Distribution Channels: Understanding and Managing Channels To Markets Business Model
Distribution Channels: Understanding and Managing Channels To Markets Business Model
Contents
03 Final-tier Trade Channel Players
04 Retailers
01 Distribution matters
Matters
1. Around half the price paid for a product is involved in getting the product to the customer.
2. There is variation in the costs and profitability of channels in every industry.
3. Companies have invested in understanding and analysing their DC to take significant cost cut.
4. This leads to increasing profits, reducing prices and gain competition.
01 Distribution matters
Significance
▪ Without the right routes to markets, you simply won’t reach your target market.
▪ Your market access depends on understanding the role you want your channels to play
Competitors
02 Challenging business dynamics
1. Direct
2. One-tier distribution
3. Two-tier distribution
4. Multiple-tiered distribution
5. Aggregators
6. Original equipment manufacturer channel (OEM)
Typical distribution structures
Customer
Intermediary
Supplier
Direct One-tier distribution Two-tier distribution
02 Challenging business dynamics
Typical distribution structures
1. Product ’s margin
2. Product ’s cost to sell
3. Product ’s life cycle
4. Level of returns and warranty claims
5. Promotional spends
6. Stocking requirements
7. Opportunity to sell related products and services
Value Proposition
➢ A supplier need to understand the business model (downstream).
➢ Final-tier need to understand customers’ businesses.
➢ A well grounded approach of DC structure.
➢ Best DC position in term of channel’s objectives
Broad line
distributors
➢ Inventory ➢ Sales
➢ Account receivable ➢ Cost of sales
➢ Account payable ➢ Gross profit
➢ Overheads
➢ Operating profit
➢ Taxation
➢ Profit after taxation
Distributors and Wholesalers
03
Margins and profitability
Gross margin and value add Margin mix and blended margin Contribution margin Net margin and operating margin
It is the difference between Distributing for brand leaders in Products need presale support Profitability measure
the price paid to supplier the market.
and the price obtained from
the customer
The higher the margin, the Lower margin, higher volume Deducts variable costs Deducts cost of sales
greater the value added by Sales management Cost to serve Deducts cost of sales
the distributor.
Discounted prices. 1. Marketing driven cost Deducts interest
2. Sales driven cost
3. Transaction driven cost
4. Logistics driven cost
5. Inventory driven cost
Distributors and Wholesalers
04
Working capital
Purchase products
Two measures
Economics of scale
Knowledge to
Knowledge of Knowledge to Knowledge to make the
product’s configure the make the product works
market product product works with other
products
Process Knowledge of
management the customer’s
knowledge requirement
Different roles command different compensation models
Partner role
Business model
Activity-based model, defined by contracts and service level agreements Value and risk based mode
Compensation model
▪ The relationship depends on the relative market power and the time horizon.
Matrix of possible ‘sell with’ models
Revenue pull-through
Share efforts to land opportunities for shared returns
Market disruption
Secure penetration of key customer segments to gain attention
Partnering programmes
Exchange of information or value (access to customers vs. access to specialist skills)
Strategic partnership built on revenue pull-through
Reduce costs of working with each other and increase integration of resources
High power
Revenue pull Strategic
through partnership built
Partnering
Market disruption
programmes
Low power
Service business
Volume sensitivity
measures
• Mange people
Contract-based • Training
Fixed capacity
value delivery • Work experience
• Staff skills
• Demand management • Fulfilment on time
• Providers’ resources • Standard quality
• Trade-off concept • Maximize profitability
• Planning capacity • Selling skills
Managing a service business
Managing a
service
Guide
03 Final-tier Trade Channel Players
2- Sales and utilization
Final-tier Trade Channel Players
2- Sales and utilization
Margin Model
▪ Volume processed
in total, by hour, by segment, degree of utilisation of infrastructure.
▪ Customer browsing behaviour
in term of visited sites, time spent in sites and selection.
▪ Customer buying behaviour
in term of average basket, payment methods, and purchases.
▪ Downtime
when a service is not available or consuming long time to calculate cost.
▪ Customer transaction success/failure rates
when a customer is lost by technical issues.
Measures for the web - based service business model
03 Final-tier Trade Channel Players
4- Sell to final-tier trade
Final-tier Trade Channel Players
4- Sell to final-tier trade
❑ Selling to a distributor is about selling the business case for a commercial relationship.
❑ Or it refers to demonstrating how you can deliver business benefits from working together.
❑ Final -tier is not the end customer, but a route to market to the end customer and a critical element in the distribution model.
❑ Segmenting the final -tier trade channels.
❑ Segmentation enables you to allocate resources.
❑ Segmentation helps understand channel economics.
❑ Key dimensions of effective channel
❑ The store-based retail channel is a high-risk channel as errors made in site selection.
❑ Retailers describe their business model in terms of ’earn and turn’.
❑ The turn and earn index analyses inventory turnover and gross margin using a ratio.
To calculate turn and earn, multiply inventory turns by gross margin percentage.
❑ So, retailers are classified as:
➢ High earn and low turn
➢ Low earn and high turn High earn
Book stores Electronics and
Clothing stores appliance stores
Petrol station
Building stores
Low earn
Advertising costs
Store costs
Net profit
Administrative
costs
Gross margin
Financial stores
04 Retailers
3- Sell to retailers
Retailers
3- Sell to retailers
➢ Selling a commercial relationship to retailers that create economic value for the business model.
➢ Retailer challenges:
Globalisation
Changes in customer experience
Moving from products to services
Suppliers dynamics
Enabling technology
Available resources
Stock requirements
Forecast sales
05 Franchising as a route to market
What is a franchise?
Exclusive
Contract Matter
Territories
Recruiting
Franchisees
Advantages of franchise
Disadvantages of franchise
Grow sales
Grow Grow
Customers profits
Franchise system
wheel of success
Value Proposition
▪ What value/products do we deliver to the customer?
▪ Which customer problem do we solve?
▪ Which product or set of products (can be service too), are we offering to our customers?
▪ Which are the customer problems we are solving?
▪ Example: quality, performance, design, branding, strategy, cost reduction, pricing, risk reduction, production
efficiency, legal, etc…
Customer Segment
▪ For whom are we creating values with our products?
▪ Who are our most important customers?
▪ Do we have a pareto diagram of our customer?
▪ Example: Mass market, segmented market, niche market, diversified market
Business Model Creation
Customer relationships
▪ How do we establish relationship with our customers?
▪ How are their expectations in terms of relationship from our customers
▪ How do we keep the relationship with our customers?
▪ Costs to keep the relationship, do we know them?
▪ Examples: Face to face, cold calls, support line, automated service, forums, etc…
Business Model Creation
Distribution Channels
1) awareness: how do we raise awareness about our company and products and services?
2) evaluation: how do we help customers evaluate our organisation's value proposition?
3) purchase: how do we allow our customer to purchase specific products and services?
4) how do we deliver a value proposition to our customers?
5) after sales: how do we provide post purchase customer support?
Business Model Creation
Revenue Stream
Cost structure
Strategy
Competition