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Channel Strategy

Channel Strategy

With the surge of digital technologies, customers can access a wealth of information when making a purchasing decision. They also have numerous venues to acquire products and services. What can businesses do to deliver the products to the end customers while ensuring customer loyalty at the end? The answer lies in “channel strategy”. This article explains channel strategy, its types, and its framework.

Channel Strategy Meaning

From product development to its distribution, companies strive not only for customers’ approval but also to forge strong customer relationships. At the same time, customers want companies to understand their needs and wants and deliver a product that meets their requirements. They also demand consistency from companies from start to the end i.e., delivering what they promised.

For a company to consistently meet the demands of customers, it is essential to have an effective channel strategy. Here, the question arises: what does an effective channel strategy entail?

A channel strategy is a plan of action through which businesses make the product or service available to the end user.

Businesses need to realize the importance of having effective channel strategies because they could affect the whole marketing plan. A good channel strategy could help businesses to reduce costs, gain a competitive advantage and deliver maximum value to the customers.

Amazon, along with its distribution partners, offers flexibility and convenience to its customers. Features such as Prime allows customers to get products without any delivery charges.

Channel Strategy Framework

The channel strategy framework helps companies to structure and design strategies effectively. It has multiple stages, and each stage contributes greatly to the overall channel strategy.

  • Identifying consumer needs – The channel strategy framework process starts with identifying consumers' needs. It is about finding and analyzing the preferences and requirements of the target market. For instance, customer preferences such as online shopping vs in-person shopping experience and add-on services such as delivery and repairs. Once the company has identified these preferences, it should assess its capabilities to match those preferences.

  • Setting objectives – At this stage, the company needs to set channel objectives regarding what it wants to achieve through the channel strategy. It means identifying the segments it wants to serve and the channels that could be used to serve those segments of customers. The aim should be to match customer service requirements while keeping the channel costs as low as possible. Factors such as market competition, external environment, and product feature directly influence channel objectives.

  • Identifying alternatives – At this stage, the company needs to identify alternatives in terms of types and number of channel partners It needs. Companies could use direct or indirect channel strategies depending on their channel objectives. For instance, Avon – a beauty and personal care brand, primarily uses a direct channel strategy with no intermediaries between the company and the customers. Companies also select strategies for product availability, such as intensive or exclusive distribution:

Intensive distribution means keeping the products in many outlets as possible.

Exclusive distribution means keeping products limited to a few outlets.

Evaluating alternatives – Once all the alternatives are identified, the company needs to evaluate all of them based on the channel objectives. It is generally evaluated based on cost, return, and operational capabilities. Decisions like giving control to intermediaries are also evaluated at this stage.

Design the strategy – At the final stage, the company designs the strategy considering the target segment, the channel objectives, and the distribution option.

Channel Strategy Examples

Brands use channel strategies based on the target market and the channel objectives. Some examples of channel strategies used by popular brands are discussed here.

Channel strategy example: Tesla

Tesla uses a direct distribution channel in its business model. It sells directly to its customers via online and physical stores worldwide. It helps the company to build a direct connection with the customers and bypass distributors.

Channel Strategy Tesla car StudySmarter

Fig. 1 - Tesla car

Channel strategy example: Apple

Apply uses a dual distribution channel strategy i.e., selling to customers directly through its stores and third-party mobile carriers. In 2021, its net sales were 36% via direct and 64% via indirect channels. The direct channel ensures more control over distribution and allows them to build strong brand awareness. The indirect channel allows wider reach in terms of product availability.

Channel Strategy Apple products StudySmarter

Fig. 2 - Apple products

Distribution Channel Strategy

Channel management is about selecting, motivating, and evaluating channel members over time. The first stage starts with channel members’ selection. These members are wholesalers/retailers. Companies conduct extensive research on prospective channel members before selecting them. Factors such as previous performances and market reputation are considered during the selection process. It is a crucial stage because these members will work with the company in making the products/services accessible to the customers.

Once the channel members are selected, companies must constantly manage and motivate them. Companies and their channel partners must work collaboratively as they have shared objectives. Companies must incorporate partner relationship management to build strong relationships with their partners. The goal is to deliver value to customers, and it is only possible when companies and their channel partners work as a team.

