Channel management is the process of administering the existing channels to attain the cooperation of channel members in order to accomplish the distribution objectives of the company. All activities that are involved in the handling of distribution function of a company come under the purview of distribution channel management. The decisions regarding channels based on the guidelines provided by the distribution strategy which is implemented using management functions. It is the manner in which the companies approach their customers and satisfy them. Channel management is not just about distribution function. Rather, it is defined as to how and where a product has to be used and how the product and the customer will interact. It is the process of recognising the potential customers, interacting with them and sustaining and continuing to create value for customers after first interaction. Managers must consider certain key factors in order to manage channels effectively such as recruiting, selecting, motivating and evaluating channel members.
Channel management decisions are significant for all types of products. However, it is easy to view the effects of distribution decisions on physical goods, e.g., truck parts or laundry detergent, distribution decision is equally crucial for digital goods, e.g., downloadable music or television programming and services, e.g., income tax services. In reality, internet is playing a significant role in changing the distribution patterns and provides wider opportunities to companies for approaching potential customers, still online marketer are facing the same distribution issues as that of off-line marketers. Once the company has selected its alternative, the individual intermediaries must be selected, trained, motivated, and evaluated. The company must also revise its channel arrangements time to time. The major Steps involved in the management of channel members are:
- Recruitment of ChanneI Members
- Selection of Channel Members
- Training of Channel Members
- Motivation of Channel Members
- Evaluation of Channel Members
- Modifying the Channel
- Managing the Relationships Channel
Recruitment of Channel Members
The recruitment of channel members to confirm that the targeted members for recruitment are suitable for the parent company and possess all the qualities, business models, strengths and other capabilities that enable to increase the re-seller’s productivity. After the recruitment of new channel members, the next step is to engage, enable and support these new members proficiently. If this does not happen, the new recruits get added in the list of unproductive partners who are unable to generate the desired results.
Considerations for Effective Recruitment
Conducting an effective recruitment is an essential function Of a channel design alongwith the periodic elimination of underperforming partners. The foremost step in partner recruitment is creating an ‘Ideal partner Profile’. With the help of this profile, a clear Image of what the company is looking for in an ideal partner is established and partners can be selected by asking the following questions:
- What should be size of the perfect partner organisation?
- What expertise and experiences would it possess?
- In which market would the partner operate?
- What should be its customer base?
- How many sales representatives should it own?
- What should be the type of infrastructure and support personnel owned by it?
The description Of an ideal channel partner acts as a roadmap for recruiting an appropriate and skil ed partner. Since, the local partner ru:ruitment is an alternative method of recruitment and is less considelul by the large organisations. The profile of an ideal partner serves as an effective tool in defining a primary standard for a new member.
Selection of Channel Members
Different manufacturers have different abilities to select qualified intermediaries. The manufacturers must be aware of the characteristics that are essential to be an appropriate intermediary, whether they are finding it easy or hard to recruit them. The factors that need to be analysed are business experience (in years), profit and growth records, other lines carried, cooperation level, creditworthiness, and reputation. In case of sales agents as an intermediary, the manufacturers must evaluate the character and number of other lines to be carried out as well as quality and size of their sales force. And if, the intermediaries are department stores, then the manufacturer must intend to scrutinise the location, type of clients and future sales growth. There are large numbers of wholesalers and distributors available in the market from which the marketer needs to select their channel intermediaries. Certain marketers only prefer channel intermediaries to sell their goods. Hence, it becomes significant to prudently select the intermediaries.
Selection Process of Channel Members
Identifying the Potential Channel Members: The channel manager has a wide range of sources available to find the potential channel members. Some of the important sources are as follows:
Field Sales Organisation: The field salesforce Of an organisation can prove to be a good source for finding new channel intermediaries. Usually, the salesforce know better about the territory in which they work. Therefore, this may help them to identify the potential intermediaries available for the firm. At times, the field salespersons of a firm may come in contact with the salespeople of the key intermediaries representing some other firms. When an organisation plans to change or extend the marketing channel in a particular territory, then this source may help in a significant way as it can provide economical and better alternatives to the firm regarding the selection of channel members.
