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Sales & Distribution

Channels: Place
- Week 5 -
Marketing Strategy 37000
Christopher Krohn

Copyright 2016
Christopher E. Krohn.
July 22/23, 2016 All rights reserved.

Course Framework
3Cs Customer, Company and
Competitor Analysis

STP Segmentation, Targeting and


Positioning Strategy

4Ps Product, Price, Promotion


and Place Marketing Mix

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What is a Distribution Channel?

What value do Intermediaries Add?

Economies of Scope Sales, Logistics, Services

Selling and promotion


Market information; feedback
Inventory management and distribution
Financing / credit, collections
Product add-ons, customization
Post-sale services

2
Channel Alternatives
Generally:
Direct Approaches
Higher control
Direct sales
Higher required investment
Direct telesales
Higher variable margin
Direct mail
Direct e-Commerce

Corporate-Owned / Captive Resellers

Contractual Distribution
Sales agents
Product trade name franchises
Business format franchises
Generally:
Conventional Distribution (Resellers)
Lower control
Lower required investment
Brokered Distribution Lower variable margin

Intermediaries & E-Commerce


E-commerce has significantly affected the structure of
intermediaries in many industries
Democratizes Information
Search engines lower the cost and increase the availability of information
Pricing
Availability / Inventory
Product info (specifications, reviews, etc.)
Lower cost to publish can enable direct (or bifurcated) e-commerce models where
direct selling would have previously been un-economical

New Distribution Models / Opportunities


Physical product delivery migrates to digital channels. E.g. iTunes, New York Times
New forms of aggregation / marketplace models. E.g. Sears Marketplace, GrubHub
Transactions based on anonymity or semi-anonymity. E.g. Craigslist, LiquidNet
Personalized selling in fragmented markets. E.g. Pandora, Netflix
Mobile-enabled commerce and service. E.g. Uber, Twitter
New forms of advertising and promotion (Covered in Week 8)

3
Agenda
Framework for Channel Strategy
Channel Strategy Decisions
Managing Direct Channels
Managing Indirect Channels
Wrap-Up

Channel Strategy: Framework

4
Environment & Strategy

Legal restrictions differ by Desired positioning


jurisdiction and often by
product category Marketing objectives (revenues,
market share, ROI, etc.)
Competitors may already
have control over certain channels Critical limitations (capital investment,
use of corporate brand name, etc.)
Infrastructure capabilities
vary by geography Ethical considerations

End User Channel Demands

Product variety
Primary information
about the product / category Convenience
Urgency
Comparative information Certainty of delivery
regarding competitive products
Service levels
and substitutes
Lot size / order size

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Information Demand Over
The Product Lifecycle

Economics, Control & Adaptability


Channel Economics Adaptability
Level of estimated sales for Developing a channel requires
each channel alternative commitments (investments,
Costs of each channel contractual obligations, etc.)
alternative (fixed and variable) When selecting a channel
structure, consider whether it
Control Issues may lock you in with:
Ease / certainty of control for Switching costs for the
Brand messages (positioning) company to change
Pricing to end-user channels in the future
Compliance with Length of time it will take to
promotional programs change channels in the future

Consequences of loss of The importance of channel


control / non-compliance adaptability increases in
rapidly changing /
uncertain markets

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Economics, Control & Adaptability
Effects of E-Commerce

Channel Economics Adaptability


Both up front investments and on-going e-Commerce channels often, but not always,
expenses may differ significantly for e- provide advantages vs. traditional channels in
Commerce channels vs. traditional channels being able to react more quickly and flexibly
Only likely to be true if the e-
Selling on-line requires Commerce channel is well-
specialized skills; be careful with managed; specialized expertise
revenue estimates is often required (e.g. Walmart.com)
Examples: personalization,
online merchandising, SEO May require large technology,
process re-design or other
Control Issues infrastructure investments to
Control is often, but not always, easier to realize these benefits
maintain in e-Commerce channels
(e.g. brand standards, MAP pricing)

Existing Channel Assets


Changing channel strategy can be risky
Potential for channel conflicts, damage to channel relationships
Potential for temporary drop in sales
Potential for disruptions in customer relationships

Developing a new channel may require significant CHANNEL


investment and/or new expertise STRUCTURES
Technology investments (e-Commerce, inventory management ARE HARD TO
systems, ERP, CRM) CHANGE
PP&E (warehouses, fleets, etc.)
Investments in inventory
Signing, financing and training distributors / franchisees
Facilitating the switch-over for existing customers
Sales force recruiting, training, management, retention
Layoffs / restructuring costs

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Channel Conflicts
Channel conflicts arise because of conflicting goals and incentives
or from lack of clarity in how rights and responsibilities are defined.

