The explosion of the Internet and other channels of customer communication has brought with it a revolution in distribution channels, and it has posed serious challenges to companies in terms of taking maximum advantage of each sales channel’s potential. However, the challenge of the Channel Strategy is not new.
Without a doubt, new technologies have marked a before and after, but many companies’ successes and failures have been linked to the accuracy with which they have managed their sales channels. Changes in spending habits, constant modifications to distribution structures, transformations of entire industries and sectors, and the growing power of certain distribution giants are some of the factors that contribute, along with the Internet boom, to the Channel Strategy being a key factor to growth for any company.
The final customers that use more than one sales channel –shops, e-commerce, direct marketing, telephone…- usually spend more than “mono-channel” customers. However, the fact that it is worthwhile for a customer to use several channels does not necessarily imply that the same is true for the company. The majority of companies have measured the cost structure and efficiency of each sales channel, but very few have a clear idea of how much it costs them to serve a customer through one channel or the other. This is the true challenge of the Channel Strategy. Knowing exactly what customers should be served through which channels, according to their value for the company, their potential life-cycle there, the costs generated by one channel or the other, and other factors that can only be revealed by an absolutely critical element in distribution channel management: Segmentation Strategies.
The company that aspires to optimize all of its sales channels, minimizing costs and maximizing revenue, must already have an appropriate Segmentation Strategy that reveals the real value of each segment of current and potential customers, their “Lifetime Value”, the sales effort that is being assigned to each sector, and the assigned channel; and it must act accordingly. The true challenge of a correct Channel Strategy is not simply saying, “the more sales channels the better”, but rather orienting the right customer towards the right channel, adapting the sales resources to this Strategy.
Many companies have jumped into “multi-channelism” as a fashionable Strategy or as a response to the growing customer demand to operate in several channels, without carefully studying beforehand which customers must migrate to which channel, and what sales efforts they should assign to each one. Moreover, it is essential to re-orient the customer towards one channel or another according to their development and the point they are at in their life-cycle in the company.
It is obvious that a telecommunications operator will tend to assign in-person visits to large accounts, visits every now and then to medium-sized accounts, sales reps by phone to small accounts, and a “contact center” to customers in the SOHO segment and residential customers. But this is only a “still photo” in time. Customers evolve; some offer greater potential than others, and it is unadvisable to pigeonhole them into one channel.
How do we orient the right customer towards the right sales channel? The financial giant and “online broker” Charles Schwab, an indisputable pioneer in the use of the Internet as a successful transaction channel, has learned to “educate” its customers so that they use the channels that are best suited to their interests and to those of the company. In their first contacts with the company, according to their profile, the customer is oriented by experts that guide them towards the products and services that best suit their needs, and towards the use of specific channels of contracting the company. This pattern repeats itself each time the customer’s financial profile changes; that is to say, according to their life-cycle within the company. The focus on the customer that Charles Schwab has been utilizing for years has allowed the firm to offer service to 6.8 million customers who invest in fixed and variable income; 1.1 million customers who invest in pension funds, and more than 150,000 who invest in checking accounts. In total, the company manages 1.3 billion dollars in assets.
Charles Schwab did not begin as an exclusively online company, as many people believe. The broker existed 20 years before the Internet boom. It simply knew how to take maximum advantage of a new channel’s performance. It considered, as every Channel Strategy should, whether the new channel would replace the existing ones or simply be complementary to them, the impact that opting for it as a corporation would have, and the organizational changes that it would cause.
E-commerce, mobile phones, phone sales and other channels have caused many companies to move to “multi-channelism” without meticulously planning how that change would affect their current channel structure, their Sales Force, the relationship between channels, the impact on the customer, etc. It is essential for every company to know their customer segments’ composition before taking hasty action.
The sector of airlines and tourism, for instance, has benefited strongly from the Internet boom, but not all companies have opted for this channel. It makes sense. All the studies prove that the leisure customer, who is motivated by price and the search for bargains even if it means restrictions on date and time, is much more prone to online purchase than the business customer. Therefore, it is only natural that “low cost” companies are placing practically all their bets on one channel, while the major airlines diversify and complement their channels, but they do not substitute them. Michael O’Leary, CEO of Ryanair, saw it clearly at the time: “A few years ago, 60% of our revenue came through travel agencies, which charged us 9% ticketing commissions. Also, managing reservations burdened us with 6% additional costs. So, 15% of the ticket price wasn’t ours. Today, 96% of sales are through the Internet, with a cost of one cent per ticket”.
British Airways, like the majority of major airlines, focuses strongly on the Internet, for the unquestionable advantages in terms of de-intermediation, as well as cost savings and higher profits; but it doesn’t play with just one card. The same thing is true with hotel companies that are aimed more towards the urban segment than towards the vacation segment. One-night reservations can easily be made on the Web, but it’s different when reserving an entire vacation package. It stands to reason that those positioned in both segments must accurately orient their customers towards one channel or another, according to the customer’s profile, value, and needs. This is something being done with extraordinary accuracy by, for instance, the Sol Meliá Group, whose Internet revenue already makes up 13% of total sales, with an annual growth rate close to 50%.
