Business-model-canvas- Selecting and managing the channels

© Entrepreneurial Insights based on the concept of Alex Osterwalder

In this article, we will look at 1) an introduction to the Channels building block, 2) channel phases, 3) channel types, 4) advantages and disadvantages of alternative channels of distribution, and 5) a case study.

INTRODUCTION TO THE CHANNELS BUILDING BLOCK

This building block defines how an organization communicates with and provides value to its chosen customer segment. Channels are the touch points through which an organization liaises with its customers and as such, play a huge role in defining the customer experience. Channels can be categorized as marketing, sales or distribution channels.

Channels and Customer Relationships are directly linked to the ‘how’ of a company linking with its target customer segment. Most companies have a different medium to attract a customer and separate strategies on how to retain them. It is advisable to list separate channels for different customer segments if your organization is targeting more than one.

Before the 1990’s, companies were severely limited in their choice of channel. In fact, there was only one channel being used; the direct channel in which a customer would go to a score with salespeople and physical distribution occurred. Now companies have the choice of using physical channels or web/mobile channels to deliver their value proposition to their customer segment.

The distribution channel represents one of the quarters of the Marketing Mix and represents how an organization will make its product or service available to the end consumer for consumption or use. A Distribution channel can be direct, which means that the manufacturer sells directly to the customer, or it can contain intermediaries who may buy and resell the product, in the case of merchants, or represent the manufacturer without owning the product, in the case of Agents and brokers. Organizations have to take into account multiple factors when deciding between owning their channels, establishing partners to provide channels or employing an amalgam of both.

An organization which sells bulbs to lighthouses can have access to a multitude of channels such as a website where lighthouse attendants can view and purchase different kinds of bulbs, advertisements placed through Google Ads are also one of the channels. If the organization outsources after-sales services to another company, this company also represents another channel that links the company to the end-user.

A well-thought out Distribution strategy can become a source of competitive advantage for your organization, as is the case for giants such as Dell and Amazon. If your Distribution Channel is customer-centric as well, that is, it is tailored to convenience the end-user, it will be even more successful. 

How to select a distribution channel

When selecting a distribution channel, five elements need to be taken into consideration to ensure a good match for your business;

  1. The number of customer segments or the size of the market you are targeting.
  2. Investment required by the distribution channel – these will include an analysis of the different associated costs such as absolute value cost, cost per customer, fixed and variable costs and the profitability each channel option brings to the table.
  3. Whether the product is standard, in which case the same version will appeal across customer profiles and can be sold through an external channel or a non-standardized product which needs to be tailored to the customer needs and for which the company needs to have direct contact with the customer.
  4. Amount of control required over the distribution channel – the distribution channel can be characterized by open communication and free-flow of information or, if there is a possibility of competition from the distributor, then a much more closed relationship.
  5. It is also important to take into account how long a healthy relationship will take to be established with the distributor as well as the length of the relationship as well; factors which contribute to the flexibility of the channel.

Functions of channels

Listed below are some of the purposes of a typical channel;

  1. A medium through which an organization can educate its chosen customer segments about the products and services it provides.
  2. Providing customers with an opportunity to study and evaluate the organizations value proposition.
  3. Providing customers with the facility to buy their chosen products or services.
  4. Providing the customer with the Value Proposition.
  5. Providing the customer with after sales services.

CHANNEL PHASES

There are five phases through which a channel passes. A channel can be covering more than one of these phases at a time.

Phase 1: Awareness

How do we educate customers about the characteristics of the products and services we have? This is the marketing and advertising phase. It is how you let your customer know about your value proposition.

Phase 2: Evaluation

How can we aid customers in evaluating our Value Proposition? This is the promotion or ‘Try me before you buy me’ phase. The customer will evaluate, read about or use your product and form an opinion about it. A good company will educate customers with other competitors in the market and help them to evaluate their choices. In this way, you make your value proposition clearer to them and why you are a better option than your competitors.

Phase 3: Purchase

How can we help customers in buying their preferred product or service? This is the sales process and denoted the dollars exchanged for a particular goods and services.

Phase 4: Delivery

How do we deliver the promised value proposition to the customer?  This is the fulfillment stage and defines how the product will reach the customer.

Phase 5: After Sales

How can we provide After Sales customer care and support? This phase creates Advocates for your products and services amongst your target segment. This stage provides a person for the customer to call when they have a problem or question about the product. The higher the value of the product, the more likely it is that he/ she will require After Sales support.

CHANNEL TYPES

This is the bridge between the customer and the company. There are different channel types.

Own Channels

A direct channel will include your sales force that would go after your customer segment and bring them in. A website is another direct channel that can be under the company’s control.

You may also have your store, however the customer must choose to go to the store and then you can sell to him/ her, but this will be indirect selling.

By employing your own channel, you will have a direct relationship with the customer, and you will have higher profit margins. However, you will require more investment to create the infrastructure to deliver your product to the market, and the production to market loop will be slower. Additionally partners leverage long established relationships with retailers that you will not have access to.

