BM/U2 Topic 5 Designing the Channel Structure
It is very important that a distribution channel is properly aligned to satisfy the needs of channel members and also for the success of any industrial marketing strategy. A good industrial channel creates the communication and physical supply linkages with existing and potential customers. Channel designing in industrial markets is a dynamic process that consists of either developing the new channels or modifying the existing ones.
Designing an appropriate industrial distribution channel and managing it is a tough and continuing task. A well designed channel structure helps to achieve the desired marketing objectives. A channel structure consists of types and number of middlemen, terms and conditions of channel members, number of channels. The various steps that are involved in industrial distribution channel design in industrial markets are given in the following figure.
Steps Involved in Industrial Channel Design Process
Let us understand each of the stages of industrial distribution channel design process in detail:
- Analyzing the Needs of the Customer
When a marketer designs a marketing channel, he must understand the service output levels desired by the target customers. Different customers have different levels of service requirements. A high potential customer needs to be offered effective and professional service backup, ensured availability of varied products compared to the low potential customer. The marketing channel designer has to know at this stage itself that providing superior service output means increased channel costs and higher prices for customers.
- Establishing Channel Objectives
Channel objectives are a part of and result from the company’s marketing objectives that need to be stated in terms of targeted service output levels. Profit considerations and asset utilization must be reflected in channel objectives and the resultant design. It should be the endeavor of the channel members to minimize the total channel costs and still provide with the desired level of service outputs. Channel objectives keep varying depending on the characteristics of the products. For example, while a customized non-standard product requires company sales force to sell directly, products like HVAC (Heating, Ventilation and Air-conditioning) are either sold by the company or its franchised dealers.
- Considering Channel Constraints
The industrial marketer develops his channel objectives keeping into consideration various constraints like the company, competition, the environment, product characteristics and the level of service output desired by the target customers.
Company: If a company has financial limitation as constraint, then it may restrict its direct distribution approach through company sales force to few high potential customers.
Competition: If a competitor has been very successful through direct service then it may force all other firms also to adopt the same strategy of direct selling.
Environment: Economic conditions, legal regulations are the environmental factors that affect channel design. During recession, producers use economical ways to sell the products to avoid additional costs. Similarly, the law looks down upon those channel arrangements that tries to build a monopoly market or minimize competition.
Product characteristics: As already mentioned, complex and non-standard products require direct distribution without any intermediaries. Eg. If an industrial marketer is providing customized machinery to his customer, then he deals directly with him rather than involving any intermediary to understand the customer needs better.
Customer: The industrial marketers depends on intermediaries to offer services to customers who are either giving less business or are located at far-off places and prefers to serve the nearby or high potential customers by themselves.
- Listing Channel Tasks
The industrial marketers have to creatively structure the necessary tasks or functions to meet customer requirements and company goals. They have to first make a list of various tasks to be performed, identify the critical tasks, take objective and realistic decisions on which tasks can be effectively performed by the company and which cannot be performed due to certain constraints. The careful analysis of customer needs, establishing objectives, considering constraints and listing the channel tasks form the backbone of channel design process. Once these aspects are delineated individually, the next step of identifying and evaluating channel alternatives starts.
- Identifying Channel Alternatives
There are four issues that are involved in identifying the channel alternatives. They are: the types of business intermediaries, the number of intermediaries, the number of channels and the terms and responsibilities of each channel members.
The types of business intermediaries: There are different types of intermediaries that the industrial marketers should identify. They have to consider various factors like the tasks to be performed, product and market conditions before selecting either manufacturer’s representatives or agents, industrial distributors, brokers, commission merchants or value-added resellers. The marketers should search for innovative or combination of marketing channels.
Number of intermediaries: The manufacturers have to settle on the number of intermediaries they wish to use in their channel structure. They may either go for intensive, selective or exclusive distribution.
Intensive distribution: In this strategy, standard products that are purchased more frequently and have less unit value like raw materials and other convenience goods are distributed intensively i.e. products are stocked in numerous outlets so as to make them available to varied customers on demand.
