Channel Management

To be effective, the provider of a product or service needs not only to be able to offer something of value to the customer, but also able to deliver it to market. Although direct marketing can do this effectively in many situations, an increasing number of organizations are offering their products or services through multiple channels -- networks involved in delivering the product or service to market. To effectively add value to the product or service for the customer and to optimize the value of the channel to all its partners, the channel needs to be effectively managed through the development and implementation of policies and procedures that gain and maintain the cooperation of the various organizations in the channel and coordinate their activities. The major factors influencing both the short-term action of the channel as well as its long-term evolution are the requirements of the demand chain, the capabilities and costs of the channel, the power of the channel, and competitive actions.

No matter how effective or efficient an organization is in producing a product, if that product can not be put into the hands of consumers, the organization will not be successful. Although cottage industries may produce goods and sell them directly to the customer, for most larger businesses this is no longer true. For example, a patient is not allowed to purchase medication directly from a pharmaceutical company and must go through a pharmacy to get a prescription filled. Similarly, although one may visit a tailor from time to time to have clothes altered or the occasional garment made, most people purchase clothes from businesses that not only offer a selection of garments, but a selection of garments from different manufacturers for comparison and convenience. Although some stores sell their own brand of products such as canned goods or over-the-counter medications, these products tend to take up a minority of their shelf space. However, it is not only tangible products that need to be delivered to the customer. Organizations in the service sector also need to market and distribute their services. For example, hotels may sell their rooms through any number of media and methods including travel agents, tour operators, tourist boards, centralized reservation systems, and on-line travel services.

Distribution Channels

The network involved in delivering a business's product or service to market is called the distribution channel. A channel is a route used by a business to market and distribute its products or services (e.g., wholesalers, retailers, mail order, Internet). The simplest channel, of course, involves only the organization itself selling directly to the consumer. However, many other channels are available. Direct marketing is a customer relationship management strategy to help the organization identify prospective customers, acquire data concerning these prospective and current customers, build relationships with customers, and influence their perceptions of the organization and its products or services. In direct marketing, the provider of the product or service delivers the promotional message directly to potential customers on a one-to-one basis rather than through the use of mass media. This can be done by the organization itself (e.g., sales call by a marketing representative) or through an agent (e.g., telephone marketing through a third party agency). Another marketing channel uses mass media (e.g., newspaper or television advertisements). Although mass marketing can reach more potential customers more economically than can direct marketing, the personal approach of direct marketing often results in a higher response rate. An organization's products can also be sold through distributors or wholesalers who sell to retailers or through retailers who sell directly to the customers. Figure 1 illustrates some of the channels that may be used by organizations.

Channel Management

Just as an organization needs management in order to run smoothly, so do the partnerships within a channel. Channel management -- also referred to as channel relationship management or partner relationship management -- is the development and implementation of policies and procedures to gain and maintain the cooperation of the various organizations in the channel and to coordinate their activities. Channel management helps organizations manage activities and the flow of information among the channel partners.

Although channel management is necessary for effectiveness of the marketing strategy and of the organization as a whole, many channels are dysfunctional. Stronger channel members often impose their will on other members in the channel and the weaker members suffer as a result. One of the objectives of channel management is to optimize the benefits for all members of the channel; policies and processes need to be developed and implemented that will minimize this problem. In addition, good channel management needs to consider the needs of the customer -- the ultimate user of the processes in the value chain -- which are often ignored in the design of the distribution channel.

Channel Stewardship

A recent development in channel management is the concept of channel stewardship. This approach to channel management is the ability of a given participant in the distribution channel to design a strategy that addresses both problems of optimizing benefits for channel members and considering the needs of the customer. In channel stewardship, the channel processes and communication flows are design to take into account the best interests of the customer and optimize profits for all partners in the channel. A channel steward -- the channel partner given this task -- can be any member of the channel including the manufacturer or service provider, the maker of a key component of the final product, the supplier or assembler, or the distributor. Effective channel stewardship has two outcomes. First, stewardship can help increase the value of the end product or service for the customer as well as the value of the relationship for the channel steward. Second, stewardship results in a stronger yet more flexible channel. In an effectively managed channel under this paradigm, the channel partners that contribute to the utility are rewarded and the less valuable partners are weeded out.

