Unit 5: Channel Planning and Design LH 7

Meaning of channel planning and design; Process of channel

planning - complete understanding of existing channel
conditions and challenges, conduct competitor channel
analysis, assess opportunities in existing channels, develop a
near-term plan of attack, conduct gap analysis, identify and
develop strategic options, conduct qualitative and
quantitative end-user analysis, develop an ideal channel
system; Types of channel design – vertical, horizontal and
hybrid channel; Factors in channel designing - efficiency,
effectiveness, capacity, agility, consistency, reliability,
integrity; Setting channel policies and strategies – market
coverage, customer coverage, pricing, product lines,
selection of channel members, termination channel partners,
ownership of the channel, legal constraints.
• Meaning of Channel Planning and Design
• A channel strategy is a vendor's plan for moving a product or a
service through the chain of commerce to the end customer.
• Channel design refers to those decisions involving the
development of new marketing channels where none had
existed before or to the modification of existing channels.
• Channel design is presented as a decision faced by the
marketer, and it includes either
- setting up channels from scratch or modifying existing
channels.
- Modifying existing channels is referred to as reengineering the
channel and in practice is more common than setting up
channels from scratch.
• The term design implies that the marketer is consciously and
actively allocating the distribution tasks to develop an efficient
channel, and the term selection means the actual selection of
channel members.
• Finally, channel design will be used as a strategic tool for
gaining a differential advantage.
 Process of Channel Planning
a) Complete Understanding of Existing Channel Conditions and
Challenges
• To determine the process of channel planning firstly understanding
the present condition of existing channel is necessary.
• Producers should firstly understand the nature of product, their
current standing in the market, the behavior of consumers, etc.
• Based on this factor, the channel can be either big & influential, or
small or mediocre.
• The capability & shortcomings of the existing channel must be
understood.
• The willingness & ability of the existing channel must be analyzed.
• This helps to understand the strength & weakness of the channel.
Thus, opportunity & challenges can be determined.
• This is the very reason why the complete understanding of channel
is necessary before starting the channel planning process.
b) Conduct Competitor Analysis
• During the channel planning process,
attention should also be given to competitors.
• The nature of competitor & their strategies
should be analyzed.
• The type of distribution channel used by
competitors, services provided by them, and
the location of distribution must be analyzed.
• Along with this the competitor’s depth in
distribution, the relation between the
distributors should also be considered.
• The strategies used by the competitors can be
reference for developing a distribution plan.
c) Assess Opportunities in Existing Channels
• The opportunity lying in the existing channels
must be identified & assessed.
• Good relation with distributors & channel
members or easy access to channel members
are opportunities.
• The ability & support of channel member are
always favorable.
• Thus the availability of channel members,
relationship with them, their capability, and
their position in the market must be assessed.
d) Develop a Near-term Plan of Attack
• Near-term means relating to what will happen soon
and not what will happen further in the future
• Plan of attack means an organized measures to be
taken in order to achieve a goal.
• Near-term plan of attack is a short term distribution
strategy to win over competitors.
• The distribution policies & practices to be adopted in
the initial days must be developed.
• Such distribution policies & practices should be such
that others/competitors cannot mimic it.
• And make competitors surprised and confused.
• Such strategies are usually unexpected by other and
can be adopted only for short time, and not for
lengthy time period.
e) Conduct Gap Analysis
• Gap analysis involves the comparison of actual performance
with potential or desired performance.
• The gap in the distribution channel must be identified so that
the gap can be filled up. It includes the following steps:
- first, the current state of distribution must be identified. The
performance or activities of distribution function at present
state must be understood. This is the actual state of
distribution.
- second, identify where you want to go, that is understand
what you want to achieve with your distribution strategy. This
is the desired state or future target.
- third, identify the gap between the above two, i.e. the gap
between actual and desired state of distribution must be
identified.
- fourth, bridge the gap, that is identify those distribution
activities that will move you from the present actual state to
future desired state.
f) Identify and Develop Strategic Options
• Strategic options are creative alternative
action-oriented responses to the external
situation that an organization faces.
• Strategic options take advantage of facts and
actors, trends, opportunities and threat of the
outside world.
• Various strategies must be identified and
developed to reach the desired state or to
achieve the objective of distribution.
• So that the best, effective and efficient
distribution strategies can be adopted.
• g) Conduct Qualitative and Quantitative End-
User Analysis
• End-user analysis uncovers which customer
needs must be fulfilled and how to best fulfill
those needs.
• It should be analyzed how & when product and
services reach the customers.
• And how highest level of customer satisfaction
can be provided as well how maximum number
of customer can be reached at lowest possible
cost.
• The cost of reaching & satisfying customer must
be analyzed. It should be considered that the
benefit must always exceed the cost involved.
h) Develop an Ideal Channel System
• Finally ideal channel system can be developed.
• Ideal channel system is the one which reaches
the maximum number of customer, provides
highest satisfaction to them, provides
adequate return to the channel members,
involves minimum costs, and helps to achieve
channel objective.
