Designing customer oriented marketing

channels

How channel members add value

Mitigating risk , minimizing management cost, maximizing utility

Why is distribution channel management so important

• The distribution channels are the interface with the customers.

• Channel decision are difficult to change.

• Channels could be a major bottleneck.

• Channel could be used as a differentiator.

• A well defined channel strategy is needed to achieve the segmentation objective.

What is customer oriented channel

• The channel in which the design objectives are predominantly on the basis of customer requirements.

• The idea is to design and implement a distribution channel that can deliver the services desired by the target customers in the most viable manner.

• It is to be understood that while customers would seek certain level of convenience, the cost of delivering that convenience is also an important factor.

• Customer oriented channel should make a trade-off between the level of service provided and the cost involved in providing that service.

Designing a customer oriented channel

• It starts with the analysis of the service demands of the customer segments sought to be targeted by the channel.

• Once the specific needs of the customers are known, it becomes easy to work and decide on the activities to be performed and the type of entity best suited to perform the activities.

• However, it may not always be feasible to offer services at the desired levels. Reason could be the enormous cost involved or it might be logistically impossible.

• For instance,

A chain smoker would like to have a facility wherein if he rings up a shop, cigarettes in small quantity would be delivered at his house. It is logistically possible, but will be highly costly.

Similarly,If a manufacturing plant wants its raw material to be delivered within a few hours of ordering, it may not be possible most often because, even if it is not very costly, the existing distribution setup would preclude it.

Channel design process

List down all service outputs that the channel needs to offer.

Develop the levels at which each of the service outputs have to be offered.

Work back from each of the service output levels and conceive the activities that have to be performed to fulfill these service output objectives.

Calculate the cost incurred for performing these activities.

Design the ideal channel structure, which will consist of a network of members performing certain functions so that the service output objectives are achieved

at minimum cost.Compare the ideal channel structure with the channel structure that is existing in

reality so as to modify the ideal channel structure.

Assess the ideal channel design within terms of channel selection criteria like effectiveness, efficiency,equity,scalability and flexibility.

Develop the channel establishment/ modification plan.

Capturing the customer requirements

• Service output demand framework helps in capturing the needs of customers in an objective and systematic manner.

Bulk breaking:• A process wherein goods that are manufactured in large volumes

are broken into smaller units at different locations which are consumed by the end consumers.• Some necessary functions that the channel has to perform to offer

the desired lot size include:• Ordering and payment collection at a massive scale.• Storage space.

Spatial convenience:

• defined as the extent of convenience offered by the channel in terms of the distance that a customer has to travel before availing the service of the channel.

• It depends on the measure of channel intensity.

• Customers, usually draw up a mental estimate of the distance that they will travel to acquire a product or service at a particular price.

• An effective method of measuring the adequacy of the intensity of distribution is to benchmark it with your competitors.

• E.g.: a housewife would normally prefer to buy all her groceries from shops which are at a distance of not more than 2 miles from her residence.

but if the same groceries are available at 10% less, she would not mind travelling another two miles to buy it at cheaper rate.

Though if a 20% discount is available at a store that is 50 miles away, she certainly would not that far just for that extra 10% reduction.

Thus, we can generalize that the distance a customer is willing to travel to purchase a product is proportional to the unit price of that product.

Waiting time:

• Time that the customer has to spend before availing of the services of the channel.

• If one has to purchase a bottle of soft drink, one expects the waiting time to be zero. At the same, if one is about to purchase a car, one would not mind waiting for a couple of weeks.

• The extent to which a consumer would tolerate a waiting period would depend on factors such as product characteristics, purchase occasion and consumers inherent tolerance capacity.

Assortment:

• Generally, products are brought in assortment.

• Assortment is the service which involves making available at one place products that are normally bought together.

• HP India understood the need of small and medium business enterprises and is planning to set up a one-stop shop to fulfill all their IT needs.

• Called “ Xtreme Value Business Points”, these outlets will have all the solution and services needed.

• Eg. Customer buying a watch would be very happy if watch repairing service is also available at the same premises.

Conceiving the channel flow

Classification scheme of channel flows

FLOW NAME EXPLANATION

PHYSICAL POSSESSION Transportation and storage of the product in order to physically deliver the product to the end user.

OWNERSHIP Nominally taking title to the product so that in case the product is damaged or lost due to any reason, the loss is accounted for.

PROMOTION Promoting the product to the customers in several ways such as advertising, displaying, demonstrating etc.

NEGOTIATING Coming to an agreement about the terms of trade with the channel entities including the customer.

FINANCING Taking care of the financial requirements (working capital) of members of the channel.

RISK TAKING Underwriting the risk associated with the possession or ownership of the channel including warranties for after sale services.

ORDERING Receiving and recording the order, consolidating it and passing it on to other channel members.

PAYMENT Receiving payment, recording it, consolidating it and passing it to other channel member.

Linking the service output objectives to the flows

• Physical possession flow directly contributes towards achieving greater level of spatial convenience, reducing the lot size required and bulk breaking and waiting time reduction.

• If the physical possession activity is not performed in the most ideal manner the products will go out of stock quiet often as they will not be stored nor transported at the right place and at the right time.

• Physical possession also contributes indirectly to the assortment flow as transportation and stocking activities are considered to bring together the most appropriate assortment of goods for the customer.

• Ownership flow contributes indirectly towards achieving greater levels of spatial convenience.

