DAN EDDY, director of EMCG, explains the secret of making more money from your marketing and distribution channels.
Historians from the future who focus on these times of ours will doubtless pay particular attention to the extraordinary range of communications technologies deployed today.
The global internet, instantaneous voice and data communications that span the world in a fraction of a second, and the myriad private international computer networks run by corporations, have conspired to create a world where people are interacting in real and virtual space on a scale and with a complexity of prodigious dimensions.
The global communications revolution has major implications for people and organisations at every level of society in every part of the world - not least because it is making it so much easier and cheaper to interact. For anyone thinking of setting up a new business, doing so without taking into account the commercial opportunities furnished by this communications revolution is almost unthinkable. Indeed, more and more new businesses today are essentially offshoots of the global communications revolution.
Longer-established businesses, or new businesses operating in more traditional markets, are also in effect being thrown a gauntlet by the revolution. But unfortunately, they may fail to act because they have too much interest in maintaining the status quo or they simply may not always be aware of the scale of the opportunity. Yes, of course they will take every step to make the most of the new communications technologies for their own internal use and for communicating with customers and suppliers. But at the same time they are often short-sighted in one crucial respect: they dont think hard enough about the opportunities out there for using marketing and distribution channels as a competitive weapon - as a way of increasing efficiency, earning more revenue and more profit.
By marketing and distribution channels I mean the fundamental interfaces between your organisations core activities and your customers.
Channels are the basic means by which you deliver your value proposition. The value proposition covers all the elements of the reason why your customers do business with you, including how your business is presented to customers, the customers experience in dealing with your business, and the product or service itself as well as of course the benefits that result from the transaction and relationship with you.
The following are all examples of channels that are typically used today by organisations:
- alliance partner
- call centre
- direct mail
- direct sales force
- maintenance provider
Each channel has different capabilities, cost implications and roles in a particular market.
Many organisations build their success on the use of a particular distribution channel. Dell Computers, for example, is associated with the phone and the internet. To take another example, Astra Zeneca is famous for the quality of its direct sales force, Vodafone for its corporate sales force.
An organisations established channels may be fine in the short term, but it is in the general nature of markets today to change and broaden their remit and how customers interact with them.
In the long run the channel that brought the organisation most of its success in the past is rarely sufficient to enable companies to reach all customer segments efficiently.
Consequently, in competitive markets organisations need to rely on an increasing array of channels when communicating and transacting with customers.
For example, in the pharmaceuticals industry, growth in over the counter products, sold to consumers without prescription, has meant that pharmaceutical companies have had to develop new skills in managing new retail channels as well as their traditional direct sales force which focuses on doctors and pharmacists.
Even Dell, which prides itself so much on being a direct, predominantly internet business, does in fact rely heavily on multiple channels including repair and maintenance companies and even retailers. The reason for this is that the greatest efficiencies are increasingly available to those who use multiple channels not just to target different segments but also to take care of different customer related tasks such as product awareness, comparison, purchase, installation and repair.
For clarity and conciseness, in what follows Ill abbreviate marketing and distribution channel to, simply, channel.
Some of these channels have in fact often been created by the global communications revolution. Yet the question you should be asking yourself is not, in fact, are my channels sufficiently high-tech and state-of-the-art? because there is nothing inherently good about channels that are high-tech or state-of-the-art. What really matters is the power of the channels you are using and what they are doing to help you succeed at a commercial level.
What you really need to ask yourself can in practice be boiled down into two major and fundamental questions.
1) How smart are we being at using the best channel for each different type of customer and for the tasks that need to be performed to serve that customer cost- effectively?
2) How resourceful, ingenious and canny are we being at managing our channels to generate more revenue and profit for us and for our channel partners?
Lets look hard at these two crucial questions, whose implications apply equally to business-to-consumer and business-to-business markets.
1. How smart are we being at using the best channel for each different type of customer and for the tasks that need to be performed to serve that customer cost-effectively?
The simple fact is that some channels are better than others for different purposes and for different stages of market and business evolution. This is another way of saying that if you arent being extremely canny and thoughtful in how you match your choice of channel to your customers and to the developmental stage of the market and your business goals, you ought to be if you want to maximise your commercial success. This matching process is called market coverage and it is essential to understand the extent of your market coverage to make sure you leave no opportunity untapped.
And be assured that if you arent carrying out this matching process properly, your competitors certainly will be.
To take just one example, a new insurance company may focus on direct channels to reach its target customers but the reality is that only around forty percent of consumers buy insurance direct. To grow beyond a certain point the company will need to find new channels to reach the rest of the market.
In fact many of the UKs most successful banks and insurance companies operate multi-channel strategies more so than in other less mature European markets where pressures for change such a deregulation have yet to make an impact
To take another example: if you are a company selling inexpensive Mediterranean holidays to people aged 18 - 30, you can be confident that a high proportion of your customers will be happy (and indeed will most likely prefer) to book their holidays with you on-line.
