Module II: Channel Design &Business School

Amity

Implementation
The design of the channel involves two main elements:-
i) Who shall be the members of the channel &
ii) How many of each type of channel member will be in the channel.
( channel intensity)
A number of factors are to be kept in mind while designing the
channel. Some of these factors are :-
a) Nature of the product or service being marketed
b) The expectations/ “deliverables” from the system
c) Location & nature of customers
d) Nature of competition
e) Intensity of distribution required
f) Nature of the markets being targeted
A marketing channel is required to add value to the product passing
through it !
 Channel Design & Planning Process
Amity Business School

Designing a suitable channel system requires defining customer needs,

clarifying the channel objectives, looking at alternate systems which can
meet these objectives , cost of channel & finally evaluating various
alternatives to hone in on the ideal channel system.

The process of channel design answers some of these questions :-

 What activities are the channel members required to perform? Which of
these activities is to be performed by which channel partner?
 How is the performance of these activities going to help company achieve
its customer satisfaction objective?
 The no. of channel members required in the network & of each category?
 How do we define the relationship between various channel entities?
 Contd. Amity Business School

 Are the roles & responsibilities of the channel partners clearly defined so
that there is no ambiguities and they can perform their roles without
constant reminders?
 Are all channel members clear about how they would get compensated for
their services?
 Is the compensation plan fair to all channel members with regards to the
task they perform?
 Are the channel members clear about how their performance going to be
judged & by whom , at what frequency?
 What is the risk of their performance being not upto the target ?
 Stages in channel Amity Business School
planning

egmentation Positioning Focus Development

 Segmentation stage Amity Business School

The most useful demand side insights for marketing channel design are not
about what end users want to consume rather how they want to consume
the product/service being purchased !

End –user channel preferences

 There is a need to identify not only what the consumer wants to buy but
also how he wants to buy.
 Clusters of customers on the basis of what each segment expects out of the
channel is grouped together.
 Different set of end users have different set of demands & that
understanding & responding to those demands create new business
opportunities.
For eg : a pharma company
 End user prefences/ SODs
Amity Business School

Define customer needs : defined by the desired customer service levels

expected out of channel system.

The same consists of Lot size, waiting time, choice to the customer , place
utility & service support.

Lot size : convenient size

Waiting time: time elapsed b/w the desire in the customer to buy the product
& the time when he actually buys it.
Choice to the customer :Variety of products to choose from, assortment
Place utility : depends on the intensity of the distribution
Service support: after sales service ; matters quite a lot in case of industrial
products e.g. Maruti service centres
 Contd Amity Business School

Service Outputs :
 Are basically the benefits which the channel system passes to the end
users.
 Other things being equal , the end user would prefer to deal with a channel
system which gives him greater service output.
 Louis Bucklin came out with the framework on the service outputs &
specified four generic service outputs :- a) Bulk breaking( more bulk
breaking ; higher price to the end
user)
b) Spatial convenience
c) Waiting/ delivery time
d) Product variety
 Segmenting the market by SODs
Amity Business School

• Service outputs clearly differentiate marketing channels.

• Different group of end users value service outputs
differently.

The channel segmentation process should be such that it produces

group of buyers who are
a) Maximally similar within a group
b) Maximally different b/w groups
c) differ on dimensions that matter on building the distribution
system
 Positioning stage Amity Business School

 The activities or functions that produce the service outputs demanded by

the end users are called channel flows.
 Define the channel element which is required to service each segment.
 Need to decide which channel partner is “ ideal” to meet the expectation of
different segments & how many of them are required, basically the no. &
type of intermediaries is decided.
 The sales manager also defines the service objectives & flows of each
channel element
 There are eight generic channel flows : physical possession, Ownership,
promotion, negotiation, financing, risking, ordering, payment
 Importance of positioning Amity
stage Business School

