15.05 – Understanding Your Channel Structure
Efficiency should be the driving goal behind your distribution channel strategy. Channel efficiency is achieved by minimizing the number of transactions involved in getting the product to the end user.
The Importance of Channel Efficiency
A direct channel, where 4 producers and 4 customers do business directly, results in 16 possible transactions (4 × 4) since each producer has to make 4 separate transactions to reach all 4 consumers. In reality, the numbers are much higher when dealing with markets involving dozens or hundreds of producers and thousands or millions of customers.
Using an intermediary can significantly lower the number of transactions. With an intermediary, you only need 8 transactions (4 + 4) to connect all 4 customers with all 4 producers. Each producer or customer deals only with the intermediary, who makes all the necessary connections. Even with markups or commission fees, intermediaries can lower overall distribution costs due to fewer transactions.
The Role of Intermediaries
Intermediaries handle business transactions for you, simplifying the distribution process. This example highlights the logic behind using intermediaries in more complex and larger distribution channels. Choosing a direct channel means handling sales, service, returns, and more directly with customers, resulting in significantly more work. This additional workload may not be worth your time and the opportunity cost of dealing with customer needs instead of executing marketing programs to gain new customers and sales.
Trends in Channel Structure
The trend is toward simpler, more direct channels, both online and offline. Marketers should be prepared to handle a large number of customer transactions to stay in step with this trend. A good general rule is to use only as many intermediaries and layers of intermediaries as absolutely necessary to reach customers. Keep it simple and add more parties only if you can’t manage it well yourself.
Balancing Direct and Indirect Channels
Finding the right balance between direct and indirect channels is crucial. Direct channels offer greater control and customer interaction but require more resources and effort. Indirect channels, through intermediaries, reduce the workload and streamline transactions but may involve additional costs.
Simplifying Your Channel Structure
To simplify your channel structure, consider the following:
- Evaluate Your Needs: Assess the complexity of your market and the number of transactions required to reach your customers.
- Choose the Right Intermediaries: Select intermediaries that add value and reduce transaction complexity.
- Minimize Layers: Use as few layers of intermediaries as possible to keep your distribution process efficient.
- Focus on Core Competencies: Concentrate on your strengths and outsource functions that can be managed more effectively by intermediaries.
Conclusion
Efficient distribution channels are vital for reducing costs and enhancing customer satisfaction. By understanding and implementing a streamlined channel structure, you can ensure that your products reach customers effectively while minimizing the resources required to manage these transactions.
