What is a channel strategy and how to successfully build one
Benefits of a channel strategy
A channel strategy costs time and effort. But if done effectively, a solid channel network will provide the following benefits:
- Improve product distribution, making them available to a larger number of customers.
- Increase customer acquisition, given the better distribution of products.
- Deliver the right product or value to specific customer segments without increasing costs. Different channels can distribute different products to specific customers that will find greater value in the offer.
- Will help decrease costs, such as inventory storage, pre- and post-sale services, etc.
- Lowers risk. Channels are buying the manufacturer’s goods and will have strategies of their own to sell them and make a profit.
- Help build, propagate, and strengthen the manufacturer’s brand.
Types of channel strategies
The most basic of channel strategies. In direct sales, the manufacturer sells directly to the end customer without any indirect channels/intermediaries. The manufacturer has its own sales team and closes deals directly with the customer. This strategy is usually used when the manufacturer sells perishable products and whose customers are located in a reduced geographical area.
In indirect sales, there is at least one intermediary or channel involved in the distribution process of the product to the end customer. The intermediaries that might be involved in a company’s indirect sales strategy are value-added resellers, retailers, distributors, consultants, SIs, OEMs, ISVs, distributors, agents, and wholesalers. For more information on how to build a strong and healthy relationship with your channels, read our post on how to create a B2B partnership.
Indirect sales classification
- One-tier channel: there is only one intermediary between the manufacturer and the end customer. The intermediary is typically a reseller or retailer. This strategy is used when the product needs to be distributed relatively quickly and when working with durable products like clothes, appliances, hardware, etc.
- Two-tier channel: there are two intermediaries (usually wholesaler and retailer, or distributor and reseller) between the manufacturer and the end customer. This strategy is widely used when:
- The products are standardized and relatively cheap.
- The products need to be spread over a larger geographical area.
- The amount purchased is small.
- Three-tier channel: In addition to a wholesaler and retailer (or distributor and reseller), there is another intermediary, which is the agent. Agents handle the distribution of the product in a specific geographical area. This strategy is chosen when the distribution of the product has to reach huge areas (probably countrywide) and the demand for the product is high.
Infographic by Repsly
What channel strategy to choose
A company has to consider certain aspects of their business and the market in which they want to participate to determine which strategy best suits their business needs – direct or indirect. There are 4 factors to consider when choosing the right channel strategy:
- The market: this factor takes into consideration the customers, their purchasing habits, and the geography. If the manufacturer’s end customers do not purchase frequently, but when they do, they buy in bulk; are confined to a limited geographical area; and require advanced technical knowledge of the product, the best alternative is to choose direct sales. On the other hand, if customers prefer to be able to purchase all their products in one place, they buy frequently, but not in large quantities; they are geographically spread over a larger area; and there is no need for a lot of pre- or post-sales technical services, the indirect sales approach is recommended.
- The product: the three parameters to consider are price, durability, and complexity of the product. If a manufacturer is selling a perishable product, it cannot afford to choose a long indirect sales strategy as products will perish during their distribution. Similarly, expensive products are usually distributed directly to the end customer or have few intermediaries given the increase in price of a long distribution chain. And finally, complicated products in which the customer needs to have a close relationship with the manufacturer for comprehension or service purposes, shorter distribution strategies are also preferred.
- The competition: studying what the competition does and determining if their strategy of using long-chain or short-chain channel distribution brings the right results will help determine what is the best strategy to use.
- The company: just as studying the competition is important, it is also important to know your company’s strengths. This will help indicate the best channel strategy to use. Are there enough resources to set up your own distribution channel? What level of management expertise is there? This will determine if it will be necessary to rely on third party distributors. Do you have a large range of products that need to be distributed over a large geographical area? What are your future business goals? Determining the company’s strengths and weaknesses will indicate which is the best strategy to use.
How to enhance your channel strategy
When working with distributors, a manufacturer has to make sure to build a healthy relationship with each channel to avoid errors and low sales, and ensure that goals are achieved. An excellent way to manage these different relationships is through a channel incentive program where proper communications, elearning, gamification, and other tools can be used to build a successful long-term relationship. To enhance your channel strategy through an incentive program, you can do the following:
A channel strategy begins when a decision is made on whether the company can handle its own channels or if it needs to build a relationship with one or more distributors to meet business goals. And to determine which is the best strategy to choose, various considerations are taken into account and should be chosen based on how well they will help you achieve your goals.