The boom in trips purchased over the Internet is the clearest example of the “revolution” of a traditional channel. In the United States, some 300 travel agencies are closing each month, and the reservations and ticket sales per agency have been cut in half in only a few years. However, despite the advantages of the medium’s extremely low transactional costs, the Internet has not shown itself to be an appropriate channel for all business models, as is proven by thousands of failures in B2B and B2C e-commerce worldwide.
“Time to market” is vital in a Channel Strategy. Not only is it essential not to jump into new channels hastily without meticulously analyzing their profitability per customer, but also…not to get there too late. This is what has happened to, for instance, the music industry with the boom in P2P music downloads. The sector has not been able to react on time to stop a phenomenon that now seems unstoppable and that is dangerously eroding an entire industry’s profits. Apple, with its iTunes service, has moved with greater accuracy than the profession’s own companies, who are anchored in distribution models, the costs of which weigh heavily on the final price of CD’s (an estimated 40% to 50% of the retail price of a CD is due to distribution chain costs).
This is a clear example of how a sector should deal with not merely the appearance of a new channel, which requires planning new complementary or substitution strategies, but with directly reinventing an entire model. A new channel does not necessarily constitute a threat, but it is an opportunity. The key is in the value proposal that the new channel offers the customer. If it is different, then several channels can co-exist. If it is clearly superior, the challenge will be more complicated. Television, and later video, was seen as a clear threat to cinema. Time has revealed that, on the contrary, the film industry actually benefited from them both. The value proposals were different. The cinema offers the “get out of the house + premiere + projection quality” component, and it clearly differentiates its value proposal as opposed to that of video or DVD. However, music downloaded from the Internet has an identical value proposal as that of music bought on CD.
One of the principal advantages of a company’s migration towards new channels, and of the creation of a truly “multi-channel” group, is undoubtedly the blooming of new customer segments, if not an entire market. When the legendary Avon company, famous for that peculiar distribution channel with an extremely powerful Sales Force made up of half a million members, decided to start selling in small kiosks at American shopping malls, the results were shocking. 90% of the customers that purchased products in its new physical spaces had never bought Avon cosmetics on sale in their home. This is proof that new channels can cause new segments to bloom, even if they’re not true “blue oceans”, as in the resoundingly successful case of eBay and its online auctions, Dell’s direct sales model, or the phone sales success of the insurance company Direct Line, in the United Kingdom.
A company’s entrance into a new channel does not simply offer the promise of greater sales. It involves a tremendously complex challenge, and it can be a source of conflict, if not a huge headache. Resistance to change will arise both inside and outside the company, damaging rivalries can arise between channels, or conflicts with allies, resellers, or dealers can occur.
For this reason, it is essential that before moving towards a new channel, every company must not only have defined an appropriate Segmentation Strategy and assigned channels accordingly, but also it must have planned how to carry out the transformation. It must take inventory of the strengths and weaknesses of its existing channels, avoid overlapping, study the cost structure of each one, as well as the cost of each customer segment in each one, properly train the members of the new sales channel and, above all, it must ask itself how the existing sales channels are serving the customer and what value proposal the new channel will offer to which customers.
This analysis will avoid conflicts. It also can’t hurt to compensate and offer incentives to the professionals and customers of the new channel, at least in the beginning, so that they put all of their effort into it. Although competition between channels of one company can be healthy, it is only healthy up to a certain point. GAP stopped selling Levi’s jeans when it felt betrayed by that brand’s choice to move to direct sales. Some department stores have reduced the physical space devoted to cosmetics chains, since these chains have moved further towards direct or online sales.
The Danish luxury brand of stereo equipment, Bang & Olufsen, is a prime example of good channel restructuring. Its extensive network of retailers tended to give priority to the sale of other brands, because of the price factor and profits, thus cornering and de-positioning Bang & Olufsen. Close to bankruptcy, the company decided at the end of the 1990’s to reduce the number of distributors in Europe by one third, and to reduce those in the United States from 200 to about 30. It focused on a network of franchises positioned in the luxury segment and on offering special care to the distributors it kept. The result was a resounding success.
Also, it is essential not to confuse “multi-channelism” (that is, the ability to serve different customer segments through different channels by adjusting the costs and value of one to the other), with “over-distribution”. Creating many channels for a small number of customers is just as bad as treating every customer equally and offering them only one sales channel.
“Multi-channelism” is not the answer for every company, but it is for those that are absolutely certain that opening up to new channels will be profitable, will make new segments bloom and become loyal, and will have a clearly differentiated value proposal. These requirements are the key to any Channel Strategy with the will to succeed.
Highlights:
“A good Channel Strategy demands a good Segmentation Strategy. Assigning the right channel to the right customer requires us to know the current and potential value of each segment”
“Multi-channel companies must know how to guide their customers towards the correct channel and offer differentiated value proposals in each channel”