VERTICAL conflicts within a channel


Example: Company setting high service standards
for its dealers on low-margin products

HORIZONTAL conflicts within a channel


Example: Two McDonalds restaurants in the same town
run by different franchisees

CROSS-CHANNEL conflicts
Your companys direct sales force being undersold by
an e-commerce site

Agenda
Framework for Channel Strategy
Channel Strategy Decisions
Managing Direct Channels
Managing Indirect Channels
Wrap-Up

8
Basic Channel Selection

Channel Selection Examples

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Hybrid Channel Structures
Channel functions for serving a particular customer segment (e.g. selling, physical
distribution, post-sale service) are unbundled and spread out among multiple entities
[ Not to be confused with using different channels to serve different segments ]

Example: Company sales force does the direct selling, an independent distributor
handles the physical distribution, and a certified third-party service provider handles
installation and tuning

May provide the most efficient overall delivery of channel services, BUT
Getting compensation right across the various channel partners can be challenging
Requires greater management attention because channel conflicts arise more frequently
Information flow may be more difficult to manage
Works better in high margin industries or for market leading firms
with greater leverage in the channel

Managing Hybrid Channels


Understand the costs and customer benefit levels provided
by each channel for each step in the customer relationship
management process (from awareness through the initial
sale to post-sales support and cross-selling)

Identify the ideal routing for the customer at each step in


the process, focusing on the tradeoffs between lowering the
companys costs and maximizing the customers benefit

Provide incentives for customers to follow this ideal routing

Ensure sales force and distributor incentives are also aligned


with your ideal routing

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Channel Strategy: Framework

Agenda
Framework for Channel Strategy
Channel Strategy Decisions
Managing Direct Channels
Managing Indirect Channels
Wrap-Up

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Managing Direct Sales

Sales Force Productivity = Efficiency X Effectiveness

Is your sales When actually


force working selling to
hard and qualified
allocating its prospects,
time, costs how good is
and talent your sales
optimally? force?

Sales Force Efficiency


Measuring Efficiency Improving Efficiency
Hours worked per week Re-size sales force
Change territory structure
Sales calls per day
Re-allocate sales force to different
New accounts per month territories / accounts
Change compensation, rewards,
% time spent selling vs other activities, recognition programs
such as service or administration Deploy sales force automation software
Increase admin / tech support; add sales
Cost per sales call
assistants or inside sales people
T&E costs as a % revenues Offload prospecting, information
gathering, service or other activities
[Many other potential measurements] Reduce % product / industry specialists

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Sales Force Efficiency
Pet Food Example

Improving Efficiency
Pet Food Example
Actions Taken
1. Re-tiered all accounts by revenues, growth, sales potential

2. Set time at account targets for each tier of accounts; different levels for pet store
channel vs. veterinarian channel

3. Dropped direct distribution for smallest pet stores; shifted these accounts to
distributor model (indirect)

4. Restructured sales territories based on geographic density and the types of


accounts present in each area

5. Re-allocated sales force to new territories; hired additional salespeople

RESULTS: Company reversed years of slippage in market share


and veterinarian endorsement rates

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Sales Force Effectiveness
Measuring Effectiveness Improving Effectiveness
Lead conversion ratio / close rate Classify accounts / prospects more
effectively to identify promising targets
Revenue or gross margin generated per hour
Recruit more qualified / skilled sales people;
of customer selling time
drop low performers

Gross margin on sales Increase training / coaching


Provide better market intelligence
Share of customer wallet (e.g. data on competitors products)
Deploy sales force automation software
Customer sales growth
Improve sales support materials (demos,
Account profitability collateral, presentations, etc.)
Increase % of product / industry specialists
[ Many other potential measurements ] Change compensation structure

Sales Force Effectiveness


Distribution Example
From 1995 -2000, the company had enjoyed very high levels of client retention
and satisfaction.

Growth at existing accounts, however, was disappointing.

Share of customer wallet not used as a planning tool to assess account


potential or set sales targets.

Very few new accounts being added to customer roster.

