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A New Metric for Sales
Channel Management
   Channel Diversity Index

                 | 2009
           May
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
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
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.
About Forte Consultancy Group

Forte Consultancy Group delivers fact-based solutions, balancing short and long term
impact as well as benefits for stakeholders. Forte Consultancy Group provides a variety
of service offerings for numerous sectors, approached in three general phases -
intelligence, design, and implementation.

                                                 For more information, please contact
                                                          info@forteconsultancy.com




           Forte Consultancy Group | Istanbul Office
                         www.forteconsultancy.com

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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. 1 ������ℎ������������������������������ ������������������������������������������������������ ������������������������������ (������������������) = ������ 2 ������=1 ������������ ������������������������������������������ ������������ ������ℎ������ ������������������������������������������ ������ℎ������������������ ������ = ������ = ������������������������������������ ������������ ������������������������������������������������ ������������������������������������������ ������������ ������ℎ������ ������ℎ������������������������������ 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.
  • 5. About Forte Consultancy Group Forte Consultancy Group delivers fact-based solutions, balancing short and long term impact as well as benefits for stakeholders. Forte Consultancy Group provides a variety of service offerings for numerous sectors, approached in three general phases - intelligence, design, and implementation. For more information, please contact info@forteconsultancy.com Forte Consultancy Group | Istanbul Office www.forteconsultancy.com