Trade Sources: The sources like trade associations, directories, trade publications, trade shows, other firms selling similar products, and the “grapevine” provide valuable information regarding the potential intermediaries.
Re-Seller Inquiries: Several firms gain information about the potential channel members by inquiring directly from the intermediaries Who are interested in managing their product-line. For some manufacturers, direct inquiries act as the main source in providing information about the potential channel members. The firms receiving large number of inquiries from potential channel members are considered to be the most prominent ones in the industry.
Customers: The customers of potential intermediaries also serve as the of information for few firms. According to some manufacturers. customers give an honest opinion about the intermediaries who work for them. By conducting an informal or formal survey of various distributors in the marketplace, the manufacturers can gain information about the potential intermediaries.
Advertising: Another approach to find potential channel members is to publish advertisements in trade journals. Through these journals, a large number of inquiries can be made about potential channel members. It can provide Wide range of options for selecting an ideal channel member.
Trade Shows: Trade shows or conventions are an effective way of finding out the potential channel members. Different trade organisations operating at wholesale and retail levels organise annual conventions where a number of organisations operating at wholesale and retail level are represented. This is one such place where a manufacture can gain access to numerous potential channel members. These conventions can be beneficial to small manufacturers dealing in consumer goods like gifts, hardware, toys, sports goods, etc.
Other Sources: The sources which are useful in finding potential intermediaries are:
- Banks, Chambers Of Commerce, and local real estate dealers,
- Direct mail Solicitations,
- Yellow Pages, Classified telephone directories,
- List brokers who sell lists of names of businesses,
- Independent consultants,
- Business databases, and
- Internet.
Selection Criteria for Channel Members: After identifying the needs of customeff to be fulfilled, the types of channel structure is determined and evaluated them on the basis of certain criteria. When the list of potential channel members is developed, the next step is to assess the prospects on the basis of the selection criteria. For the selection of intermediaries, the two major criteria are important, firstly, that the intermediaries must have a good knowledge Of market and secondly, the market coverage. On the basis of these two criteria. sub criteria for selection can also be developed. Some of the sub-criteria are:
- Experience of channel members,
- Product and pricing factors,
- Administrative factors,
- Risk factors, and
- Intensity of sales.
Finalising the Channel Members: A selection process is a mutual decision of two parties. It is not only the manufacturer who is involved in the selection process but it also involves the intermediaries at the wholesale and retail levels. The large and well-established intermediaries are very selective about whom they will select as their representative. The manufacturers cannot expect the ones who are reputed and extraordinary in their work to stand in line. Instead, for getting their services, manufacturers must need to have most effective selling job. The manufacturers and producers can use various inducements to secure the services of certain channel members. All this is directed to convey the potential channel members, that the firm will always extend its support to them. This is done so that they become more successful in this field. In order to secure channel a fir-ill can offer numerous incentives, some of which can be:
- Profitable product line;
- Promotional and Advertising Assistance;
- Management support; and
- Cordial relationships and unbiased policies.
Training of Channel Members
The selected intermediaries must be provided effective and careful training sessions because the intermediaries are considered as the company by the Customers. For example, Microsoft conducts a set of course and certification exams to assess the ability of resellers which is handled by third-party service engineers. The ones who pass the exam are known as the ‘Microsoft Certified Professionals’ and only they can use this designation to promote the business. The intermediaries are seen as the company in the market therefore it the responsibility of intermediaries to maintain a good and high image Of the company they are representing. Thus, training is an important factor to be considered by all companies.
Types of Training for Channel Members
The types Of training for channel members are:
l) Field Training: The channel sales people are provided on the job training regarding achieving sales, ensuring the quality Of merchandise and collecting payments from the market.
2) Class Room Training: The distributors and his staff members are given classroom training on the company’s product line, the competition level and the ways to handle the competition so as to gain large market share. The points mentioned below must be addressed in the initial training session:
i) The product and its competitive position,
ii) The attributes and features of the product,
iii) Sales merchandising, marketing and promotional material must be reviewed,
iv) Details about the prices, commercial terms and Other such things. Installation, fundamental sales, servicing techniques and procedures must also be discussed.
v) Detailed follow-up training must also be planned.