Sales force compensation structure rewarded sales people for stable


relationships with large customers.
No special incentives to grow accounts
No incentive to win new accounts

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Improving Effectiveness
Distribution Example

Actions Taken
Identified priority targets for New Accounts and Share of Wallet improvements.
Created account plans with specific goals and metrics for each account.

Trained sales force on how to increase share of wallet (identifying causes of


SOW gaps, asking the right questions, being aggressive, etc.)

Developed a specialist Hunter sales team to seek out and obtain new accounts.

Changed compensation structure to reward hunters.

RESULTS: During recession, company achieved 0.5% annual


growth rate while industry shrank at a rate of 7% per annum.

Relationships With the Sales Force


Sales and Marketing must work well together to achieve optimal
results. Generally, this responsibility falls on Marketings shoulders.

Show the sales force you respect and get their customer insights and relationships
Listen carefully to their war stories and trip reports
Respond to their requests and complaints, even if its only in small ways
Go on sales calls and customer visits with them

Never dump new programs, products, pricing plans, etc. on the sales force
Explain how the new program benefits them never forget WIFM!
Explain how the new program benefits the company
(but avoid marketing jargon)
Give them sales tools, scripts and ideas on how to sell the new program to customers
Anticipate potential customer objections and provide the sales force with ideas and
strategies on how to overcome those objections

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Relationships With the Sales Force (2)
Sales and Marketing must work well together to achieve optimal results.
Generally, this responsibility falls on Marketings shoulders.

Show your support for their efforts by giving the sales force the tools they need to sell effectively
Lead generation and nurturing programs
Customer insights, data and tracking systems
Competitive intelligence
Sales collateral, demos, assistance with proposals and sales presentations

Generally, the best sales people need lots of emotional support and recognition. Give it to them.
Formal recognition and reward programs
Informal recognition (pats on the back)
Hang out at the bar with them. Be part of the team.

Managing Direct e-Commerce


Managing a direct e-Commerce channel requires specialized skills.
Customer Acquisition Customer Relationship Management
Affiliate marketing E-mail marketing
PPC / SEM SMS / Push notifications
Display & Retargeting Loyalty / Gamification
SEO Triggered campaigns
Offline to online lead gen Cross-channel CRM
Lead nurturing
Social Media & Online PR
Platform Management
Information architecture Specialized IT Resources
Site design / UX E-Commerce Architecture
Mobile design / UX E-Commerce Development / QA
Conversion management Mobile Development / QA
Online merchandising Extract / Transform / Load (ETL)
Content management Data architecture / Big Data
Site analytics Security / PCI

Legal / regulatory compliance

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Direct e-Commerce
Key Principles
Clearly identify the target segments you are trying to serve with this channel

Design your platforms (Web, mobile) to meet specific target customer needs and problems (use cases)
Example: Im a member of the DIY Office Manager segment and Ive been to the site before to
research storage solutions (Need). Now Im ready to place my order for new filling cabinets for the
Legal department (Problem/Use Case).

Ensure every on-line experience supports your desired positioning

Integrate your customers on-line and off-line experiences. This requires investment in data collection,
management, and CRM tools

Use rigorous data analysis to monitor customer behavior loyalty and profitability

Develop customized / personalized solutions as appropriate to the value of the customer. Use this to deepen
the customers relationship with your company or brand. Building a sense of on-line community may be
effective for some segments.

Tweak & test relentlessly (feature sets, page flows, forms design, geo-targeting, creative, copy, etc.)

Agenda
Framework for Channel Strategy
Channel Strategy Decisions
Managing Direct Channels
Managing Indirect Channels
Wrap-Up

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Distributors: Some Terminology
Distributor Generally, an intermediary in the distribution channel

Reseller Any distributor that takes title to the goods being distributed

A distributor that re-sells to other distributors, often including


Wholesaler retailers. In some cases, may also be called a Master Distributor

Dealer Distributor that sells to end-users (business or consumer)

Retailer Distributor that sells to end-users (usually consumer)

Sells a product line on commission and does not take title to


Agent the goods (e.g. manufacturers rep)

Broker Brings buyers and sellers together to facilitate / negotiate


transactions, often in fragmented markets

Comparing Distributors

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Managing Distributors
There are four key factors that drive distributors
level of effort to push your products.

