Channel strategy: What you need to know now

By Herman Kwik, Ph.D.

When I work with entrepreneurs or inventors who are excited about their new products and eager to get busy “marketing,” I often have to urge caution – for two reasons:

Because when they say “marketing” they really mean “selling,” and that’s a different operation altogether. Because entrepreneurs don’t always consider the sequence of events necessary for “marketing” to be properly deployed.

In launching a new product—as opposed to offering a service—there is one strategic element that is rarely given its proper due: deciding on the channel strategy.

Failure to carefully plan a channel strategy is perhaps the No. 1 mistake entrepreneurs make in their rush-to-market approach. Unfortunately, the consequences of such an oversight are significant.

For example, industry statistics indicate that 50 to 80 percent of new products fail within five years. Granted, not all failures are the result of poor channel planning. But the lack of channel planning severely reduces a new product’s already slim chance to succeed in the marketplace.

So how do I develop my channel strategy?

First, let’s define the term. Simply put, channel strategy is a set of decisions that identifies the path a product must take from producer to end user. There are three channels that must be considered: sales channel, product channel and service channel. Although some channel intermediaries may serve one or more of these three different channel roles, it is essential to refine your new product’s marketing strategy through each of these three lenses.

1. The sales channel. These are intermediaries involved in selling your product through each channel layer and ultimately to the end user. The key question is this: Who needs to sell to whom for your product to be sold to your end user?
2. The product channel. The product channel focuses on the series of intermediaries who physically handle the product on its path from its producer to the end user.
3. The service channel. The service channel refers to the entities who provide necessary services to support your product launch, as it moves through the sales channel and after purchase by the end user. The service channel is an important consideration for products that are complex in terms of installation or customer assistance.

The four key points to consider when building your channel strategy:

1. Internal capabilities. Be honest and identify where you might need help. Do you have the resources to service end users directly? Do you have the ability to service all the retailers who should be carrying your product? And what about your sales staff? Is it large enough to call on distributors who handle regional markets?
2. Margins and fees. Every intermediary extracts a fee or reduces your profit margin. How will these costs impact your pricing to wholesalers? To direct-to-retail buyers? To end consumers? What about the fees your channel partners charge each other? How will those affect the end user’s price? And finally, how will your channel partners handle discounts, coupons or rebates?
3. Market connections. Identify which channel partners have the necessary relationships to help place your product. Is your selection of channel partners consistent with your brand identity and positioning? Do the best-connected distributors also carry your competitors’ products? If you use multiple distributors in overlapping markets can you manage conflicts over territories?
4. Alternative channels. Develop alternate channels to ensure continued sales growth. If key distributors or retailers refuse to carry your product, do you have other creative but still strategic ways of reaching your targeted end users?

So where do I start?

Having said all that, there is one additional factor that complicates even the best of plans: The Power-Trust balance between the producers and channel partners.

Here’s what I mean. Let’s say that you plan to use a certain wholesaler to sell your product into key retail outlets. Naturally, wholesalers and retailers prefer to handle products with a proven level of demand. In fact, they may refuse to carry new products with insufficient demand, although that’s a rare occurrence, since consumers like new things. But ultimately, producers are in a weak bargaining position. They can only trust that their product will be marketed properly, while the channel players maintain the power to dictate the terms of the relationship.

As demand increases, however, power shifts upstream to the producer, and reliance on trust shifts downstream to the retailer. Once a product reaches a high level of demand, the producer gains the power to dictate how the product is marketed by its channel players. The downstream channel players have to trust that the producer will deal with them equitably.

Take Nike’s dispute with Foot Locker stores in 2003 as an example. There is no doubt that there is high demand for Nike products in general, and for Air Jordan brand shoes in particular. But that didn’t keep Foot Locker from mistakenly thinking that it still had the power to dictate the terms of the relationship. They were sorely mistaken when Nike decided to withhold inventory from them, putting a dent in their revenues and strengthening their competitors in the process.

Nike is clearly the power holder in that channel, but it takes years for most producer—especially for new ventures—to reach that point.

How then does a new product build demand in order to acquire this coveted power position? By utilizing effective consumer marketing communications (advertising and direct mail) and promotions (discounts and special events) to generate increased demand to pull products through the channels.

Remember: Demand is the driver that changes the Power-Trust balance.

Herman Kwik, Ph.D. is Marketing Integrator + Principal at Outsource Marketing in Bellevue, Washington. His experience includes work in international trade and supply chain management.

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