3) Orientation program: Orientation programs are special which are organised to launch a new product and the way in which the product has to be launched.
4) Training for Paper Work: Intermediaries are trained to prepare reports and maintain records.
5) Training for Care of Company Products: The distributor or the C&FA are trained to take appropriate care of the products that are in their custody.
6) Technical Training: For technical products, intermediaries are provided with the training of all technical specifications and developing skills to handle all types of customer queries.
7) Installation Training: In case of industrial and technical products, the staff is provided training on installation procedure, identification of specifications, maintenance and repair and ways to give effective demonstrations to prospective customers.
8) Servicing Training: Servicing training are given especially for engineering products such as automobiles.
Training is a continuous process since the market is dynamic in nature and the customers’ expectations keep on changing. An effective training program intimidates the channel members to devote more resources and time on company’s products and services, in order to make them more productive.
Motivation of Channel Members
Every company has a definite sales and growth target which can only be achieved by putting in extra effort from the company’s sales force and their channel members. In order to receive the desired results consistently, the channel members must be kept highly motivated. The company must constantly remind the channel members that they are the part of the company and that they are also responsible for satisfying the needs of customers. Channel Members can be motivated through training programs, capacity building programs, promotional support. marketing research and also by way of working with them. Initially, the company must understand the needs and requirements of the intermediaries and the factors that influence them to perform beyond their capabilities in delivering customer satisfaction. A company must consider its intermediaries and customers equally. The needs and requirements Of the intermediaries must be identified and channel positioning should be done in order to provide enhanced value to the intermediaries. The aim of intermediaries can be a good relationship that is based on partnership, cooperation or distribution programming. The major challenge faced by all manufacturers is to gain the cooperation of intermediaries. For this purpose, manufacturers basically use positive motivators like special deals, high margins, premiums. display allowances, cooperative advertising allowances. sales contests and display allowances. Sometimes, they may also use negative ways like slow down delivery, threaten to reduce margins or terminate the relationship. The main drawback of this approach is that it is based on the basic stimulus-response thinking.
Strategies to Motivate Channel Members
A company uses the following strategies to motivate channel members:
1) Relationship Marketing: This type of marketing takes place when mass marketing for variety of products has already been undertaken and the conventional method of advertising has failed to deliver desired results. Relationship marketing stresses on the company’s relations with the intermediaries. A strong relationship between the company and an intennediary helps to enhance sales in the long-run.
2) Benefits and Costs Offered to Intermediaries: The distributor must be provided with certain benefits from the company. Other than the benefits, the Of overheads also affects the distributor positively. Some of the benefits to a distributor can be:
i) Reduction in the amount of capital employed by the distributor,
ii) Lower operating cost,
iii) Reduction Of overall risk,
iv) Availability of specialists’ services,
v) Customer finance schemes, and
vi) Improved sales promotion.
3) Cooperative Programs: It is a traditional method used for motivating intermediaries. Under this approach several benefits are provided such as advertising allowance, sales force training, commission on extra sales, free goods, etc. This program results in improvement of sales volume of intermediaries.
Evaluation of Channel Members
The ewaluation of channel members is crucial for determining the retention, training and motivation decisions. Through evaluation, necessary information regarding the channel member is attained which can be used in deciding whether to retain the channel or drop it. This process also helps to identify the shortfalls in the skills and competencies of the distributor, for which training programs can be organised. But, the scope of evaluation is limited to an extent, where more power lies in the hands of channel members. Alternatively, if the manufacturer have more power as they have strong brands and several distributors for selection, then the frequency and scope of evaluation becomes wider. It is essential to evaluate the performance Of the channel members on periodic basis. A channel member may have been effcient earlier but may not be performing well in the present scenario. The reason behind this can be self-satisfaction or having inadequate skills and resources to perform effectively. Hence, the costs associated and performance levels (service output) of channel members must be evaluated. In addition, the changes in technology or in the marketplace may require shifting of responsibilities from one channel member to another channel member. Lastly, the manufacturer should also re-evaluate the compensation offered in lieu of performance to the channel members. For example, if a is selling inventory in no time and also is providing additional needs and requirements of the then he must be compensated accordingly. As per experts’ opinion, the purpose of distribution is to make company’s product exsily available to those who need them. Therefore, While evaluating the channel members this must be kept in mind that how well a distribution channel is sewing this purpose.