 Types of Channel Design
• Vertical, Horizontal and Hybrid channel
• a) Vertical channel design
• Vertical channel design is one in which the members of a
distribution channel- producers, whole sellers, and
retailers- work together as a unified group in order to
meet the consumer needs.
• Vertical marketing system help define areas of channel
members so that such overlaps between various channel
members does not occur.
• b) Horizontal channel design
• Horizontal marketing system is one in which two or more
companies join together to follow a new marketing
opportunity.
• By working together companies can combine their capital,
production capabilities, or marketing resources to
accomplish more than what any one company could
alone.
• c) Hybrid channel
• When companies interact with their
customers from a combination of channels,
such as kiosks, ATMS, call centers, direct
marketing, home shopping networks,
catalogues, online interactions, as well as
supermarkets and stores, they operate
through multiple channel.
• Companies can build a lasting customer
relationship management (CRM) through
multiple channels.
• They must use their multiple channel strategy
to achieve synergy among them.
 Factors in Channel Designing
• a) Efficiency
• Efficiency is the (often measurable) ability to avoid
wasting materials, energy, efforts, money, and time
in doing something or in producing a desired result.
• Channel should be designed in such a way that it
utilizes the optimum resources.
• The standard definition of input, process & output
applies here also.
• The major is the effort required to achieve a desired
service level.
• Thus efficiency is being able to achieve the channel
goal with minimum time, efforts & expenses.
• b) Effectiveness
• Effectiveness is the degree to which
something is successful in producing a desired
result.
• The designed channel should produce the
desired result for all the channel member, else
it is ineffective.
• This is the analysis of how will the channel
system meets its objectives.
• Effectiveness is doing the right thing. It is
producing the intended or expected result.
• c) Capacity
• Capacity is the maximum amount that something can
contain. The bigger the capacity of the channel
members the more beneficial it is to the organization.
• If the channel has been designed for a current volume
of business handling a specific number of customers,
it should still be effective when, example, the volume
doubles and the number of customers goes up by
another 50%
• Similarly when the demand for the company product
suddenly goes off at the end of the month or during a
festive season, the channel system would still work
well.
• The system should have the capacity to tackle
adversaries as well as manage long term growth
equally effectively.
• d) Agility
• Agility is the ability to move quickly and easily.
• All the channel members should be as flexible as
possible to adapt according to the situation.
• This is the ability to handle changing demand
patterns, new customers, new products or pack
sizes.
• For example, C&FA (clearing & forwarding agent) is
expected to handle very high-volume changes at the
end of each month and should be prepared to
handle this rush.
• A pharma company or a high technology company
keep introducing innovative products often and
would expect the channel partners to take it in their
stride (pace).
• e) Consistency
• Consistent is the consistent behavior or
treatment.
• All the channel members should perform
consistently to achieve the organizational
goals.
• The channel network should deliver the same
level of service to day after day all month after
month without fail.
• This keeps the customer satisfaction labels at
a high level & will not allow customers to stray
and hence is an important factor in the
working of the channel network.
• f) Reliability
• Reliability refers to consistently good in quality or
performance who are able to be trusted.
• This is a measure of the commitment to the
performance of obligations and this certainty
with which the commitment is met.
• This sector allows the company to make
promises on delivery to customers which it
knows will be met by the channel system.
• This factor gives the company confidence in the
system delivering as per promises.
• g) Integrity
• Integrity is the quality of being honest and
having strong moral principles.
• Integrity is most for the well-being of all channel
members in the marketing channel.
• A channel system has to do business in a fair &
broad manner.
• At no stage is it expected to indulge in any
practices which may have the slightest nature of
the irregularity.
• Any such actions can reflect badly on the
organization for which the channel partner is
working.
 Setting Channel Policies & Strategies
I. Market coverage
• Sales policy of any company whether selling FMCG,
industrial products or services dictates that all market,
with potential for doing business need to be serviced.
• Resource limitations prevent the same level of service for
all markets.
• The sales manager prioritizes' his markets and devotes
maximum channel power in the potential markets.
• For industrial products, the customers are normally
located in clusters and it is easier to decide the marker
coverage for the dealers.
• In the case of consumer products and pharmaceutical
products. the markets are spread widely.
• For these kind of products the frequency of
market coverage is decided based on the
importance or potential of the market and the
prevalent competition.
• In either case what competition does, decides the
kind of market coverage most of the times.
• Companies make sure that there is no overlap of
markets between their contracted channel
members like distributors, stockiest, dealers or
agents (as otherwise, this could be the primary
reason for channel conflict).
• Independent wholesalers and retailers normally
service the market in which they are located.
• The primary objective of distribution strategy is to provide
sufficiently broad, gap-free market coverage, i.e. make goods
available in enough outlets so that customers have convenient
access for purchases.
• For some products, effective coverage is achieved with exclusive
or selective distribution through relatively few specialized
stores; other products (like Coke) require intensive distribution.
• The appropriate level of market coverage is situation-specific,
depending on product characteristics, and on customers' buying
behavior.