Designing Effective Marketing Strategies

In designing an effective marketing strategy, a number of factors need to be considered. These factors tend to be the same regardless of the industry or the specifics of the channel. The major factors influencing both the short-term action of the channel as well as its long-term evolution are the requirements of the demand chain, the capabilities and costs of the channel, the power of the channel, and competitive actions.

Demand

Traditionally, demand is defined narrowly as the desire of the customer for a product or service. However, for effective channel management, demand needs to be viewed in a broader context. In addition to the desire of the customer for the product or service, demand can also include the customer's desire for supplemental or supporting products or services, maintenance of the product, training about the product's use, etc. For example, when purchasing a new computer, there may also be a demand for a new printer or other peripheral, an extended service contract, or training or consulting in how to use the new computer. Effective channel management should include consideration of all such demands, not just for the main product or product line.

Capabilities & Costs

Another factor to be considered in channel design is channel capabilities and costs. An effective channel needs to be a value chain where each partner adds value to the product or service before it is offered to the customer. Channel partners who do not add to the value of the product or service raise its cost without raising its value. Value can be added to a product or service by adding information (e.g., writing a user's guide or technical manual), inventory or warehousing the product, convenience for the customer (e.g., delivering the product to the customer's door or making it available in a retail outlet where the customer can examine or compare products), and so forth. However, these activities not only add value to the customer, but also add cost to the channel partners. The comparative benefits of these additions must be estimated in order to determine whether or not the additional capabilities are of benefit to the channel members.

Distribution of Power

Another factor to be considered in the design and management of a channel is the distribution of power among the channel partners. More powerful partners exert more influence over the policies and procedures governing the relationships within the channel. This power can come from two sources. A channel partner may have power because it has a unique product or technology that is necessary for the effectiveness of the channel (e.g., in a channel distributing computers, the computer manufacturer will have significant power). Power can also come from a channel partner's access to the market or intelligence about the market (e.g., although the computer manufacturer may have power because of its product, if it does not know how to effectively market its product, the other partners in the channel that do have this skill also have power). Power is often also correlated with other factors such as the partner's size. While in some ways this can be an advantage for the partner exerting the power, it can also be disadvantageous not only to the weaker partners but to the channel as a whole. Channels should foster cooperation and communication among the partners if they are to be effective. Channel management requires coordination and facilitation of these relationships.

Actions of the Competition

Finally, it is imperative that channel design and management take into account the actions of the competition. No matter how well an organization or channel markets a product, most customers make their purchasing decisions after some level of comparison with similar products. Therefore, the policies and procedures associated with the channel structure and management need to be flexible so that the channel can not only respond quickly and appropriately to the demands of the customer, but also to meet or exceed the offerings of the competition.

Applications

E-Commerce Pros & Cons

The advent of the Internet led some observers to predict that online retailing would become a superior channel to store-based retailing. After all, in e-commerce, the customer can shop from the comfort of home, compare prices and products, and have items delivered directly to the front door. In reality, however, although the Internet is a potent marketing channel for getting goods into the hands of consumers, it is not without its drawbacks. Although one can compare prices and items on-line, it is impossible to try on a garment, compare two physical items (as opposed to pictures or descriptions) side by side, or see if the blue in the oriental rug is compatible with the blue on the living room wall. Although some organizations have developed various ways to overcome these obstacles (e.g., free return shipping for exchanges; virtual models for "trying on" clothes), the bottom line is that these approaches add significant time to the transaction. When a product is needed quickly, promises of free returns do not suffice. However, the Internet continues to be a viable channel for reaching the customer.

