An article that introduces a new metric for sales channel management, channel diversity index

1. A New Metric for Sales
Channel Management
Channel Diversity Index
| 2009
May

2. A New Metric for Sales Channel Management | Channel Diversity Index
Across numerous different sectors in an ever-increasing manner, companies are
agreeing with external parties to serve as a part of their sales channels – and, in
some cases, to serve as the sole sales channel. The traditional driving factors for
this shift? Companies are trying to gain certain valuable benefits, such as
increasing their number of sales points, utilizing external parties’ store traffic or
decreasing the operational burden of sales and distribution.
These benefits can bring with them some concerns as well. If and when one of the
external parties begins to represent a significant source of a company’s sales, that
party can cause havoc. With such bargaining power in hand, these kinds of
partners can drive down margins and make demands on the parent company that
can completely wipe out the benefits once obtained. Alternatively, they can take
their business to the competitor if their demands are not met. Such is the
situation that often happens when external partners grow too big.
To prevent such a nightmare scenario from occurring, companies should, and
need, to keep a constant tab on the power of their sales partners. Executives who
define corporate strategy, sales strategy or channel strategy need to ensure there
is always enough diversification in their sales channels to prevent one partner
from gaining too much bargaining power.
Although executives can manage diversification related issues when they have
one or two partners, it is quite difficult to effectively manage the channel’s overall
diversification without a numeric measure when the number of partners is
greater. The Channel Diversity Index (CDI) can be used to measure and to monitor
the power of any one given partner over time.
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For a given number of sales channel partners, CDI increases when the equitability
of the partners increases. For a given equitability of the partners, CDI increases
when the number of partners increases. The bigger the CDI, the more diversified
(and usually less risky) the channel composition is.
This index can be used to monitor the diversity of the channels that have
relatively small number of elements as well as for those channels that have
hundreds of thousands of sales points. For where the number of partners grows,
CDI needs to be calculated more often, on a deeper level (i.e. region by region
rather than on a national scale). Also CDI can be derived for different products or
product groups. Diversity variation of different products in the channel will

3. require extra attention from the product management/channel management
perspective.
Calculation of the CDI index for a certain product is shown below, with a disguised
and masked example. The figures are from a mobile operator in a developing
country. In its dealer channel, the prepaid revenue figures are tabulated in Table
1, in the countries’ currency.
2008 2007
Partner 1 25,516,407 16,727,553
Partner 2 16,563,785 16,735,254
Partner 3 15,318,653 9,495,918
Partner 4 15,214,561 14,429,633
Partner 5 9,763,377 5,581,994
Partner 6 9,267,298 7,676,713
Partner 7 9,045,847 5,382,819
Partner 8 3,144,206 1,544,462
Partner 9 3,131,338 -
Partner 10 2,337,305 1,240,965
Partner 11 1,628,893 1,617,708
Partner 12 1,502,445 1,776,180
Partner 13 948,682 1,042,249
Partner 14 278,833 87,154
Partner 15 118,872 51,356
Total 113,780,503 83,389,957
Table 1 : Prepaid Revenues of the Channel Partners 2007-2008
As you can observe, there exist significant differences in the channel partners’
revenues between 2007 and 2008. In year 2007 the channel had 14 partners - in
2008 the company added another (Partner 9). After the new volume figures and
new partner, CDI changed significantly. Table 2 shows the calculation of CDI for
year 2007 and 2008.
2008 2007
2008 2007
p p2 p p2
Partner 1 25,516,407 16,727,553 0.224 0.050 0.201 0.040
Partner 2 16,563,785 16,735,254 0.146 0.021 0.201 0.040
Partner 3 15,318,653 9,495,918 0.135 0.018 0.114 0.013
Partner 4 15,214,561 14,429,633 0.134 0.018 0.173 0.030
Partner 5 9,763,377 5,581,994 0.086 0.007 0.067 0.004
Partner 6 9,267,298 7,676,713 0.081 0.007 0.092 0.008
Partner 7 9,045,847 5,382,819 0.080 0.006 0.065 0.004
Partner 8 3,144,206 1,544,462 0.028 0.001 0.019 0.000
Partner 9 3,131,338 - 0.028 0.001 0.000 0.000
Partner 10 2,337,305 1,240,965 0.021 0.000 0.015 0.000
Partner 11 1,628,893 1,617,708 0.014 0.000 0.019 0.000
Partner 12 1,502,445 1,776,180 0.013 0.000 0.021 0.000
Partner 13 948,682 1,042,249 0.008 0.000 0.012 0.000
Partner 14 278,833 87,154 0.002 0.000 0.001 0.000
Partner 15 118,872 51,356 0.001 0.000 0.001 0.000
Table 2 :Calculation steps of CDI

4. The sum of p2 in 2007 was 0.142, CDI was thus calculated as 7.04. In 2008 the sum
of p2 was 0.130 and CDI thus rose to 7.68.
This shift in CDI means the company achieved to have a more diversified channel
in 2008 compared to 2007. The driving reasons behind this were the introduction
of a new partner and the changes in revenue.
CDI can effectively be used by companies on an ongoing basis to assess the
current state of their sales channels (i.e. to measure the importance of a given
partner to the overall channel portfolio, the channel structure change over the
years, etc.) as well as to design new channel strategies (i.e. initiation or
cancellation of a partnership, partner favoring campaigns, etc.).
Although a diversified channel reduces some risks, it complicates the
management of the channel with more players or comparably important partners.
Companies should have proper channel management enablers (organization,
channel segmentation, incentive systems, channel processes, etc.) to support
effective management of diversified sales channels. Sustainable success in sales
channel operations will then be realized.

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