Channel Breadth Decisions


Exclusive Selective Intensive
Distribution Distribution Distribution

Selling through only An intermediate form; Selling through all


one distributor / selling through more responsible and
retailer in a specific than one but still suitable distributors /
geographic area limited number of retailers who will
distributors / retailers stock or sell the
Best for specialty product
goods or luxury items Best for shopping and
where buying risk is some specialty goods Best for convenience
high and purchase goods
frequency is low Example: Cisco
Systems Example: M&Ms
Example: Grand
Soleil Yachts

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Channel Breadth Tradeoffs
Exclusive Selective Intensive
Distribution Distribution Distribution

Better fit for less Moderate intra- High intra-brand


competitive or highly brand competition competition
differentiated categories
Moderate market Highest market
Less market coverage coverage coverage

Higher margins for the Moderate margins Lower margins for


distributor = for the distributor = the distributor =
Higher Effort Moderate Effort Lower Effort

Value of the Brand to the Reseller


Assessing the Value
End-user brand preference
Percentage of reseller revenue the brand represents
Suppliers staying power / sustainability of the brands positioning / preference

Increasing the Value


Increase end-users brand preference
Improve on your ability to deliver your chosen positioning / product
differentiation (investments in Product)
Increase marketing communications efforts directed at end-users
(investments in Promotion)
Select resellers where products success is critical to their success
Make products success more beneficial to reseller through incentives
(e.g. volume discounts)

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Reseller Switching Costs
Assessing Reseller Switching Costs
Distributors cost to drop product and take on a competitors
Willingness of competitors to add new distributors

Increasing Reseller Switching Costs


Relationship-specific investments
Inventory management systems / ECR / ERP
Brand-specific knowledge, expertise among distributor personnel
Partnership rewards programs
Contractual terms and obligations
Anti-trust and/or restraint of trade laws may apply in some circumstances

Day to Day Reseller Support


Reseller Relationship Management Cooperative Marketing
Frequency of sales contacts Merchandising support
Intensity / quality of sales contacts Point of purchase displays and
Value-added by sales person (education, promotions
training, consulting, business planning, etc.) Sales collateral / marketing materials,
Rewards provided to reseller potentially customized
Cooperative advertising
Promotional events, educational
Logistics & Support
seminars, etc.
Ease of ordering / re-ordering Sales lead referral programs
Order accuracy and delivery performance Joint marketing research
Returns and reverse logistics Customized products / assortments
Billing accuracy, timeliness
Responsiveness to problems

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Agenda
Framework for Channel Strategy
Channel Strategy Decisions
Managing Direct Channels
Managing Indirect Channels
Wrap-Up

Sales & Distribution Channels


Channel strategy decisions derive from multiple inputs:
1. Background factors:
A. Legal and environmental factors;
B. Strategic objectives and constraints;
2. End-user demand for channel services: Information and Logistics
3. Evaluation of channel economics, control issues and adaptability
4. The firms existing channel assets and potential channel conflicts

Channel needs vary across the product lifecycle and by customer segment

The basic channel design question is whether to use a direct, indirect or hybrid channel
structure for each customer segment. Hybrid structures are more complex to manage.

The key issues in managing a direct sales force are efficiency and effectiveness

E-Commerce channels require specialized expertise

The key issues in managing reseller efforts are distribution intensity (channel breadth),
value of the brand to the distributor, reseller switching costs, and day-to-day reseller
relationship management and support

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Sales & Distribution Channels
Where to Start?
1. Assess customer needs for information and logistics, and pick a channel
hypothesis using the channel strategy 2x2 matrix

2. Include an evaluation of channel economics, control, and adaptability to ensure


you have the right basic strategy

3. Consider risks / limitations re: existing channel assets, environmental factors,


strategic objectives

4. Address channel implementation:


If you pick a direct channel, focus on plans to manage sales force efficiency and
effectiveness ELSE
If instead you pick an indirect channel, focus on plans to manage the four factors
affecting reseller effort ELSE
If instead you pick a bifurcated strategy, you need to cover both.

Sales & Distribution Channels:


Questions for Your Business
What does our current channel structure look like? How is each channel
performing in terms of supporting our strategy and positioning, financial returns,
control issues, and adaptability?

What are our channels strengths and weaknesses in providing information and
logistics services to end users? Does this vary by segment? What
improvements can be made in each channel?

How is the sales force performing in terms of its efficiency? Its effectiveness?
How can these be improved?

Are end user needs for channel services changing over time (e.g. due to the
product lifecycle)? If so, how should we respond?

How critical is e-commerce to our success and are we investing appropriately?

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