Selective distribution: The industrial marketer selects few intermediaries to distribute the products to the target customer. This gives the marketer to develop a good working relation with the selected intermediaries, have better control, incur less costs and finally expect a better than average selling effort.
Exclusive distribution: This strategy helps to enhance the product image and is more prevalent in consumer markets where some intermediaries exclusively deal and distribute the products of one manufacturer. They are not allowed to handle the competitor’s products. The manufacturer expects aggressive selling by the intermediaries and tries to have control over their pricing policies, promotion strategy, credit terms and other services.
Number of channels: Industrial marketers need to serve various market segments. This necessitates them to use more than one channel for distributing and marketing their products. This multi-channel approach helps them not only to increase their market share but also reduce their costs. However, the industrial marketers need to take care of possible channel conflicts like proper demarcation of territory to channel members to sell and serve the customers in their respective areas.
Terms and responsibilities of Channel Members: There are various terms and conditions which the industrial marketer must make clear to the participating channel members like the responsibilities and tasks, conditions of sale and territorial rights that would enable both of them to enhance their performance.
Responsibilities and tasks: In order to avoid any future disagreements, there should be clarity in the roles of both the industrial marketers and the channel partners. Each should comply with the commitments about their individual responsibilities and tasks to be performed.
Conditions of sale: It should be clearly mentioned well in advance about the discounts offered by the manufacturers to the distributors, the commission to be paid to the agents or brokers. Other terms relating to warranty period, replacement of defective parts also should be appropriately stated.
Territorial rights: The territory between the distributors should be well demarcated so as to avoid any future confusion that may lead to legal issues.
- Evaluating Alternate Channels
There are several channel alternatives available to the industrial markets. They have to determine the best among the alternatives by evaluating them based on the following criteria:
Economic Performance: Different channel alternatives generate different levels of sales and incur different levels of costs. An industrial marketer has to pose a question whether sales generation would be more by direct selling through company sales force or through the channel members. Many of the industrial marketers believe that sales will be more from company sales force as they exclusively concentrate on company’s product, they are given proper training to sell the product, they show more aggressiveness as their career depends on company’s success and finally customers prefer to deal with the company directly. But it may also happen that the intermediary can sell more than the company sales force. The possible reasons for this could be the agency having many sales people with it or its sales force are much motivated with the commission offered by the company or the customers prefer to deal with agents who have extensive contacts. The marketing manager has to similarly estimate the total costs of selling through different channel members.
Degree of control: This is another important factor while evaluating the channel alternatives. An industrial marketer exercises different levels of control over different channel members. The degree of control is more on company sales force and least on distributors. The distributor may concentrate more on those products that earn him high products rather than following the instructions of the manufacturer to push less preferred products. Similarly an agent entertains his potential customers most rather than concentrating on manufacturer’s product.
Degree of adaptability of channel members: With the market changing dynamically, the channel members should have the capacity to adapt themselves to the changing environment. The industrial marketer must be able to control as well as modify the channel structure. Each channel member should be committed to the agreement they have with other members.
For example, a Tyre Company who is trying to enter into US market is a manufacturer of safety systems for vehicle tyres whose products allow the vehicle to continue to be driven even if the tires burst or are shot out. The main customers for the systems are police forces, security companies, emergency services like ambulance and fire service, armies, trucking companies, and even the general public. The organization cannot serve all types of customers through a single distribution channel, so depending on the size of the market, value and the level of usage, the market for safety systems can be divided into three segments.
Government Organizations (Ambulance, fire services, armies),
Private sector (Original equipment manufacturers like Trucking companies & vehicle manufactures),
In the above scenario, channel 1 comes under direct distribution channel where the organizations directly deal with the customers. This distribution channel does not have any intermediaries like distributors, wholesalers, retailers etc. Direct distribution channel the manufacturer’s own sales force deals directly with the customer segments, and the manufacturer has the complete responsibility for performing all the required channel tasks. Channel 2 and channel 3 come under indirect distribution channels. Indirect channel distribution uses one or more intermediaries like distributors, retailers, sales representatives etc..