Methods of Evaluating the Performance of Channel Members
The different methods through which the performance Of channel members can be evaluated:
l) Activity Based Costing: In this method, the cost Of a product or service is calculated on the basis Of the activities that take place while developing the product or service. The cost at which activities are performed in a company is measured by ABC method. It also helps to provide the accurate cost information to the decision makers. This method also creates a detailed report of the overhead cost, which involves all the indirect and support expenses related to the production process, and then connecting them with processes and activities. Finally, these costs are linked With the concerned products and services. ABC method explains that the production Of a product consisting Of a number Of activities which govern the associated costs. Whereas, in traditional costing, all the associated costs are directly governed by the products or services. Under ABC method, all activities related with the production of products are identified through micro-analysis, regardless of the group size and number of products in each category. The identification Of activities also involves details Of revenues generated and resources utilised at each level. On this basis, the manager is able to prioritise its activities and focus on the activity at the top priority. It also helps the managers to divide the expenses associated with the utilisation of resources and activities of different levels. The managers must always attempt to carry out activities using fewer resources. The level Of profit is positively affected by the reduced level Of resources utilisation for a given Output level Or increased level Of Output for a given resource level. The application Of ABC has played an important role for many companies, e.g., P&G applied the cost-revenue analysis at a micro-level which increases the profit level of the company.
2) Direct Product Profit: Allocation of shelf space is a key parameter for sellers as different products contribute differently towards profit and sales, Usually, profitable items are given more priority by the intermediaries while allocating shelf space to the products. Intermediaries use different approaches like non-linear programming, mathematical programming and direct product profit (DPP) for the allocation of shelf space. Among all approaches, direct product profit (DPP) is largely used by retailers for shelf management. ‘Direct product profit’ refers to the contribution of a product towards the channel member’s profits. This method is used to find out the product’s contribution to profits based on its gross margin. DPP believes that the gross margin solely might not be able to the actual performance of the product. Therefore, there are other factors also which determine the profits. As a result, in this method dinxt costs such as delivery cost, warehousing cost, and cost incurred while placing goods on shelf are subtracted from the gross profit. Cash discounts, if any, are added to the gross profits. The main issue of retailers is the calculation of ‘Shelf Yield’. This is calculated as follows:
Shelf Yield = (DPP per item) x (sales per week) / (Square metres occupied)
A high shelf yield can be attained by having a low gross margin product with a low direct product costs, low space occupancy and high sales. Alternatively, a low shelf yield is the resultant of a high gross margin product with high direct product costs and high space occupancy and low sales.
Channel Audit: In order to evaluate the channels, a company must conduct quarterly audits involving some important distributors. Channel audit is defined as a check-and-balance vehicle which helps the company and its distributors to analysis the position of business relationships and takes corrective actions for the overall improvement. By conducting a channel audit, the communication between the company and its distributors is encouraged, as they are usually busy in handling their manufacturers. The audit also forms a framework on the basis Of which the company and its distributors can evaluate and compliment or criticise the policies. It also points Out the areas Of strength, puts an end to the issues that the distributor might be hesitant in discussing and introduces new product and market ideas which may be profitable for the company. Other than all this, it also helps the company to review all the facets of distributor’s performance in the previous year, where both sides can express their view points. By and large, the channel audit provides a plan Of action to enhance the quality Of the relationship.
