Any change in a distribution strategy can be risky.  A miscue can affect your market share or costs very quickly.  Other channel participants may have strong influence over buying behavior and, therefore, the ability to move substantial sales volumes in response to real or perceived threats.  Emotion can play as large a role as financial logic.  It is difficult to recover after losing the trust of a key channel partner. 

Our proven approach will help you select the best marketing channels in light of these real world risk factors.  Successful implementation is an integral part of IRCG’s design process, not an afterthought. 

How do you know if it’s time to re-evaluate your channels?  Declining market share is an obvious signal, but the seeds of decline are usually planted much earlier.  Channel re-design should be considered whenever any of the following occur:

§      You introduce a new product.  Although it may seem similar from a functional or manufacturing standpoint, the new product may be a poor fit for existing channel members, because the customer base or required service outputs are different.  For example, a leader in the commercial construction industry introduced what it believed to be a simple product extension but failed to recognize that the bundle of services required was entirely different from those of its existing products. Over the course of a year the company tried in vain to force its channel partners to sell the new line, while a major competitor with a more aligned strategy came to dominate the market.  In the end, the company had to withdraw the product.

§      Your core customer base has evolved to new buying patterns or preferences.  Over time customers change in many ways and formerly successful approaches can become vulnerabilities.  (need a good example here)

§      Your core customer base is limiting your growth.  While customer intimacy is one of the hallmarks of a successful supplier, there are risks in becoming too reactive to the customer base.  For example, manufacturers of electrical equipment enjoyed a strong and profitable bond with traditional electrical contractors for many years.  However, this focus caused them to largely miss the high growth of emerging low voltage products because contractors had little interest in this business.  Instead, the market went to a new breed of system integrator who had completely different buying habits. 

§      New competitors or channel plays have entered your market space.  More and more firms are recognizing that market channels can offer as much differentiation as product features or pricing.  They are becoming more innovative at creating channel combinations for different customers or even the same customer under different situations.  If your competitors are moving more functions onto the web, adding tiers of service levels for different customer types or realigning their distribution channels, it may be time to examine your own channel strategy.  

§      Your product has matured.  Products at different points in the product lifecycle require different strategies.  Many firms continue to use early stage approaches, such as selective distribution and expensive direct sales forces, for products that have become commodities.  Competitors who eschew these investments may be able to meet minimum acceptable levels of customer service at a lower price point.   

Analysis Methodology 

Our methodology is the result of 21 years of experience and refinement.  It directly addresses all aspects of channel performance through a rigorous, data-intensive process.  The first step is to identify customer segments based on their service output requirements (e.g. bundling, spatial convenience, financing, technical support).  These findings chain backward into an analysis of the incumbent channel players, and forward into how these services can be provided most cost effectively.  The result is what we call the channel story: a crisp, coherent, actionable description of key behavior drivers.  Although this story is ideally quite concise, it is the result of significant data collection and analysis activities, potentially including review of publicly available and third party data sources; primary research through surveys and focus groups;  market sizing and modeling; and IRCG’s proprietary adaptive interview process. 

The Proprietary IRCG Channel Analysis Framework 

Based on the channel story, we proceed to design optimized channels to provide manufacturers with a clear line of sight to their chosen customers.  This involves an analysis of channel segmentation, coverage and economics. 

§      Proper segmentation ensures that each customer grouping will have its service demands met at an acceptable level.  For example, project contractors receive bid support and best pricing while retailers receive frequent deliveries from stock. 

§      Coverage ensures that the manufacturer’s products are visible and easily available to potential customers at the right time.  For example, an industrial MRO buyer can easily include the products on a supply house purchase order and a consumer can quickly find application information on the web.   

§      Favorable economics ensure that the channel provides required services at an acceptable cost and offers partners a viable economic return.  For example, sales reps who call on architects are compensated for the resulting sales, even though the order flows through a builder. 

§      In an optimized channel, the cost of and value provided by channel partners are equal.  For example, a supplier of a secondary or tertiary product line may need to focus on partner selection and compensation (i.e. gross margin), while a primary supplier may find more value in actively managing its distribution partners. 

Market Coverage and Economics 

At a high level, manufacturers have four channel options for reaching a customer segment: direct, exclusive, selective and open.  These options can be combined in different ways for different customers, different situations and different parts of the service bundle.  For example, a manufacturer may have a direct sales force for demand creation but use selective distribution for demand fulfillment (order taking, logistics, financing). 

The direct approach is the most intensive and most expensive option.  It can be thought of as the narrow but deep approach.  The manufacturer enjoys total control and mind share over the channel, but it can’t spread the costs over anything except its own product line.  Manufacturers often believe they are paying channel partners too much gross margin for the services provided, especially if the manufacturer performs some typical downstream functions such as does drop shipping (reducing the need for channel partner inventory), demand creation (reducing the value of channel partner sales forces) or providing post-sales customer support.  A disciplined analysis can readily determine the costs and benefits of increasing direct sales, including the potential impact on partner behavior and the realistic ability of the manufacturer to provide the additional channel services. 

Exclusive channels use a single partner (e.g. distributor) for a given geographic area or clearly defined market. Caterpillar, with about one dealership per state, provides a good example of an exclusive channel.  The approach is typically used for products which require extensive investment and/or are early in their lifecycle, but can still benefit from being bundled with complementary products and services.   It is appropriate for Caterpillar for several reasons.  Cat’s high market share and awareness mean that customers typically choose the product first, and then find a dealer who carries it.  Therefore, Cat doesn’t lose substantial business by not being more widely available.  Since owning a Cat dealership requires a considerable investment, dealers must be given an offsetting financial incentive, which is provided by the exclusivity.  An exclusive channel is every distributor’s dream, and they will make a concerted effort to convince manufacturers that they should have exclusive territories because they have relationships with every conceivable customer who could use their product.

Selective channels are more common.  They are appropriate for maturing products and customers requiring a modest level of support and bundling.   Suppliers establish performance criteria for channel partners (e.g. customer service levels, promotional participation and sales resources) and then select only those which meet those requirements. Selective distribution is common when a product line is primary or secondary in a channel partner’s business, i.e., it’s the reason he is in business and he has to be able to make money on it.  Typically, there are several partners that meet the manufacturer’s criteria within the same geography, and this overlap must be managed.  Ideally, selective channels have enough partners to ensure market coverage but not so many that channel partners can’t make money on the line.

Open distribution means that any channel partner who wants to buy and sell a manufacturer’s products can.  This is generally appropriate for mature products and/or those that are tertiary to the channel (less than 1% or 2% of total revenue).  In these situations there is no such thing as too much coverage because no one is expected to make significant investments in the product line.  Customers don’t chase these products but will buy them along with their primary and/or secondary product purchases.