CHANNELS OF DISTRIBUTION

Application: Revenue Achievement, Sales, Market Access

The Concept

Complex and difficult though channel strategy and management is, it is the “P” for “Place” in the four Ps of the marketing mix; and it needs careful thought. Marketers, more than sales people, have to step back and think through how their product or service is going to reach buyers; how it is going to be “placed” in the market. Figure C.2 depicts the range of direct and indirect channels accessible to marketers. Direct channels involve, for example, field sales, catalogue and, of course, the internet. Indirect ranges from retail to “added value” suppliers. Activities involved in the channel are wide and varied though the basic activities revolve around these general tasks:

• selling
• marketing
• ordering
• handling and shipping
• storage
• display
• promotion
• merchandising
• information feedback
• installation and service.

Figure C.2: A depiction of different potential channels of distribution

(adapted from McDonald, M.H.B. and Wilson, H., 2011)

For many marketers, the distribution decision is primarily about the supply chain’s “front-end”. Distribution channels are designed to move products or services from the company into the hands of the customer. All activities and organizational helping with this exchange are part of the marketer’s channel strategy task components.

The different channels to consider are:

• Direct field sales (see entry under “sales”). Companies often take a “field sales” approach to their sales organization. This involves sales people being assigned to a geographic territory and handling the approach to all potential customers within that territory. They are often managed by an “area manager” reporting to a “regional manager” who, in turn, reports to the sales director. The ethos behind this approach is efficiency in terms of sales time. This is the most recognizable and, in some ways, straightforward type of selling. A new business sales person is normally briefed and trained on the details of a product or service in order to sell to an intended group of customers. They will usually have a defined “territory” to cover, the size of which depends on the size of the total market, and sales targets to achieve each month or quarter. These sales people have to be managed and motivated through pay, training, administrative back-up, and targets; some form of payment by results being the chief of these. It is then up to them to find and gain access to potential customers who will buy, with the help of “leads” generated by the company’s marketing programmes. This approach has been widely used across a range of both product and service businesses (from cars and confectionery to banking and insurance) in a wide range of countries for at least 300 years. Often this type of sale is led by a direct marketing campaign and executed by telesales people, combined with an online sales mechanism. The sales person can plan what length of time to take to visit customers within a geographic patch and management can assess this efficiency by the number of “sales calls per day” (or its equivalent).
• Account management (see separate entry) is based on the fact that certain buyers will give a stream of repeat business to a supplier whereas others will not. Three researchers who studied “2,500 businesses in sixty eight countries” (Zoltners, A. A., Sinha, P., and Lorimer, S. A., 2006) claim that companies which move from regional sales to the appointment of account managers find that “the change increases revenues and customer satisfaction whilst reducing the cost of selling”.
• Direct retail sales. Of course, many companies who sell to consumers through retail premises employ people to sell their products. This is a balance between sales skills and service attitude. Whilst sales skills and instincts are self-evidently important, there is evidence that an emphasis on service and achieving the best result for customers has earned long-term positive performance for retailers like Marshall Field, John Lewis, and Marks & Spencer.
• Online selling. One of the most recent revolutions in channel strategy has obviously been the internet. Many, many companies now sell online, direct to their customers (see digital marketing).
• Dealers. These are small businesses that sell products or services on behalf of manufacturers. They might be tied to one manufacturer in an exclusive deal or they may offer a range of products. They often have, though, limited marketing and sales skills. So, they need effective marketing support from the marketers in the manufacturing company which they are representing. This can range from lead generation campaigns to training and more extensive business support.
• Value added resellers (VARS). Value added resellers normally buy products and adjust them in some way. For instance, software companies might tailor a basic software product to a particular sector.
• Franchisees. These are businesses where people pay for the right to sell a tightly designed package in a tightly controlled geographic area. They expect a clearly defined and effective marketing package to assist their sales.
• Consultative selling. Contrary to popular opinion, the best sales people are the best listeners. Many develop intuitive approaches to get an idea of their potential buyers’ needs, and then begin to offer product that best suits those needs, to match the product “benefits” to the “prospect’s requirements”. With more complex products, this approach has to become more structured and, at its most sophisticated (with, say, complex engineering networks) the listening aspect of the sale is more like consultancy. The sales people who lead these deals, often first class scientists or mathematicians, are taught the sort of diagnostic and discovery approaches which are second nature to leading strategy consultants. Consultative selling is remarkably successful. The majority of product sales people are unable to whisper in the ear of senior people and walk away with the high revenue, high margin deals that many partners in professional practices do every day. “Business generation” (sales) in consultancies is led by their top practitioners who manage client relations. This is called “partnership selling”, a term from the professional services industry where it is often the role of partners in the firm to lead the dialogue with clients. The consultancy industry tends to base its sales organization on “industry knowledge”; familiarity with the industrial sector in which the buyer works (see the separate entry on sector marketing).