Modifying Channel Arrangements
Once, the channel members are finalised, the companies usually do not re-evaluate them. As a result, this can cause
potential harm to the marketing Of the firm. Therefore, it becomes necessary for a company to keep modifying the marketing channels as per the changing needs Of the market. Market is a cumulative place consisting of many factor; which play a critical role in the marketing of any product. These factors continuously change in the due course of a product life cycle. Some of the major factors are changes in customer preferences, competition, market share, environmental factors, and many more. Hence, the companies should give proper attention towards the evaluation of channel membx•rs_ Following factors should be considered While modifying channel arrangements:
Changes in Stages of PLC: A firm must that in accordance with the stages in the product life cycle, the distribution needs of the product also changes. With every stage of PLC, the most suitable distribution model is adopted. There is no single distribution channel that fits in all the stages of a product life cycle. For example, if a technical product is introduced in the market, then it may require a highly specialised channel due to its technicality and complexity. While, if the same product is in its maturity Stage, then it may not require the same channel but a simple channel Structure as people in this Stage are already aware of the product and its features. Therefore, the companies should modify the channel as per the changes in the PLC of the product.
Customers’ Needs and Preferences: Modifying the marketing channel arrangement is one of the key aspects for the success of an organisation, For a marketing channel to be successful it is important to fulfil the customer needs and demands. If not, then the channel may become obsolete, which will force the customers to find a new alternatives for the fulfilment of their needs. Hence, it is important to know the needs and preferences of customers, but due to the reluctance of existing channel members, the modification becomes much harder than it is in real.
Multi-Channel Marketing System: Conventionally, the firms used to adopt single marketing channels for the distribution of their products. But, due to the drastic changes in market dynamics and increased segmentation, the marketers are bound to select more than one distribution channel. In multi-channel marketing system, the firms adopt more than one marketing channel for the distribution of products to various segments. This process is also called a.s “dual distribution”. In order to cover all the segments easily the firms use than one channel. Here, different channels implement different strategies to distribute the products.
Managing Relationships in Channel
One of the key aspects to maximise the revenue and profit is the management of relationships with the channel members. Usually, the marketers have the information regarding the channel members, but are not aware of the total sales and the needs of ultimate consumers. The channel members who sell the products and services to ultimate consumers possess the significant information regarding consumer behaviour_ Hence, getting in touch with those channel members may help in getting the information about consumers. This helps in building up of mutual understanding and good relationship with the customers. The factors that influence the channel relationship are as follows:
Channel Cooperation and Coordination: Coordination and cooperation are the complementary terms which exist together. The success of a product to a great extent depends on the marketing channel adopted by the firm. It is almost impossible for a channel to be efflcient without coordinating with each Other, and for improving the performance of channel, cooperation among the channel members is very important. The channel members speed the process of replenishment, improve the customer service, minimise the costs, etc., by coordinating With each Other, in the absence of which neither the organisational goals nor the personal goals can be achieved. Therefore, the channel members should put considerable efforts in cooperating and coordinating with each other, as it builds more trust and helps in satisfying the customer requirements. A marketing channel is considered to be coordinated if the channel members understand their roles and responsibilities clearly and perform with the vision to serve the customers effectively.
Channel Power: Channel power can be defined as the ability of a channel member to influence the actions of other channel members. It is the capability Of a channel member that allows him to control the decisions of other channel in the same marketing channel. Usually, channel power is exercised to fulfill the needs of a channel member. But, if the same power is exercised on the channel members for getting their work done promptly, then an optimal marketing channel can be developed with minimum possible cost. Channel power is an important part of any distribution network. It acts as a balancing force that supports the members working together to achieve the channel goals. At times, it becomes necessary to exercise power as it compels the channel members to act in a way in which they would not have worked normally.
Channel Conflict: Channel conflict refers to a situation when one channel member competes with the other or against the internal sales department of a vendor. This conflict arises When a channel member feels obstructed by another channel member in the achievement of its goals. It can also arise among the different segments of an organisational department. It finds its way to arise no matter how well the channel is structured and maintained. Channel conflict is hidden initially and does not disrupt the work, but it comes in focus when it starts hampering the channel activities of organisation. Channel conflict has both positive and negative implications. On one hand, channel conflict is necessary as it creates a level of competition among the channel members which compels them to perform better. On the other hand, it hampers the channel efficiency and lowers down the morale due to which some channel members try to quit or find other vendors.