Strategies for Conducting On-line Business

There are several different strategies that are taken by organizations that do some or all of their business on-line. These strategies vary in the extent to which they use either or both online and off-line channels. In the off-line focused strategy, the primary channel used is off-line with on-line marketing efforts playing only a supporting role. In the off-line focused strategy, a web site may be published that provides customers with information about store hours and locations, describes the range of products that are sold, or offers customer service options. For example, many grocery stores use this strategy. One can go online to read the weekly sales flyer, send a comment to the store or corporate manager, or find driving directions to the store, but one cannot buy groceries on-line. This strategy is often used when a sophisticated distribution system is needed to provide goods, personal consultation services are offered that can only be done in person (e.g., interior decoration services), or there are contractual restrictions among the channel partners that prohibit more on-line involvement. On the other end of the spectrum are organizations that primarily use the on-line channel for their marketing efforts. Some businesses only do business on-line and use traditional marketing methods (e.g., television advertisements; infomercials) to point the customer to their web site. This strategy can be an effective way to bypass the "middleman" or to take advantage of the lower costs associated with the on-line channel (e.g., no need for the overhead associated with a physical retail store).

Multi-Channel Strategies

In addition to these two ends of the spectrum, some organizations use a more balanced approach to using both on-line and offline channels. In the isolation strategy, the on-line and off-line channels are distinct entities, often managed separately or even offered as independent brands. In this approach, the organization does not offer any incentive to customers to switch between one channel and the other. This approach can be effective in situations where the two channels are used to appeal to different market segments (e.g., a younger or more technologically savvy target market for the on-line channel and an older or more traditional target market for the off-line channel). Another way to utilize both physical and virtual channels is to integrate them. In this strategy, the two types of channels are viewed as complementary rather than as independent. This type of multi-channel approach is typically used to provide convenience to customers. For example, some retailers allow customers to order on-line and pick up their purchases in the store. Other retailers may offer the same products through traditional catalog/mail-order sales, the Internet, or in retail stores.

Despite the initial predictions that on-line channels would become superior to off-line channels, this has not proven to be true. Traditionally, many theorists posited that multi-channel strategies work best when they are extensively integrated. As a result, many organizations attempt an extensive use of on-line channels and integrate them with more traditional channels. Some theorists go so far as to say that such approaches are best no matter what the retailer's individual situation.

However, Müller-Lankenau, Wehmeyer, and Klein found that the range of combinations of physical and virtual channels in multichannel strategies suggest that no one approach is universally superior. Based on the literature and their observations of multichannel management, they developed a model to examine how organizations use physical and virtual channels in multi-channel strategies. Their analysis led to the conclusion that differences in retailers' business activities and marketing strategies can impact their choice of multi-channel strategies.

Significant Factors for Aligning Multi-Channel Strategies

Their analysis found four factors to be significant in the alignment of multi-channel strategies: business scope, distinctive competencies, governance, and technology scope. For purposes of the model, business scope is shaped by the organization's decision concerning the arenas in which it should compete. These considerations include product and service type, customer segmentation, and geographical reach. Distinctive competencies are those factors that distinguish one business competitor from another as well as their differing skills and abilities in providing products or services to the customer. These factors help determine whether or not the customer will choose to make a purchase from a given provider. These factors are influenced by the organization's competitive strategy (e.g., cost leader, differentiation, and niche strategy), established channel system (i.e., retailers have less flexibility to use on-line focused strategies than do Internet-only retailers), and competitive environment (i.e., how the competition is using the various channels). Governance also plays a part in which multi-channel strategy is most appropriate for a given business. Specifically, the governance of retail outlets differs from organization to organization. In some companies, each retail outlet is required to use the same channels as the other outlets in the group. In other companies, however, the various outlets have more flexibility as to how they will manage their channels. This allows them to better target the demographics of their particular market. Similarly, the structure of the organization can impact the best multi-channel strategy. In addition, multi-channel approaches can be restricted or promoted by government regulation (e.g., regulations concerning the legal store opening hours; consumer protection laws). Finally, the scope of technology can affect how an organization can best manage multi-channel strategies. For example, the value chain -- the network of businesses working together to bring a product or service to the market -- can affect the strategic role of information technology across industries. Similarly, the development of multi-channel strategies may be limited or supported by the organization's current information technology infrastructure and competencies.

Using this model, Müller-Lankenau, Wehmeyer, and Klein examined the multi-channel strategies of four grocery store chains. They found that each chain used different strategies based on the four factors discussed above. They concluded that the extensive integration of physical and virtual channels proposed by some theorists is not necessary and that the organization needs to choose its multi-channel strategy based on its own situation. This model better explains the diversity of approaches that can be observed in the real world.