• Ownership flow enable the channel to pass on the costs associated with the ownership of the product through the channel.FLOW DIRECT CONTRIBUTION INDIRECT

CONTRIBUTIONPHYSICAL POSSESSION Spatial convenience, bulk

breaking, waiting timeAssortment

OWNERSHIP Spatial conveniencePROMOTION Spatial convenienceNEGOTIATION Spatial convenience, bulk

breaking Assortment

RISK- TAKING Waiting time, bulk breaking, spatial convenience

FINANCING Spatial convenience, waiting time, bulk breaking

Assortment

ORDERING Bulk breaking, spatial convenience, waiting time

PAYMENT Bulk breaking, spatial convenience, waiting time

Conducting cost analysis

• The cost associated with all the flows adds up to form the cost of distribution. The cost of distribution of any distribution system will normally reflect the price of the product to be paid by the customer.

• eg. If a product is produced at a far off location, a part of price paid by the customers include the cost of transportation of goods.

• One of the biggest hurdle in estimating cost is the non- availability of precise and accurate costing data. This is because the costs are incurred at several points in the distribution process and by several parties.

• While designing ideal channel, it is important to consider the remuneration that each channel member has to receive. The remuneration should not be confused with margin.

• Margin includes both the remuneration as well as the amount required to perform the activity.

• Eg. If the margin received by the channel member id 10% and works out to say Rs.200, it would cover both the cost incurred as well as the profit.

• The remuneration has to be in tune with:(a)The cost of performing the activity(b)The criticality of the activity

Designing the ideal channel

• The design effort would involve decisions about:(a)Service output levels(b)Flow or activities associated with the achievement of service output levels(c)Type of entity that would be entrusted with the performance of each of these

flows.

• Having understood the needs of the customers with regard to the channel service outputs from the analysis of the customers and competitor’s level of service output offerings, the channel designer would have a fair idea about the objectives to be set for the service output types and also any new type of service output valued by the customer

• The next step on designing the ideal channel is to see how these requirements can actually be achieved.

• Eg. Taking the case of Lakme :

• While most cosmetic manufacturers concentrated on achieving higher levels of spatial convenience, Lakme differentiated itself by providing beauty advice to the customers who visited select shops.

• The company brought in promotion as a service output to be provided by the channel.

• The company arranged to appoint specially trained sales person to advice the customers about the type of cosmetic that will suit them.

Comparing the ideal with reality• The need for looking a existing distribution system emanates from two

reasons:(a)Existing distribution system would give ideas and insights about the

task performed by the entities and problems if any related to it.(b)The need to understand the equilibrium that exists in the system.

• Equilibrium in a channel system would mean that all the members in the system are getting sufficient rewards to motivate them to perform their tasks in the most effective manner and also that all the needs of the customers are met to the extent the customers are willing to pay for.

• The best channel design practice is to conceive the ideal design and compare it with the existing system and make modifications wherever feasible.

Comparing the channel designs

• Channel designs are compared in terms of following criteria:

Effectiveness:analyzing whether objectives set for the channel are achieved. eg,. If one of the objective includes zero waiting time, the effectiveness criterion would look at whether this service objective can be achieved without fail by the channel system.

Efficiency:Concerned with the inputs expended for achieving the level of outputs. If two channel deliver the same output but one channel design requires fewer inputs then it is deemed to be mare efficient.

Equity:The constituents of the channel should be remunerated to the extent of their participation in the channel. If remuneration pattern does not follow equity principle the entire channel would become highly unstable and ineffective.

Scalability:If there is an unusual surge in demand can the channel system handle it? This criterion becomes important in case of products where it is not very easy to predict demand accurately.

Flexibility:If the demand pattern changes or new products are introduced at frequent intervals, will the channel system be able to fulfill the rapidly changing demand?

Channel establishment plan• It is the detailed blueprint of the process of setting up the channel.

It includes:

• The main purpose of the channel to be set up: it is a statement of the aims and objectives of the channel.

• The profile of the customers who are the target market for the channel: describing the characteristics relevant to the channel. If a channel is set up to deliver pizzas, the profile can be defined in terms of geographic location, average family income etc.

• Needs and requirements of the target market with regards to the identified service outputs provided by proposed or existing channel

• Analysis of the operations of the existing channels that deal in similar product/service line: essential to understand the logistical complexities as well as set benchmarks for the channel.

• Detailed activity chart for achieving the service output objectives: list of activities as well as the sequence of performing these activities for achieving the objectives of the channel.

• Details about the various channel constituents who will be performing these tasks: the channel would include specialists vs. non- specialists. Eg. The distributor would be exclusive or can the distributor carry other lines? Will the distributor take title to the goods?

• The cost of performing the activities: coting has to be carried out so that the total cost of he channel can be ascertained.

• The designated roles and responsibilities of the channel constituents: it is important to have clear understanding of the purpose served by a channel member in the channel system.

• The proposed remuneration for performing the roles and responsibilities: remuneration would reflect the roles and responsibilities to be performed as well as the cost of performing these activities.

Standards for measuring the performance: most of the performance standards are based on achievement of targeted sales. Building a customer oriented performance measure is an important component of designing a customer oriented channel.

Procedures foe reporting and information sharing: reporting framework must specify the type of information that has to be shared, the periodicity of sharing the information, the mode of providing the information etc.

Monitoring mechanism: includes reports that have to be sent on regular basis, plan for personal inspection and visits by the representatives of the parent company and other point of contact between the company and channel embers.

Criteria for appointing the channel members: the components of criteria would include factors such as:(i) investment capability(ii)Related experience(iii)Past history etc.

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