The last stage is about the performance evaluation of channel partners. Companies have performance benchmarks, and the performances are measured according to them. For instance, a delivery partner’s performance metrics could be average delivery time, and customer reviews. The partners must be rewarded for matching the performance standards, and those who are not performing optimally, need to be assisted or replaced.

Types of channel strategy

The are three main types of channel strategies when it comes to distribution:

Channel strategy: Direct channel

In this type, the company sells the product/service directly to the end customer by bypassing the channel intermediaries such as wholesalers and retailers. This type of strategy can be implemented online, offline (physical stores), or a combination of both. It offers more control to the manufacturers over product delivery and overall performance. However, it is not ideal for large-scale businesses that want to reach wider audiences.

Channel strategy: Indirect channel

In this type, companies sell products to customers via intermediaries such as wholesalers and retailers. These intermediaries share the risk with the manufacturers, and therefore, they get products at a cheaper price, especially wholesalers who buy products in bulk. For manufacturers, keeping a good relationship with these intermediaries and communicating their objectives is important.

Channel strategy: Dual channel

It is a combination of direct and indirect channels. Some distribution is handled by the company itself and the rest is delegated to the intermediaries. Companies could have a direct link with the end customers while ensuring wide-scale product availability through their intermediaries.

Channel Strategy - Key takeaways

  • Customers want companies to understand their needs and wants and deliver a product that meets their requirements.
  • For a company to consistently meet the demands of customers, it is essential to have an effective channel strategy.
  • A good channel strategy could help businesses to reduce costs, gain a competitive advantage and deliver maximum value to the customers.
  • The channel strategy framework helps companies to structure and design strategies effectively.
  • Channel management is about selecting, motivating, and evaluating channel members over time.

Frequently Asked Questions about Channel Strategy

A channel strategy is a plan of action through which businesses make the product/service available to the end user. 

Apple uses a dual distribution channel strategy i.e., selling to customers directly through its stores and third-party mobile carriers. This is an example of channel strategy. 

Direct, indirect, and dual channels are the types of channel strategies. 

Channel strategy can be formulated through a channel strategy framework. 

he steps involved in distribution channel strategy are:
Identifying consumer needs, setting channel objectives, identifying alternatives, evaluating alternatives, and designing the strategy. 

Final Channel Strategy Quiz

Question

Customers want companies to understand their needs and wants and deliver a product that meets their requirements. 

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Answer

True

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Question

For a company to consistently meet the demands of customers, it is essential to have an effective ________ strategy.

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Answer

Channel

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Question

Define channel strategy. 

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Answer

A channel strategy is a plan of action through which businesses make the product/service available to the end user.

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Question

A good channel strategy could help businesses to reduce costs, gain a competitive advantage and deliver the maximum _____ to the customers. 

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Answer

Value

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Question

The channel strategy ________ helps companies to structure and design the strategies effectively.

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Answer

Framework

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Question

Why does a business need to identify customer needs? 

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Answer

To find and analyze the preferences and requirements of the target market. 

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Question

What is the purpose of setting objectives in the channel strategy framework? 

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Answer

To identify the segments a company wants to serve and the channels that could be used to serve those segments of customers.

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Question

Define intensive distribution. 

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Answer

Intensive distribution means keeping the products in many outlets as possible. 

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Define exclusive distribution. 

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Answer

Exclusive distribution means keeping products limited to a few outlets.  

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Question

What is channel management about? 

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Answer

Channel management is about selecting, motivating, and evaluating the channel members over time. 

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Question

Why is it important for companies to have a good relationship with channel partners?

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Answer

Companies and channel partners work together to deliver value to the customers. 

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Question

What are the three types of channel strategy?

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Answer

Direct, indirect, and dual channel strategies. 

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Question

What is a direct channel? 

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Answer

Through the direct channel, the company sells the product/service directly to the end customer by bypassing the channel intermediaries such as wholesalers and retailers.

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Question

Define an indirect channel. 

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Answer

Through an indirect channel, companies sell products to customers via intermediaries such as wholesalers and retailers.

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Question

Define dual channel. 

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Answer

It is a combination of direct and indirect channels. Some distribution is handled by the company itself and the rest is delegated to the intermediaries..

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