Terms & Concepts

Channel: A route used by a business to market and distribute its products or services (e.g., wholesalers, retailers, mail order, Internet).

Channel Management: The development and implementation of policies and procedures to gain and maintain the cooperation of the various organizations in the channel and to coordinate their activities. Channel management helps organizations manage activities and flow of information between members of the channel. Channel management is also referred to as channel relationship management or partner relationship management (PRM).

Channel Stewardship: An approach to channel management in which the channel processes and communication flow are designed to take into account the best interests of the customer and to optimize profits for all partners in the channel.

Customer Relationship Management: The process of identifying prospective customers, acquiring data concerning these prospective and current customers, building relationships with customers, and influencing their perceptions of the organization and its products or services.

Direct Marketing: A customer relationship management strategy in which the provider of the product or service delivers the promotional message directly to potential customers on a one-to-one basis rather than through the use of mass media.

E-Commerce: E-commerce (i.e., electronic commerce) is the process of buying and selling goods or services -- including information products and information retrieval services -- electronically rather than through conventional means. E-commerce is typically conducted over the Internet.

Information Technology: The use of computers, communications networks, and knowledge in the creation, storage, and dispersal of data and information. Information technology comprises a wide range of items and abilities for use in the creation, storage, and distribution of information.

Integrated Strategy: A marketing strategy in which physical and virtual channels are used to complement each other and offer customers a wider range of options.

Isolation Strategy: A marketing strategy in which physical and virtual channels are used independently to market products. This strategy is often used to target different market segments.

Marketing: According to the American Marketing Association, marketing is "an organizational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders" (http://www.marketingpower.com/content24159.php).

Strategy: In business, a strategy is a plan of action to help the organization reach its goals and objectives. A good business strategy is based on the rigorous analysis of empirical data, including market needs and trends, competitor capabilities and offerings, and the organization's resources and abilities.

Value Chain: A network of businesses working together to bring a product or service to the market. Value chains typically comprise one or a few primary suppliers supported by many secondary suppliers each of whom add value to the product or service before it is offered to the customer.

Bibliography

Avery, J., Steenburgh, T., Deighton, J., & Caravella, M. (2012).

Adding bricks to clicks: Predicting the patterns of crosschannel elasticities over time. Journal of Marketing, 76(3), 96-111. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=74749677&site=ehost-live

Columbus, L. (2005/2006). Avoiding the pitfalls of channel management. Manufacturing Engineer, 84(6), 16-19. Retrieved June 5, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19677139&site=ehost-live

Kuruzovich, J. (2013). Sales technologies, sales force management, and online infomediaries. Journal of Personal Selling & Sales Management, 33(2), 211-224. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=86457301&site=ehost-live

Kushwaha, T., & Shankar, V. (2013). Are multichannel customers really more valuable? The moderating role of product category characteristics. Journal of Marketing, 77(4), 67-85. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88790001&site=ehost-live

Lichung, J., & Han-Kuang, T. (2013). Ascertaining the dynamic competition in channel relationship management. International Journal of Marketing Studies, 5(3), 36-47. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88382365&site=ehost-live

Müller-Lankenau, C., Wehmeyer, K., Klein, S. (2006). Strategic channel alignment: An analysis of the configuration of physical and virtual marketing channels. Information Systems & E-Business Management, 4(2), 187-216. Retrieved June 5, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20253392&site=ehost-live

Rangan, K. (2006). The promise and rewards of channel stewardship. Supply Chain Management Review, 10(5), 42-49. Retrieved June 5, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21691541&site=ehost-live

Suggested Reading

Brown, M. D. & Smith, R. W. (2004). The role of channel management. Adhesives & Sealants Industry, 11(6), 16-18. Retrieved June 5, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=13803615&site=ehost-live

Foreman, S. (2006). Power conflict and control in distribution channels. Henley Manager Update, 17(3), 11-18. Retrieved June 5, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20770548&site=ehost-live

Harreld, H. (2001). Channel management. InfoWorld, 23(41), 47-51. Retrieved June 5, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5335842&site=ehost-live

Manjunatha, K. V. (2006). Channel management. The Journal for Decision Makers, 31(2), 179-184. Retrieved June 5, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21559060&site=ehost-live