1. Chapter
12
Designing Channel Systems
SDM- Ch 12 Tata McGraw Hill Publishing 1

2. Learning Objectives
• Understanding customer needs to define
channel objectives
• Channel design factors, components, issues,
steps and process
• Method of evaluating various channel
alternatives
• How channel partners are: selected, trained
and kept motivated
• Principles of vertical integration and
electronic channels
Channel design factors….
SDM- Ch 12 Tata McGraw Hill Publishing 2

3. Channel Design Factors
• Product mix and nature of the product
• Width and depth of market / outlet coverage
planned
• Long term commitments to channel partners
• Level of customer service planned
• Cost affordable on the channel system
• Channel control requirements of the company
Steps….
SDM- Ch 12 Tata McGraw Hill Publishing 3

4. Channel Design Steps
• Define customer needs
• Clarify channel objectives
• Look at alternative systems which can
meet these objectives
• Estimate cost of operating the channel
system
• Evaluate available alternatives
• Finalise the ‘ideal’ system
SDM- Ch 12 Tata McGraw Hill Publishing
Customer needs….
4

5. Customer Needs
• Lot size – most convenient pack size which
the consumer can buy at a time
• Waiting time – time elapsed between the
desire to buy the product and the time when
he can actually buy it – should be almost zero
• Variety – choice of products, brands, packs
• Place utility – choice of buying where he
wants. For a consumer product it has to be at
a location closest to his residence
Components …
SDM- Ch 12 Tata McGraw Hill Publishing 5

6. Channel Design Components
• Revenue generation or the commercial
part
• Physical delivery of the goods or
services – the logistics part
• The ‘service’ part to take care of after-
sales support
• Each part of the system is likely to be
handled by a different entity.
SDM- Ch 12 Tata McGraw Hill Publishing Design issues…. 6

7. Channel Design Issues
• Activities required and who will perform
• Activities relationship to service levels
• Number of channel members required
and the relationship between categories
• Roles, responsibilities, remuneration
and appraisal of performance of
channel members
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8. Channel Design Process
Similar to any other marketing task
Segmentation
Positioning
Focus
Development
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9. Segmentation
• Putting customers in similar clusters based
on their needs
– Doctors who prescribe medicines
– Chemists who dispense medicines
– Hospitals and nursing homes who use them
• Each segment has a different need to be
serviced by the channel
• Gives an idea to the sales manager as to the
kind of channel members he should be
planning for.
SDM- Ch 12 Tata McGraw Hill Publishing 9

10. Positioning
• Defines the channel element required to
service each of the segments
– The sales manager decides the channel partner
who is ‘ideal’ to meet the expectations of the
segments.
– The number of each category of intermediary is
also decided based on the number of customers
to be serviced in each segment.
– The service objectives and flows for each channel
partner are also frozen
SDM- Ch 12 Tata McGraw Hill Publishing 10

11. Focus
• It may not be possible to meet the
needs of all segments – cost and
practicality considerations (the
managerial talent available for instance)
• The sales manager has to firmly decide
which of the segments he will service
• The competitive scenario also helps in
this decision
SDM- Ch 12 Tata McGraw Hill Publishing 11

12. Development
• At this stage the channel system is being put
in place to achieve the objectives
• Select the best of the alternatives
– Comparison with the most successful competitor
could be a good benchmark
• Channel partners of competitors may be
willing to share best practices of their
principals
• For modifying an existing channel, the gap
between the ideal and the existing is to be
identified for remedial action.
SDM- Ch 12 Tata McGraw Hill Publishing 12

13. Channel Objectives
• Defines what the channel system is supposed
to do to support customer service.
• Customer needs could include:
– Lot size convenience
– Minimum waiting time
– Variety and assortment
– Place utility
• The product characteristics and the market
profile also impact the objectives.
• Competition could also affect the objectives
SDM- Ch 12 Tata McGraw Hill Publishing 13

14. Channel Alternatives
• Are planned after deciding the customer
segments to be serviced and the levels of
service
– Business intermediaries currently available like
C&FAs, distributors, dealers, agents wholesalers
and retailers.
– The number and type of intermediaries required
– Developing new channel types
– Roles of each channel member
SDM- Ch 12 Tata McGraw Hill Publishing 14

15. Evaluation of Major
Alternatives
Cost of operations
Ability to manage
and control
Adaptability
Range and volume
to be handled
Criteria for evaluation
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16. Evaluation Critieria
• Cost:
– If existing sales force can be expanded cost
effectively, this is the best alternative
– Cost of alternatives at different volumes can only
be estimated for comparison
– System with the lowest cost is preferred
• Adaptability – the channel should be flexible
to handle different types of markets and
changes in the market conditions
• Volume and range to be handled – Capable
even when business grows or expands
SDM- Ch 12 Tata McGraw Hill Publishing 16

17. Evaluation Criteria
• Ability to manage and control:
• Distribution network being an extended arm of
the company, the channel partners have some
obligations
• Operating guidelines specify these rules
• The channel system should help the company
enforce these rules fairly to all channel partners
• Some of the operating rules are……
• Company trains channel personnel and
provides proper product literature
SDM- Ch 12 Tata McGraw Hill Publishing 17

18. Selecting Channel Partners
• Getting good channel partners is a difficult
part of doing business
• Some of the methods employed to select
channel partners are:
– Sales people identify prospects and talk to them
– Press advertising (industrial goods)
– Existing channel partners can give good
references
– Competitors’ channel members for reference, not
poaching
SDM- Ch 12 Tata McGraw Hill Publishing 18