Identifying what channel flows are performed by whom and at

what level is helpful in several aspects :-
1) Helps the channel manager diagnose & remedy shortcomings
in the provision of service outputs.
2) Helps establish a new channel or revise an existing channel to
minimize the cost of providing desired service outputs
3) Helps in allocating profits equitably because…..
Compensation in the channel system should be given on the
basis of the degree of participation in the marketing flows &
the value created by the participation !
 Focus Stage Amity Business School

 The sales manager decides which segment to be addressed as

it may be impractical & expensive to target all segments.
 There can be constraints such as those of the environment,
managerial talent pool available & competition.
 Developing the right channel alternative
Amity Business School

 The sales manager has to work out best possible alternatives in

case a new channel needs to be established
 In case an existing channel exists which needs to be modified ,
the sales manager needs to identify the gaps which exist b/w
the ideal channel & existing channel .
 Needs to take steps to minimize these gaps
 Establish new channelAmity Business School

• The channel manager opts for a new channel if no channel

exists currently in the market for a particular segment.
• He needs to establish a channel design which comes closest to
meeting the target market’s demands.
• The same will be subject to the environmental & managerial
bounds constraining the design
 Refine existing channelAmity Business School

• When a pre existing channel exists in the market but is not that
effective & productive, the channel manager needs to perform
a gap analysis.
• The difference b/w a zero based and the the actual channel on
the demand &supply side constitute gaps in the channel
design.
• On the demand side, gaps mean that at least one of the service
output demand is not being appropriately met by the channel
• The SOD can be oversupplied or undersupplied.
• Supplying too much leads to higher prices to the end users
• Supplying too little will result in end users asking for more.
 Contd. Amity Business School

• In a supply side gap at least one flow in a channel is carried

out at too high a cost..
• This not only wastes channel profit margins but can also
translate as higher prices for end users which they are
unwilling to pay. This is followed by a drop in sales and thus a
fall in market share.
• Generally occurs due to lack of up to date expertise in channel
flow management or simply from wastage in a channel
 Gap Analysis Amity Business School

Zero based channel : A channel that meets the SODs & does so
at the minimum cost of performing the channel flows.
A zero based channel may not exist or may seem difficult to
build

The Gap Analysis framework considers :-

a) Sources of gaps
b) Types of gaps
c) Closing gaps
 The gap analysis framework
Amity Business School

Sources of gaps
Environmental Managerial
• Local legal constraints Lack of knowledge
• Local physical retailing infrastructure Optimization at a higher
level

Types of gaps
Demand side gaps Supply side gaps
• SOS <SOD Flow cost too high
• SOS>SOD Which flow(s)?
• Which service outputs?

Closing gaps
Demand side gaps Supply side gaps
• Offer tiered service levels Change flow responsibilities of current channel members
• Expand- contract provision of SO Invest in low cost distribution technology
• Change segment(s) targeted Bring in new channel members
 Channel Design Process
Amity Business School

Segmentation Positioning
Segmentation PositioningTargeting
Targeting Establish
Establish
new
*Define optimal • Choose
Channels
new channels
* Define SODschannel flow segments to
*Channel flow
by performance target to
Performance
segment for each *Channel structure
* Identify Channel *Environment
environment *Define optimal Bounds
-al
*Managerial Refine existing
characteristic channel structure Refine existin
for each segment Bounds Channels
-s &
constraints *Competitive
channels
*Gap analysis
benchmarks *Channel flow
Performance
*Channel structure

Channel Design Process

 Examples of channel systems
Amity Business School

Category of Channel objectives

product
Industrial/ technology Direct marketing to a small no.of customers

Consumer products Large no. of end users/intensive distribution

Frozen desserts/ ice creams Cold chain supported channel system

Fertilizers, pesticides/ seeds Rural based channel system

Pharmaceutical products Requires different set of partners to handle

doctors, chemists, hospitals
Multi level marketing Distributors to recruit more distributors

House construction items Distributors of hardware