How to design a channel strategy

After segmenting, targeting, understanding customers, positioning ourselves and exploring new markets to enter (subjects discussed in my other blogs), comes the task of reaching out to these markets. Channels are routes to reach customers,  Customers can be reached through a spectrum of channels ranging from a direct sales force or indirectly through distributors, volume resellers, value added resellers, service and support partners, solution partners, partner retailers etc., each providing higher reach, cost advantages, but lesser control as we move down the channel. Customers can also be reached through direct to customer channels like a website, an e-marketplace, extranets, Tele channels etc. Choosing the right channels is all about market reach, and has its own cost implications which can in turn impact success. Direct sales channels are high touch and high cost, but can cope with complexity and provide a high degree of control. As we move down the spectrum towards, VARs, distributors, tele-channels and websites, the reach increases, cost decreases, but we tend to lose control and need to keep the offering simple.

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With most of the companies I have worked with, direct sales had been their first and only choice. When channels were added, it had been opportunistic and random. Little time had been spent in evaluating a variety of other options available. It is useful if this is done methodically rather than just hitting upon an idea and going about it randomly. It is an exciting exercise that the marketing department needs to perform every year in close association with sales and existing channels, keeping in background knowledge of customers and competition.  Processes, policies, metrics need to be developed and implemented to make results count and build scalability.

We use the following framework and list the steps to design channel options:

  • Identify all possible channels. There is no need to restrict only to existing and obvious channels. Sometimes, channels identified could belong to competitors too, and though it might seem counter intuitive for the marketing folk, it could be worthwhile exploring, since it might make strategic and financial sense. For example, Fedex and UPS although being competitors, struck a deal wherein UPS’s extensive channel logistics network would be shared. Similar models are used among telecom operators where one brand rides over another’s network for a fee. Sometimes, the sharing could be deeper as in the case of ocean cargo liners where assets are shared, so that rates and route scheduling can be more optimal.
  • Apply customer centric rules to eliminate unsuitable channels. This means listing out customer requirements such as – need for sharing complex technical knowledge, making complex choices among product options, need for customization etc. The product, service or offering might be such that there could be a need for selling value, selling insights, or it can be just selling plain vanilla products. There could be a requirement for support, installation, integration with existing systems etc. Every channel needs to be evaluated against each of these criteria. Those that do not meet critical criteria need to be eliminated. When there is need for sharing complex knowledge, then certainly a VAR or a volume distributor is not suitable. A direct sales force that is trained, has in depth knowledge, and can be consultative is more suitable here. For a product like an industrial battery, a direct sales force for all segments is expensive, since it is pretty much a straight forward buy, and prudence dictates that distributors and dealers are more suitable. If possible, with a little market research – both primary and secondary, a current snapshot of all possible channels that customers are using can be taken. This will also throw light on trends and tendency of customers to gravitate towards certain channels over the next couple of years from now. This will help us decide what to focus on and what to build for the future.
  • Apply product filters to determine whether our product or service is suited for these channels. If it is a high complexity, high touch sale it has to be through direct sales. If it involves insights, ideas and problem solving, or perhaps a lot of cross selling, (as in selling engineering design solutions to R&D heads of product development companies) it needs a different type of sales person who can specialize in account management. If the same company needs to sell trained resources (headcount) and place them at the same R&Ds, it is best done by an ordinary sales rep. If it is volume based sales such as table ware sold to fine dining restaurants, or maybe a software license where there is clarity on features, and involves a clean install, then it is better to use lower cost distributors who have better reach. On the flip side, choosing to go through certain channels will have implication on the product itself. There may be need to productize, simplify features, have a simple price list, reduce customization, provide different forms of support, provide auto updates etc. Often, channels imply new markets and new customer segments. We need to understand how new markets and new customers will use the products, and what would they need. Design the value proposition so that it is simple, believable, attractive and compelling.
  • Strategic issues also need to be kept in mind when selecting channels. For example, there may be a need to keep up a reputation or maintain premium brand. For example, high end Swiss watch manufacturers will only sell through premium outlets at perhaps the shopping lobby of a five star hotel. Hence strategy dictates how the product is sold. Strategy could also dictate the objectives whether they are cost optimization, market growth, profitability etc.  If market coverage and growth is the overarching strategy, then multi channels need to be used for maximum coverage. If customer loyalty is a concern, then nothing like a personalized approach through the direct sales reps. If cost is a concern, then use a hybrid channel system with bulk of the work relegated to lower cost options like telesales and VARs, while handing over core sales (negotiation/closure) to the sales rep. Strategy also dictates how old customers should be migrated to new channels, and the ramifications need to be kept in mind.
  • Rationalize and optimize structure. When companies have multiple segments and products, there is need to rationalize and understand how to cover the markets effectively using the various channel options available to them. Selective markets or segments could be reached out through specific channels, or, there could be intensive coverage of the market using all possible channels, or, an optimization could be achieved by using a hybrid combination of channels at various stages of the process. In such a situation questions to be asked are – should sales team be used for enterprise accounts, should resellers and VARs be used for mid size accounts, and tele sales be used for small size segments? We could even have intensive coverage with all channels covering all segments. But then there needs to be an ability to handle conflict. This can be done through market separation (though often impractical), through product configuration i.e. vary the flavor of offerings  or differentiate products for different channels, it can also be done through pricing tweaking.  Another option to reduce conflict is to have revenue share with a dual compensation or incentive system. Here the sales rep could get a commission for quantities sold through the distributor which will then encourage the sales rep to better manage the distributors and treat them as complementors.
  • Channel integration with internal functions. Lastly, there remains the issue of integrating multi channels with internal functions and processes in the sales cycle. The channels designed, need to be mapped with the sales process or stages, such as lead generation, qualification, proposal making, sales, negotiation & closure, fulfillment and maybe even after sales. When mapped appropriately, lower cost channels like telesales can be used to generate leads, cover the market and the high cost sales team can be brought in only for proposal making, negotiation, or for deals above a certain size. Subsequent handover to a business partner for fulfillment and another handover to the telesales team for after sales support can also be built in. Construct the various options available like a lead generation model, high margin model, high coverage partnering model and max growth model. This optimizes the system, improves effectiveness and reduces cost. Seamless experience can be ensured with technology. We need to determine where the hand over of leads happen across teams such as between Tele sales and direct sales and define when a task or handover considered complete. The criteria and information that has to be transmitted needs to be clearly specified. This means a lot of emphasis on policy and process.

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Then we need to Pilot and institutionalise the system. In case new channels or geographies are chosen, the marketing department needs to pilot test the channels in perhaps a micro area and fine tune the strategy prior to launching it across the market. Work also needs to be done on the metrics to be used.  Metrics for each channel will be different. For sales it is revenue. For tele-sales it could be leads generated. For proposal writers it could be successful proposals. There could be fulfilment targets too. Processes, policies, metrics also need to be thought of and put in place to make results count and build scalability. These steps will ensure that we largely get our act right.