19. Selection Criteria
• Qualitative: willingness, confidence in
company products, willingness to abide
by company rules, building company
image, innovativeness etc
• Quantitative: financial status,
infrastructure, location, present
businesses, customer relationships,
market standing etc
SDM- Ch 12 Tata McGraw Hill Publishing 19

20. Training Channel Members
• Starts from the time of recruitment
• Channel member owner and his staff
• Market views channel member as part of the
company – he has to behave in a like manner
– hence training assumes significance
• Training could be on the job field training or
classroom training
• Training is an ongoing process.
SDM- Ch 12 Tata McGraw Hill Publishing
Subjects….. 20

21. Subjects for Training
• Field training on how the markets are to be
worked to achieve sales, collect payments
and ensure the right kind of merchandising
• Class room training on company products,
competition and how to tackle it to gain
market shares
• Special meetings for new product launches
• Submitting reports and maintaining records
• Statutory compliance
SDM- Ch 12 Tata McGraw Hill Publishing 21

22. Subjects for Training
• Care of company products
• Technical specifications and answering FAQs
of customers
• For technical and industrial products –
recognition of specs, installation procedure,
repair and maintenance and effective
demonstrations
• Servicing of automobiles and other
engineering products
Motivation….
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23. Motivating Channel Members
• Ambitious volume and growth targets –
continuous motivation required to achieve
• Motivation includes:
– Capacity building programs
– Training
– Promotions support
– Marketing research support
– Working with company personnel
– Incentives
“power”……
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24. French & Raven
“Power” of Motivation
• Reward – positive support
• Coercion- threat of punitive action
• Referent – positive effects of association
• Legitimate – enforcing a contract
• Expert – support of special knowledge
• Support – additional benefits for performers
• Competition – pitting against peers
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25. Role of ROI…..
Channel Members Evaluation
• Effectiveness of the distribution channel
determines the success of the company
• Company would like its channel partners to
perform at the highest standards possible
• Need to constantly evaluate performance on
sales targets, coverage, productivity,
inventory holdings, attending to servicing
requests etc
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26. ROI as a Measure
• Leading FMCG companies feel that an ROI of
30% for a distributor is healthy and is a fair
indication that he is performing well.
– If the ROI is more, additional tasks are given
– If the ROI is less, the company may provide
additional support
• Post evaluation tasks include counseling,
retraining and motivating. In extreme cases it
may result in termination.
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27. Performance Evaluation
• On pre-agreed tasks only. No surprises.
• Specific targets on periodical basis are set.
– Targets on volume and outlet productivity could be
for a week or a month
– Targets relating to increasing market shares or
total outlet coverage could be for 6 months
– Different weightages could be given for each of
the parameters for evaluation
• The performance appraisal is open and
transparent
Modifying a network..
SDM- Ch 12 Tata McGraw Hill Publishing 27

28. Steps for Modifying Networks
• Service level desired and willing to deliver
• Activities required to deliver service level,
who will do it and at what cost
• Derive ideal channel structure and compare
with existing to know gaps by evaluating
based on standard parameters relating to
effectiveness and efficiency
• Action to bridge the gaps and put modified
channel system into place
• Define key performance indicators
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29. Channel Comparison Factors
Efficiency
Effectiveness
Scalability
Flexibility
Consistency
Reliability
Integrity
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30. Non-store Retailing
• Selling door-to-door
• Vending machines
• Tele-shopping networks
• Selling through catalogs
• Other forms of direct selling
• Electronic channels
Electronic channels…
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31. Retailing on the Internet
• Unlimited assortment
• Items may not be on hold
• No product touch or feel
• More information makes the customer a
better shopper
• Comparison shopping possible
• Consumer has to plan purchases ahead
• No need to handle cash – payment can be
on-line
• Shopping is 24X7
Vertical integration….
SDM- Ch 12 Tata McGraw Hill Publishing 31

32. Vertical Integration
• This means owning the channel. The
company does the work of production,
branding and distribution.
• Downstream integration means the
producer of the goods also does the
distribution – Eureka Forbes, Bata
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33. Vertical Integration
• Upstream integration means the seller
also produces the goods – private
labels of modern retailers.
• If the organization does the work of
production, branding and distribution, it
is said to be vertically integrated.
• Vertical Integration provides better
control over the distribution function
Outsourcing..
SDM- Ch 12 Tata McGraw Hill Publishing 33

34. Outsourcing Distribution
• Is the most prevalent situation as:
– The ‘reach’ is better
– The cost may be lower
– The company can exploit the ‘core competence’ of
its channel partners, which is distribution
• Vertical integration is a choice which will
become long term and cannot be easily
changed once the resources have been
committed.
• However, direct distribution (owning the
channel) is still the best solution for ‘intensive’
distribution.
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35. Key Learnings
• The nature of distribution channels required
in different situations is based on a number of
factors
• Channel design takes into account all the
service deliverables required by customers
• Intensity of distribution determines the
number of intermediaries required
• Distribution can be in-house (vertical
integration) or out-sourced
• Channel design alternatives are assessed
primarily on effectiveness and efficiency
SDM- Ch 12 Tata McGraw Hill Publishing 35

36. Key Learnings
• Channel alternatives are evaluated on cost,
ability to control, adaptability and capability to
handle range and volume.
• Training of channel partners can be in the
class room or on the job and is a continuous
process
• Motivating channel partners can be done
using different ‘power’ equations
• There are different formats of non-store
retailing like catalogues, internet etc
• Electronic channels are used to sell products
to consumers directly
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