On the other hand, if you are selling luxury weekend breaks in Devon or Cornwall to people aged 60 or over, its a fair bet they will want to book their holidays with you by phone and/or post. But there is more to it than customer preference; smart also means using the most efficient and effective channel for each distribution task so not only may you need different channels for different types of customer but you may also need to use different channels for different types of product or service and for different tasks such as creating awareness, informing customers and the actual sales transaction. This is because the effectiveness and cost of these channels in relation to each customer segment may be very different.
In fact, its very much worthwhile - to draw up a matrix matching channels to the tasks that need to be performed, recognising that channel configurations may be different for each segment and may vary according to the product characteristics, the stage of market evolution and the stage of your own organisations evolution.
Lets move on now to the second question, which is as vital for your success as the first. Answering this one correctly will improve your most important business asset of all: your bank account.
2. How resourceful, ingenious and canny are we being at managing our channels to generate more revenue and profit for us and for our channel partners?
The sad fact is that for many organisations the answer to this question is not very.
In some industries, such as the manufacturing of fast-moving consumer goods (FMCG), manufacturing and raw materials account for less than fifty percent of the price paid by the consumer.
The remainder of the price is accounted for by the cost and the profits (for example of the wholesaler or retailer) related to delivering the product or service via the channel.
Yet in most business-to-consumer and business-to-business industries, where the channel to the customer accounts for much of the price; there is almost always some potential for the organisations that originate the product to win more revenue and to increase their control within the channel by carefully managing their allocation of resources and the activities they perform.
Control is a key issue in channel management because it enables you to have a greater say in the delivery of your businesses value proposition but, importantly, it is also a means by which you can capture a greater share of the resulting profits
The strange thing is that, historically, most business leaders and organisations have focused much more on looking at their own internal operational efficiency (and aiming to cut costs here where they can) rather than re-thinking how they do business from first principles. This is due, in part, to the perception of greater certainty attached to cutting costs in your own business versus cutting costs in someone elses.
The key is to look at how to introduce control mechanisms that enable you to be more prescriptive in the delivery of your proposition and to influence the way revenue and profit are shared.
For example, at one end of the spectrum there are channel systems like McDonalds and Coca Cola both of whom rely heavily on franchisees. Yet the franchisees are both supported and controlled by tight management against a set of standards, the marketing power of the brand and a highly prescriptive contractual relationship.
In other industries control is exerted in a less overt but no less effective way.
For example, one of the worlds leading consumer products companies already runs its relationships with major retailers using a highly systematic and evidence-based approach to ensure that the resources they apply to managing the channel and the activities they undertake are differentiated and best-in-class in comparison with, not just competing suppliers, but also with suppliers of other product categories.
The impact can be dramatic in terms of revenue and profit uplift. Other suppliers using high street retail channels can often benefit from the approaches taken in other industries to control indirect distribution. Cross-industry practices can be applied in the other direction as well; Industrial and business-to-business companies have much to learn from consumer products companies approaches to collaborating with retailers in the use of customer data.
This thinking should not only relate to operating more efficient channels, thereby capturing the money that is released from greater efficiencies, but should also include new ways to gain revenue from the channels themselves by capturing a greater share of the channel as well as by helping the channel generate more revenue.
The basic point here is simple: it cannot possibly make any sense for you just to sit back and watch others reaping profits - and very possibly greater profits than you reap yourself - from distributing products and services that you, not them, have originated.
Instead, you should reach out to your customers via your channels, and you should take every reasonable step to get more of that profit for yourself whilst helping your channel partners to win as well. This requires a different type of leadership.
It is vital to think of your channels as the basis for success not as an afterthought or the last step to get your brilliant product to market. This means that you need to think about how to continually develop the capabilities of the channels you use, whether they are direct or indirect, to make them more efficient and effective. You also need to think about how you can build third party channel commitment to help you achieve your objectives.
This means that you have to work out how to make more profit from existing channels and you need to do the same with new channels that are being created.
This strategy of seeking to maximise your own revenue and profit from your channels should be applied to all the channels you use, and for all the categories of customer if this is approached in the right way you will also help any channel partners to win in the process.
If you want to make a difference in your business, whatever its focus, consider the following issues and prescription:
1. Coverage - measure your market coverage, understand customers channel preferences, identify segments that you are not reaching or that would prefer another channel,
2. Profitability - analyse the profitability of alternative channels and channel configurations for each segment
3. Cost and efficiency - explore the opportunity to deploy new channels or technologies to raise the productivity or to reduce the cost of existing channels this might include providing shared services or, for example, integrating call centres and internet with direct sales and service teams.
4. Control - be clear about the control mechanisms that are most effective in your channels and invest in them. These are likely to include commercial (monetary), contractual and your management approach.
5. Commitment - build commitment through; rewards, margin, degree of exclusivity ease of doing business, support, product quality, end-user pull [i.e. the extent to which customers ask for your product perhaps because of the strength of your brand]
6. Capability - develop programmes to improve your channel partner skills particularly in relation to your products and services.
Dan Eddy is a director of EMCG, an international management consultancy, with offices in London and New York, that works with organisations throughout the world to improve their marketing channel performance and profitability.