When the market has been segmented into groups of end- users, each of which can be described by a set of service output demands, the channel manager should next define the optimal channel to serve each segment. We call this exercise positioning or configuring the channel (positioning to parallel the segmentation targeting-positioning paradigm in marketing management). Just as positioning a product means setting its product attributes, price, and promotional mix to best fit the demands of a particular segment, so also positioning refers to the design of the distribution channel to meet the segment’s demands. This exercise should be done, even if the channel ends up not selling to some of the segments in the end. The channel analyst may then discover that some segments simply do not make good targets because their demands cannot be adequately met with the channel’s current resources. Alternatively, the positioning exercise may reveal some unexpectedly attractive segments to target. Unless the optimal channel is defined for each segment, it is impossible to make a thorough decision about what segments to target.
The optimal channel is defined first and foremost by the necessary channel flows that must be performed in order to generate the specific segment’s service output demands. Channel flows are all the activities of the channel that add value to the end user. In enumerating the list of channel flows, we go beyond the concept of the mere handling of the product to include issues of promotion, negotiation, financing, ordering and payment. For instance, our office employee looking for a soft drink on her coffee break (see Above Table) has a high demand for spatial convenience and minimal tolerance for out- of-stock product. This means that the channel How of physical possession (the physical holding of inventory) takes on great importance for such end-users. Each product or service-selling situation can have its unique set of service output demands by segment, implying that the differential importance of different sets of channel flows depends on the segment.
Further, the channel analyst must identify the optimal-channel structure to produce the necessary channel flows, which themselves, of course, result in the generation of the required service outputs that are demanded by a particular segment of end-users in the market. The design of the channel structure involves two main elements. First, the channel designer must decide who are to be the members of the channel. For example, will a consumer packaged-goods manufacturer sell its grocery products through small independent retailers with in-city locations, or through large chain stores that operate discount warehouse stores? Or will it use an outlet such as Indiangrocer.com, an on-line seller of Indian’ food and household products that operates no retail stores at all? Moving up the channel from the retail level, decisions must be made whether to use independent distributors, independent sales representative companies (called “reps” or “rep firms”), independent trucking companies, financing companies, export management companies, and any of a whole host of other possible independent distribution channel members that could be incorporated into the channel design.
Beyond this decision, the channel manager must also decide the exact identity of the channel partner to use at each level of the channel. For example, if it is deemed advisable to sell a line of fine watches through retail stores, should the outlets chosen be more upscale, such as Tiffany’s, or should they are family- owned local jewelers? The choice can have implications both for the efficiency with which the channel is run and the image connoted by distributing through a particular kind of retailer. In a different context, if a company seeks distribution for its products in a foreign market, the key decision may be which distributor is appointed to carry the product line into the overseas market. The right distributor may have much better relationships with local channel partners in the target market and can significantly affect the success of the foreign market entry.
The other main element of the channel structure is the decision of how many of each type of channel member will be in the channel. This is the channel intensity decision. In particular, should the channel for a consumer good include many retail outlets (intensive distribution), just a few (selective distribution), or only one (exclusive distribution) in a given market area? The answer to this question depends both on efficiency and on implementation factors. More intensive distribution may make the product more easily available to all target end- users, but may create conflict among the retailers competing to sell it.
The channel structure decisions of types, identity, and intensity of channel members all should be made with the minimization of channel flow costs in mind. That is, each channel member is allocated a set of channel flows to perform, and ideally the allocation of activities results in the reliable performance of all channel flows at minimum total cost. This is a nontrivial task, particularly because it involves comparing activities across different companies who are members of the channel. Intuitively, an activity-based costing (or ABC) sort of analysis is useful to establish the best allocation of channel flows
This exercise results in one channel profile for each segment that is identified in the market segmentation stage of the exercise. Each of these channel profiles is called a zero-based channel, because it is designed from a zero base of operations that is, as if no preexisting channel exists in the market. The concept of a zero-based channel means (1) that the segment’s service output demands are met and (2) that they are met at minimum total channel cost.
Channel Design: Targeting At this stage of the analysis, the channel manager is equipped to decide what segments to target. Note carefully that this also means that the channel manager is now equipped to decide what segments not to target! Knowing what segments to ignore in one’s channel design and management efforts is very important, because it keeps the channel focused on the key segments from which it plans to reap profitable sales.
Why not target all the segments identified in the segmentation and positioning analyses? The answer requires the channel manager to look at the internal and external environment facing the channel. Internally, managerial bounds may constrain the channel manager from implementing the zero-based channel. For example, top management of a manufacturing firm may be unwilling to allocate funds to build a series of regional ware- houses that would be necessary to provide spatial convenience in a particular market situation. Externally, both environmental bounds and competitive benchmarks may suggest some segments as higher priority than others. For example, legal practices can constrain channel design and hence targeting decisions. Many countries restrict the opening of large mass- merchandise stores in urban areas, to protect small shopkeepers whose sales would be threatened by larger retailers. Such legal restrictions can lead to a channel design that does not appropriately meet the target segment’s service output demands, and may cause a channel manager to avoid targeting that segment entirely.
Of course, the corollary of this statement is that when superior competitive offerings do not exist to serve a particular segment’s demands for service outputs, the channel manager may recognize an unexploited market opportunity and create a new channel to serve that underserved segment. Meeting previously unmet service output demands can be a powerful competitive strategy for building loyal and profitable consumer bases in a marketplace. But these strategies can best be identified with knowledge of what consumers want to buy, and importantly, how they want to buy it, and the necessary response in terms of channel flow performance and channel structure.
We have now identified a subset of the market’s segments that the channel plans on targeting, using the segmentation and positioning insights derived earlier.
Channel Design: Establish New Channels or Refine Existing Channels
Now, the channel manager has identified the ‘optimal way to reach each targeted segment in the market, and has also identified the bounds that might prevent the channel from implementing. the zero-based channel design in the market. If no channel exists currently in the market for this segment, the channel manager should now establish the channel design that comes the closest to meeting the target market’s demands for, service outputs, subject to the environmental and managerial bounds constraining the design.
If there is a preexisting channel in place in the market, however, the channel manager should now perform a gap analysis. The differences between the zero-based and actual channels on the demand and supply sides constitute gaps in the channel design. Gaps can exist on the demand side or on the supply side.
On the demand side, gaps mean that the service output demands is not being appropriately met by the channel. The service output in question may be either undersupplied or oversupplied. The problem is obvious in the case of undersupply: The target segment is likely to be dissatisfied because end-users would prefer more service than they are getting. The problem is more subtle in the case of oversupply. Here, target end-users are getting all the service they desire-and then some. The problem is that service is costly to supply, and therefore, supplying too much of it leads to higher prices than the target end-users are likely to be willing to pay. Clearly, more than one service output may be a problem, in which case several gaps may need attention.
On the supply side, gaps mean that at least one. flow in the channel of distribution is carried out at too high a cost. This not only wastes channel profit margins, but can result in higher prices than the target market is willing to pay, leading to reductions in sales and market share. Supply-side gaps can result from a lack of up-to-date expertise in channel now management or simply from waste in the channel The challenge in closing a supply-side gap is to reduce cost without dangerous])’ reducing the service outputs being supplied to target end-users. When gaps are identified on the demand or supply sides, several strategies are available for closing the gaps. But once a channel is already in place, it may be very difficult and costly to close these gaps. This suggests the strategic importance of initial channel design. If the channel is initially designed in a haphazard manner, channel members may have to live with a suboptimal channel later on, even after recognizing channel gaps and making best efforts to close them.