Channel design is often detailed, complex, and hard work. Marketers need to understand and model the cost and efficacy of delivering a product or service through each particular channel. They then need to recruit their representatives or partners (whether direct or indirect) and establish the channel infrastructure (perhaps through negotiated contracts). Once underway, they need to create marketing campaigns to support the channel while delivering appropriate levels of stock and measuring performance. Moreover, they need to look out for “channel conflict”, damage caused by one means of distribution to another.

There are different types of marketing communications strategies which can be applied to different channels. A “pull” strategy, for instance, communicates directly to the end consumer and tries to attract them to the channel. In America, for instance, pharmaceutical companies can advertise drugs to the general population and encourage them to ask their doctor for them (a practice banned in parts of Europe). A “push” strategy, on the other hand, conducts marketing communication campaigns through the channels.

One of the fundamental aspects of good channel management is clear operational performance monitoring and measurement. Marketers need to be in close contact with the development and activities happening in their channel in order to spot difficulties or aberrations in performance which will affect sales and revenue. Sometimes these are so disastrous that they need to “cull” the channel.

History, Context, Criticism, and Development

Businesses have used different sales mechanisms to reach markets for many years and marketers have thought carefully about the nature and mix of different channels for at least a hundred years. For example, one American marketing text book published at the start of the 20th century (Butler, R.S., 1917) dedicates several chapters to “distribution” including: direct sales, mail order, retail sales, and retail chains. He emphasizes the need to plan them carefully and examines in detail what was then the channel conflict (although he does not use that phrase) between the huge impact of mail order and retail sales. In fact, market access and channels of distribution seemed to be a primary concern of businesses, economists, and marketers in America up until the outbreak of the Second World War as the country grew.

Similar studies continued after the War as new markets were opened up (international distribution) and new methods of market access took off (such as the internet).

Voices and Further Reading

• “While product innovation continues apace, with the Internet offering many opportunities for providing digitizable products and surrounding services remotely, we believe that the dominant business theme of the next ten years will be innovation in the route to market – the channels by which the customer is communicated with the product delivered.” McDonald, M.H.B. and Wilson, H., 2011.
• Pelton, L.E,, Strutton, D., and Lumpkin, J.R., Marketing Channels: A Relationship Management Approach. McGraw-Hill, 2002.
• McCally, R.W., Marketing Channel Management, Praegar, 1996.
• “To accomplish the task of moving products from one or more points of origin to hundreds of destinations that reach thousands or even millions of consumers requires a formal structure for both marketing and physical distribution. The unified structure, which must accomplish the objectives of these functions, is the marketing channel. The marketing channel includes every aspect of business, from product concept to the guarantee of its value or usefulness to the buyer. It is the obligation of the marketer or manufacturer to create or employ a marketing channel capable of ensuring that all these functions are accomplished.” McCally, ibid.
• Coughlin, A.T., Anderson, E., Stern, L.W., and El Ansary, A.I., Marketing Channels. Pearson, 2006.
• “The starting point in addressing channel strategy options is to consider objectively who should dictate channel – the customer or the supplier … Companies usually select from one of the following broad channel strategies: A mono-channel provider strategy … A customer segment channel strategy … A graduated account management strategy … A channel migratory strategy … An activity-based channel strategy … An integrated multi-channel strategy.” Payne, A., 2006.
• Zoltners, A.A., Sinha, P., and Lorimer, S.A., “Match your sales force structure to your business life cycle”. Harvard Business Review, July–August 2006. Based on the study of sales structures in 2,500 businesses in 68 countries.
• “The choice of channel/medium is generally a complex one, involving different media for different communications with the same customer. The organization will also frequently want to leave some options in the hands of the customer.” McDonald, M.H.B. and Wilson, H., 2011.
• “We view channel partners as complex entities. They are hybrids of companies, consumers and employees. They are also companies with their own missions, visions, values and business models. They are consumers with needs and wants that need to be served. Moreover, they also sell to end-users and form the consumers’ interface just like employees do. Their role is essential in marketing 3.0 as they become collaborators, cultural change agents and creative partners for companies at the same time.” Kotler, P, et al., 2010.

Things You Might Like to Consider