declined.  At the same time, the cost of distributing these goods and services increased in many countries due to statutory and legal changes which redefined the supplier reseller relationship.

Terms such as channels of distribution, sales channels, supply channels and marketing channels began to emerge.  The first textbooks on marketing channels or channel marketing were written.  And, marketing channels were defined.

Rosenbloom (author or “Marketing Channels – A Management View”) defines marketing channels as: “The external contractual organisation that management operates to achieve its distribution objectives.”

As marketing channels and marketing channel strategy evolved, a number of marketing channel strategy tools were modified or developed.  These included:

  • Marketing Channel Health Checks
  • Marketing Channel Profitability Models
  • Market Entry Strategy focused on reseller networks
  • Capital Based Incentive Programs

A brief description of each of these tools follows:

Marketing Channel Health Checks

Many executives, sitting in their ivory towers, develop programs for their reseller networks without any consultation with or intimate knowledge of their resellers’ needs or wants.  We have often been told that reseller programs failed because the reseller group “didn’t understand.”

Sadly, companies that spend significant amounts of money on consumer research often spend very little on checking the health of their reseller networks.  Effective Marketing Channel Health Checks use individual interviews, focus groups and written questionnaires to probe the health of individual resellers and compare them with World Best Practice.  The result is a clear picture of the resellers’ (channel partners’) wants and needs.

The ultimate goal is a framework for consultative program development and ongoing consultation for mutual benefit.

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Marketing Channel Profitability Models

Marketing Channel Profitability Models help companies to improve their marketing channels’ financial performance through providing details of the actual costs of transacting business with these channels.  Many companies understand product costs.  In our experience, few understand channel costs.  Instead of concentrating on the simplistic measure of gross profit generated, Marketing Channel Profitability Models look at key marketing channel costs and relationships such as:

  • Products purchased
  • Pricing
  • Discount structure
  • Number of orders
  • Delivery frequency
  • Delivery distance
  • Average order value
  • Type of sales representation

Effective analysis of marketing channel costs allows companies to identify profitable and unprofitable marketing channels and reallocate accounts among channels or change or eliminate channels.  Potential profit gains are significant.

Market Entry Strategy

Many companies take less time to choose an international distributor, than they do to hire a secretary.  The choice of international distributors is often reactive.  A foreign company writes and asks for the agency, dealership or distributorship and gets it on the basis “what do we have to lose, we’re not there now?”

The potential loss is enormous: 

  • A lucrative market may be lost
  • Your reputation may be irreparably harmed in the market
  • Inordinate resources may be needed to support your new reseller

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Although businessmen speak of a Global Market, few have Global Knowledge.  Effective market entry strategy analyses identifies:

  • The market
  • The marketing channel structure in the target country
  • Potential channel partners
  • Risk levels

Primarily, a formalised procedure forces a company to methodically evaluate new market opportunities and establishes a repeatable framework for the future international expansion.

Capital Based Incentive Program

Many companies choose to operate through wholly owning some or all of their marketing channels.  It is often difficult for these companies to motivate management of these wholly owned channels to act as owners and make the best financial decisions for the businesses they run.

Often, the sales or profit targets are moving goal posts.  As annual sales or profits improve, the targets for the following year are increased.  Although the value of the business may increase, aside from a bonus, the manager doesn’t share in the increased value in the same way an owner would.

A capital based incentive program allows the manager to share in his business’s increased value.  The business is valued at the start of the program at, say, four times earnings.

The next year and each succeeding year (for the life of the program), the business is valued at four times earnings and the manager receives a share of the increase in addition to a bonus based on profit.  The simplest parallel is stock plans, where shares are optioned at a given value and options are exercised as share value (hopefully) increases.

The four preceding tools are all relatively new.  While all have been used in some way before, none have been applied specifically to marketing channels and marketing channel strategy.

All organisations need to understand their marketing channels.

As Peter Drucker said 10 years ago:

“The greatest change will be in distribution channels not in new methods of production or consumption.”

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