Partner Channels

This is an indirect channel. In this case, the company will not sell to the customer directly but through an intermediary.

The company can do this by placing their products or making their services available at the partner store.

Wholesalers are also partner channels. Wineries create partnerships with wholesalers in different countries to sell their wine to the end customer.

With a partner channel, there will be a lower margin on the product but it would get to the market quicker, and there will be lesser investment required in infrastructure.

Heineken delivers their beer to wholesalers, bars and shops, supermarkets as well as retail chains such as Gall and Gall, a retail chain of liquor with its distribution channels. Alternatively, Heineken also delivers to its network of bars to which it delivers directly. Hence, Heineken uses different Distribution channels to reach its customers.

Apple has its network of stores as well as premium resellers. They also sell their products through mobile networks, retail chains, and websites. Hence, there are different distribution channels in use at the same time with varying profitability. Their stores are extremely well-developed as well as experiential for any consumer that walks in. This may impact the profitability of the store, but it also allows Apple to communicate an entire experience to its consumer, and through this experience, establish a direct relationship with the customer.

ADVANTAGES & DISADVANTAGES OF ALTERNATIVE CHANNELS OF DISTRIBUTION

Direct distribution

This can be done through personal selling, the internet, telephone or mail.

Personal Selling

In the case of personal selling, there is a lot of conveniences afforded to the customer including personal demonstration, home delivery, and satisfaction guarantees. The cost of a direct selling channel, especially if it is based on personal selling is low and can be easily afforded by an individual starting a business. Personal selling is a wonderful way to establish a strong relationship with the customer and gain insight into big customers’ preferences. The Return on Investment in personal selling is also higher, and the company can exert control over the brand image and positioning of the company.

However, if the organization is bigger, personal selling costs can be prohibitive. This particular distribution channel is also limited in its reach and creates too much dependence on people who may leave the organization and take their clients with them.

The Internet

The internet, on the other hand, provides a low-cost channel to target a wide customer base. It also provides convenience to customers in the form of instant access, ease of use and personalization. It is also a wonderful source of information for the customers is available 24/7 and gives them the chance to establish two-way communication with the company by letting them provide feedback and share preferences.

Conversely, the internet is an impersonal tool that does not allow the customer and the company to establish human contact. There is also the possibility of annoying customers by sending them too much spam. It also limits how the customer can directly interact with the product and requires an infrastructural investment. There is also a lack of after-sales service opportunities.

Telephone

The telephone is an inexpensive ad efficient way to establish direct contact with the customer. It is also a good way to establish a relationship, create leads and reach customers in remote areas. On the other hand, the telephone, due to being outsourced to third world countries and used as a medium for marketing may seem intrusive and annoying to customers.

Mail / Email

Mail is another direct medium that is inexpensive and can reach a large audience. It is also easily customizable to different customer segments and allows for easy alteration. It is a wonderful way to create a brand image, communicate innovations or new products and foster good will. Again there are challenges with this medium such as the possibility that customers consider it junk mail or choose to never peruse its contents. This medium in general has low ROI.

Indirect Distribution

Indirect distribution can be carried out through retailers, agents/ brokers/ reps and distributors.

Retailers

Retailers come with many positives such as already established infrastructures of stores, webpages, and aggressive marketing strategies. Retailers have their established brands that can provide a bolster to the already existing brand. There is also personal service and after sales services provided by the retailer, as well as a being a source of market and consumer intelligence.

This channel, however, leads to lower margins and loss of control. There is a disconnect from the end customer, and the retailer may be stocking competing brands side by side. This is a complex channel that can be expensive for a new business.

Agents and Brokers

Agents, brokers or reps provide personal selling and have established relationships with customers. They have a broad network, lesser distribution costs and are a source of market intelligence. They also assume the role of promoting the product, as well as share the burden of overhead costs.

Conversely, this channel is more sensitive to pricing, difficult to control and train. They may represent competing brands and maintain loyalty to the highest selling brand. This channel also means the company has less control over its brand image and no opportunity to establish a direct relationship with the client.

Distributors

Finally, distributors have a focused customer base, assume inventory risk, have a wider reach and are technically trained. However, they carry competing brands, have a say in the final pricing of your product and your company does not have control over the final look of the product to the customer. They also have low customer intelligence and represent an additional investment.

CASE STUDY

Google is the largest technological company in the world. Its main product is its search engine that is the most used search engine in today’s day and age.

Google employs two channels to deliver its value propositions to its customer segments. It has created Global Sales and Support teams as well as a Multi-product Sales force.

  1. For its individual customers, Google has a DIY approach with a high level of automation to make the process convenient and to appeal to the average Googler.
  2. Google’s Global Sales and Support team consists of specialized teams across industries that establish relationships with advertisers and network members and aid them in gaining maximum value from their relationship with Google.

Google’s sales force sells Search, Display and Mobile advertising and is focused on fostering relationships with major advertisers and premium internet companies.

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