No matter how good the product or service is, without being able to place them where customers can see them, try them and buy them, the firm is simply not going to generate revenue in any volume.
A business which has an intention to grow, especially one that wishes to grow aggressively, has to find channels to market which will put their products in front of the intended target customers in sufficient numbers that the growth objectives can be achieved. There are many possible channels to market and the business needs to choose those which are most appropriate for the type of product or service being offered as well as the type and purchase preferences of the target customer.
The channel to market is most often determined by the price of the product or service. Thus a low priced product must achieve significant volumes to generate growth of any magnitude. On the other hand, higher priced items or services need less capacity in the channel but are often more complex to sell.
With low priced products or services, few companies develop their own distribution networks, instead they distribute through existing channels such as retail stores. Servicing the retail stores will be a network of high volume delivery routes, lower volume wholesalers and a network of agents and distributors. In order for the firm to achieve significant volumes, it must be able to gain access to this vast network of distribution services. Access will need to account for any preexisting agreements which exist with competitors, the profitability of the product or service to the channel and whether the owners are willing to set aside capacity and space for the new product.
In some markets multiple channels for low value products can exist. Thus some products may be sold through supermarkets, pharmacies and department stores. Each is likely to have its own feeder systems. A lack of access to one may not prohibit the firm from securing sufficient sales through others. However, some markets, such as consumer packaged food products, are mainly sold through supermarkets. Without adequate access to that channel, the growth of the firm is limited. If the firm is up against strong incumbent competitors, it may not have the bargaining power to gain the shelf space needed to generate the level of growth it
desires.
Products which compete closely with others will have difficulty gaining attention in an existing channel which is operated by a few large retail corporations.
They will have existing agreements with the large product suppliers and may not wish to upset those relationships. On the other hand, a product with very distinctive characteristics which has no close competitor and fills a compelling need for customers, will find a ready acceptance within such channels. This would be particularly so if the margins offered to the distribution channel were generous.
Lower priced products with a higher service component or higher knowledge requirement of sales staff often utilise a franchise/agent/distributor model. The problem they are solving is one of replication to achieve scale. To achieve replication and scale they need to move the product or service delivery to a highly standardised offering. This form of delivery ideally suits a franchise operation. The problem of funding growth is also partly alleviated with franchise sign up fees. Providing the product or service can establish some unique selling proposition, rapid growth within this type of channel is possible. If a strong brand can be quickly established, a leadership position can often be secured. Even if new entrants come into the market to copy the offering, the brand is often sufficient to ensure additional margins and continued growth.
Higher priced products generally require exclusive outlets or a direct sales force. Most products sold through retail outlets which carry high prices are normally well established brands. To establish a new retail channel requires considerable funding and a product with very high customer pulling power. Very few products can ever achieve such success.
Products which have been successful in this regard have normally come from very large corporations that can fund the roll-out and trade on their corporate identity to give them credibility with potential customers.
The normal channel for high priced items is via a direct sales force. In the case of consumer products, this would be through established channels which deal with like products and services, such as professional practices, real estate firms and dedicated outlets. Business to business products are normally sold via agents, distributors and a direct sales force. The limit to growth is usually the speed with which such agents or distributors can be recruited and trained and/or the pace at which direct sales staff can be recruited and trained. The more complex the product, the more specialised knowledge required to sell it, the more difficult it is to find appropriate sales staff.
Many firms have turned to agents and distributors to create greater capacity in their channels to market. The most appropriate distributors are those which already deal with the target customer and offer a complementary product or service. The firm thus rides in on an existing channel with sales staff who already understand similar product and service purchasing processes. But in this situation, the firm has to generate enough commitment from the distributor to have them devote the necessary resources to train their own staff to handle the new product or service. The greater the investment required and the longer it takes to gain a return on the investment, the fewer potential distributors the firm will be able to attract.
Clearly then, a product or service which has a high margin, a well defined target customer and a compelling need to buy, will be able to attract distributors more easily. If the level of investment can be reduced, the amount of training reduced through simplification and standardisation and the value proposition made easier to deliver, potential distributors are more likely to sign up.
Growth is both a factor of capacity and velocity. Thus a firm will limit its growth if it cannot establish sufficient bandwidth within its outbound distribution channels. At the same time, growth will be limited if the sales cycle is long. To the extent the product or service can be simplified, standardised and packaged, both the capacity and the velocity can be increased.
When it comes to distribution channels, many entrepreneurs believe more is better. In fact, the reverse is true; having fewer channels helps avoid some serious problems with channel conflict.
Getting to market is a challenge for any business and choosing the right channel is an important strategic decision. Adding extra channels may be the right thing to do, but only if the firm has worked through how it is going to manage any overlap and deal with any conflict which arises. When the firm has wholesale, retail and internet distribution channels, its own staff and alliance partners may not be overjoyed.
Channel conflict occurs when two or more channels of distribution promote products to the same customer. For example, the consumer who can buy from a retail shop or over the internet may be able to work out which is the cheaper, thus cutting out one party. The conflict occurs where the consumer uses the resources of one channel to evaluate a product or service and then buys from another. The firm is then competing with itself and potentially wasting resources. Even where the firm owns both channels, it may have sales incentives which are being compromised.
It is difficult to motivate staff if you are undermining them.
A company which seeks to ‘go direct’ and yet wants to retain its existing marketing channel partners can create a conflict of interest with its existing channels. The partners see the company’s actions as a threat to their commercial existence. The commercial world is full of examples. As airlines, for example, compete more aggressively in the packaged holiday market, their channel partners – the travel agents – need to find new ways to attract business.
How do you avoid channel conflict? You have to design a channel strategy which clearly matches a specific type of customer with a chosen distribution channel. Your marketing strategy should direct the right prospects to the right channel. The various channels also need to clearly understand which prospects they are pursuing, so that their sales efforts will not be undermined by another channel.
Markets can be divided up by territory, type, vertical market, products offered and so on. The level of achievable business needs to reflect the size of the potential market and the resources available to secure the business. The sales commissions and other incentives need to be aligned to achievable targets.
Conflicts between channels may still arise, so rules of engagement need to be established which are fair, objective and equitable. If necessary, engage an external arbitrator acceptable to both parties.
Where the same products are offered in overlapping channels, consider using different brands and perhaps packaging the products with slightly different features or accessories. Consumers may compare the two, but you do not want them to be able to shop around for an identical product looking for the cheapest price. For example, you can use an internet site solely to promote products and direct sales to your retail channel, but if selling online care needs to be taken with internet discounts, as these will be seen by your other channels as undermining their sales efforts.
Smart firms involve their channel partners and staff in developing the marketing strategy. The partners may be able to see areas where they can be more successful and where a new channel will supplement their own efforts. By being actively involved in the design, they may come up with some creative suggestions. They also have a chance to voice their own concerns and could help to create a channel design which is acceptable to all parties. It can work effectively – it just needs some careful planning up front.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
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