Idea 8 - Channel management (50 Management ideas you really need to know)


Idea 8 - Channel management

We hear a lot about discontinuous change these days. It first cropped up in catastrophe theory, which may give pause for thought, but business thinkers and economists like the way it describes the quantum leap - the radical shift that makes everything look different. They also like how it (eventually) boosts growth, far more than incremental change ever does.

Some of the most powerful discontinuities of the last century or so have been the coming of the horseless carriage, powered flight, the personal computer and now, dot.com bust or no, of the Internet. The Net has forced anyone running a business to reconsider exactly how they market, sell and distribute their products. And that boils down to some serious thought about channel management.

Distribution Channels are a business's routes to market, part of the 'place' in the four Ps of marketing. In considering the four Ps, managers must make decisions on how many levels of distribution to employ. Can the firm afford - or does it even want - its own direct sales force? Will it distribute via retailers, or wholesalers and retailers, and how selectively will they be chosen?
A direct sales force is expensive but has the virtue of being firmly under the company's control. Wholesalers and retailers are not, and motivating them to do their best for you makes up a large part of traditional channel management. The most widely used and probably the most effective incentive is to grease their palms, either by offering more generous margins for pushing your product instead of your rivals', or by staging some form of competition to reward salespeople who do likewise. Providing them with training and the tools they need to sell the product effectively also helps.

In a vertically integrated organization, the manufacturer or supplier might own its retail outlets, or the store group might make the products that it sells - forward or backward integration, respectively. This model is inflexible, imposes high fixed costs and can be distracting for management but, like a direct sales force, it is under the company's control,
One distribution channel that gives control at low cost is mail order. And now, of course,
there is the Net (a kind of mail order plus). Like most advances in technology, there were a few enthusiastic early adopters, while many sat back to wait and see. Now, however, the Net has become an indispensable channel for the majority of consumer industries and, at the very least, a marketing tool for many business-to-business firms.

Customer choice More significantly, perhaps, the Internet is not just another single channel from which to choose. Its arrival has accelerated the development of multiple-channel distribution in which customers may use different channels at different stages in the process of buying something. They might check online that an item is in stock before going into a store to buy the goods. Or they might order online for collection at the store. They might want to be able to transact by phone, online or in person on different occasions of their own choice.
In this world of 'bricks and clicks', channel management takes on new meaning. More and more customers want, or have been persuaded to want, access to goods and information via new channels such as the Internet, the phone and - particularly in the case of financial services (an early adopter of the new channels) - the automated teller machine or ATM. As banks discovered early on, they still want the old bricks and mortar too.

Companies are spending-considerable sums to oblige. Some have noticed that the customers who want multiple channels tend to have more money than the ones who only use one channel, and that they are likely to spend more too. The customers are looking for more convenience - shopping from home - and quicker access to information. The result is that multiple channels are becoming less of an opportunity for competitive advantage and more of a strategic necessity.

Managing them has its problems, however. One is what consultants call the '3E trap' - the unprofitable temptation to provide 'everything to everyone, everywhere'. The answer is, first, to know who your most profitable customers are, an area where channel management becomes intertwined with customer relationship management, then, decide which channels they prefer to use.
CRM persuades us to focus on the customer, to provide a seamless, homogenous service. If multiple-channel distribution is to deliver that experience for the customer, then it has to be
joined up. The channels must be managed as an interdependent, linked and coordinated system instead of as standalone operations. Some consultants call this a 'multichannel', as opposed to a multiple channel, strategy.

No laissez faire The preferences of high-value customers should obviously influence how that strategy is implemented. But that's not to say that the organization should be completely passive and leave customers to use whichever channels they please. Some are more costly than others, sometimes surprisingly so. Channel economics have to be understood and customers nudged in the direction of the most appropriate and, indeed, cost-effective channel. Migrating customers to new channels is a sensitive and risky affair, so a delicate touch is needed. If that's true for customers, it can also be true for existing channels. Retailers can feel threatened by the introduction of a new and, they might believe, competing channel. Some firms have devised incentives to keep their retailers on side while they roll out new web- or phone-based sales initiatives.

Done right, the multi-channel approach can be a source of differentiation that is hard to copy. If channel management was getting humdrum before the advent of the Net, it's a lot more lively now.
Reference: 50 Management Ideas You Really Need to Know
Book by Edward Russell-Walling

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