• For example, exclusive distribution may be appropriate for
specialty goods (like expensive, high fashion watches) that are
sought out by customers, that may require in-store selling.
• But, sales of frequently bought, commodity-like products
(sometimes called convenience goods) are often driven by
proximate availability, so intensive distribution is usually
appropriate and sometimes mandatory.
• Many products follow a systematic progression over their life
cycle, moving from more exclusive to more intensive
distribution as the product matures.
II. Customer Coverage
• After deciding the list of market to be served, it is necessary
to decide the customers (Wholesalers, Retailers, and
institutions- those who buy the product for their own
consumption and not for resale).
• Based on the experience the customers need to be classified
as A, B & C categories with service level accordingly.
• The basic rule on customer coverage includes:
- Every customer needs to be visited at least once in the
month
- Every call on a customer need to be made productive
- A customer cannot be visited by two distributors for the
same product.
- The owner of the distributor firm also has to visit the key
customer personally apart from the visit by his salesmen.
• For independent wholesalers & retailers there is no
limitation on their customers. Every person who walks in to
their outlet is a customer.
III. Pricing
• This is probably the most critical issue when
dealing with the channel partners whether they
are on contract or independent.
• Like all Businessman, they want prices which are
favorable to give them the highest margin.
• There is however a limit to the margins to be
provided, as every such margin affect the end
price for the product to be paid by the consumer.
• Most of the times, what competition does decide
the prices that can operate in the market.
• The pricing mechanism for a product consumer product works
like this:
– The end consumer price is decided best of the company costs, margins
expected & what the competition is doing for similar products. This is
the MRP (maximum retail price) printed on the pack.
– The permitted retail margins are known and hence the price to the
retailer can be worked out from the MRP.
– The retailer price also takes into account the margin to the distributor.
If this permitted margin is deducted the price to the distributor can be
worked out. The company will sell the product to the distributor at
this price and expects him to mark up the price to the retailer so that
he can earn his margin.
• Prices in the market with independent wholesalers & retailers
also get affected by the trade promotions run by the companies.
• In the case of Industrial Products, however, prices are negotiated
& can vary between customers or even channel partners.
• Even for consumer durables, discounts which companies operate
can vary between dealers and so can the end consumer prices
which may get influenced by competition.
IV. Product lines
• The channel members in the market, independent
wholesalers and retailers, decide on their own as to
which product lines they want to promote.
• However, for contracted channel members like
distributors and C&FA's, there is an unwritten rule that
they will not work with competitive products once they
have signed with a company for its product.
• If the company has different categories of product like,
beverages & food products, soaps, detergent & ice
creams, they would prefer to have different channel
partners for each setup products.
• At times, it is not feasible to handle some of these
products together we get the - for example, detergent
product and branded wheat flour.
• Some products like ice creams need special cold
storage and handling facilities and hence need a
different channel.
• Rules in handling product lines through channels:
- Complementary product lines through the same channel.
- All similar customers serviced through the same type of
channel.
- In pharmaceutical for example, different channels may
be used to cover doctors, hospitals and chemist.
- Products requiring special handling arrangements (like
gold chains) to be distributed by channels capable of this.
- Separate channels may be used for special customers.
• A product line is a group of related products under a single
brand sold by the same company.
• Companies sell multiple product lines under their various
brands.
• Companies often expand their offerings by adding to
existing product lines, because consumers are more likely
to purchase products from brands with which they are
already familiar.
V. Selection of channel members
• Companies have no choice in the use of channels already in
the market like wholesalers, retailers, chemists,
transporters, warehouse leasing companies, spare parts
dealers for all equipment, hotels, restaurants.
• The question of selection arises depending on the intensity
of distribution & in case companies want to set up their
own distribution network.
• The selection process consists of three basic steps:
• (1) finding prospective channel members.
• (2) applying selection criteria to determine whether these
• members are suitable.
• (3) securing prospective members for the channel.
• Each firm must develop its own list of criteria for selection
of channel members for its particular objectives.
• An important point to note is that channel members do not
always “stand in line” to be selected by producers and
manufacturers.
VI. Termination of Channel Partners
• Termination of a contracted channel partner is
the most painful part of doing business with
other parties.
• It is resorted only when the partner is unable to
meet the objectives of the company or has been
caught in dishonest business practices.
• Both sides discuss & decide that the relationship
cannot continue.
• Both parties try & amicably (politely) settle the
amounts due to each other as well as the
statutory obligation to be completed.
• It has been mentioned earlier that the
termination is normally handled orally by the
sales people.
VII. Ownership of the channel
• Ownership does not just mean the investment in the business.
• It includes taking responsibility for developing the business of
the channel principal who has contracted a channel member to
work for it.
• It considers all the statutory obligations like abiding by various
acts, sales tax implications & so on.
• Most of these obligations are specifically covered in a contract.
• However, there are unwritten rules of behavior that come into
force, by tradition and convention (meeting), which are also
expected to be followed.
VIII. Legal constraints
• Various rules and regulations of the existing country should be
taken into consideration while setting channel policies and
strategies so that both the parties in the distribution does not
have any issue later.