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I. Lecture
“Measuring Channel Performance”
This discussion provides a discussion of distribution / channel strategy in the contemporary
marketing setting and the role and value of effective channel strategy in the overall marketing
process and strategy. It is useful to update the examples utilized so that students will be able to
identify readily with this concept, based on their general knowledge of the companies and
products involved in the lecture / discussion.
Teaching Objectives
To stimulate students to think about the critical issues, pro and con, for a firm when it
develops or modifies its channel strategy.
Points to consider in proceeding with a modification of the distribution strategy
Role of various channel and distribution strategies and policies in helping the firm
achieve a balanced position vis á vis the customer and the competition.
Discussion
INTRODUCTION
One of the more important functions in today’s complicated marketing environment is how to
measure the performance of channel members. Whether the analysis involves an independent
or vertical marketing environment, the problem is similar. There are means for following and
measuring the results of this activity, and this discussion will focus on one such method.
Before beginning the formal evaluation of the channel, there are several considerations.
Degree of manufacturer control over the channel members. If there is a strong
contractual relationship there will be a much greater expectation for information
on performance.
independents.
Nature of the product. Obviously, the more complex the product, the more the
evaluation. Since complexity also usually means more after sale services, the
criteria tends to be focused more on issues of target market satisfaction.
comprehensive.
PERFORMANCE EVALUATION
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Performance evaluation clearly will be more comprehensive than day-to-day monitoring
Develop measurement criteria.
Evaluate channel members against the criteria.
Take corrective actions, as needed.
The measurement criteria for the channel member should include the following:
Sales performance. This critical measurement includes both sales to the channel
last measure.
Inventory maintained. This major indicator provides information on the degree
to which the member maintains stock or meets stocking requirements as
specified in any agreements between the manufacturer and the channel member.
It is important to understand whether this agreement is formal or informal.
oTotal inventory level
oBreakdown by units/types/prices
oComparisons between the member estimates and purchases of related
and competitive lines
oCondition of the inventory holding facilities
oQuality of inventory control and record-keeping
salespeople have in the manufacturer’s products.
Attitudes of the channel member. Usually this is not done until there is a drop in
performance. The best way to handle it is to survey the attitudes through
face-to-face contact and also solicit feedback from the member’s clients,
salespeople, the competition, and related sources.
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manufacturer. To probe this issue further, it would be appropriate to ask for
names of the competitors and how they rank them. This will help you determine
the degree to which the member understands the competitive arena.
General growth prospects for the channel member. This measurement provides
labor, and growth has created a scarcity of human resources for the supplier, the
supplier faces several alternatives, each of which will affect the organization.
Other Criteria. Includes financial status, character, reputation, and reliability
and quality of services.
1. First, there is a separate performance evaluation, utilized primarily when there is
business.
2. Second, the multiple criteria are combined informally. The goal here is to
combine the criteria into an overall judgment. There are, however, some pros
and cons:
also flexible in use and application.
This measure adds in the element of experience, but it can be arbitrary when
the member does well in one area but not so well in other areas
performance.
3. The third measure is the multiple criteria combined informally. The steps here
are:
Complete all criteria operational measures.
Assign weights in terms of importance.
Evaluate on the basis of a scale of 1 to 10.
Multiply the score times the weight to achieve a product for each factor.
Sum the factors to obtain an overall status.
The advantage of the third method is that it provides weights and measures to provide an
explicit and overall quantitative index. While this may be viewed as a bit artificial in some
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ways, it also is easier to rely on a number to start with and then develop ameliorating
qualitative data to make a final conclusion.
A discussion on how the Internet and wireless technology advances have impacted channel
management may include:
The Internet has provided organizations with great cost reduction opportunities. Any
digital entity such as information and transactions can be managed over the Internet
thereby reducing or eliminating functions required to manage the information or
transaction. But it also means that new channel activities are required to manage the
Internet applications.
The Internet provides a vehicle for organizations to find new solutions and suppliers. It
also, through reverse auctions, has provided buyers with more power over suppliers.
Tendency to commoditizing products and services by the buyer using reverse auctions
places pressure on suppliers to further differentiate them from their competitors.
Suppliers not prepared to begin using radio frequency identification (RFID) when
Wal-Mart demanded that all of its suppliers use RFID on all of their shipments were
and are at a competitive disadvantage.
Consumer access to manufacturer information more readily on the Internet has
provided them with additional leverage over intermediaries in the same channel.
New organizations enter the channel to provide Internet and wireless enabling
technologies.
Channel members who fail to retrofit their technology from print to digital will leave
the channel. In fact, even if they convert, buyers of their services may be able to
perform some of the functions themselves.
The Internet has made it easier for the end users to pull from the channel. Push
techniques using the Internet can sometimes be treated as spam unless the proper
permission marketing techniques are implemented.
II. Background Articles
Issue: Channel Management in the New Economy
A. Source: “Five Tips for Achieving Channel Management Success and Better
Understanding End-Customer Needs,” PRN Newswire, April 2002, p. 14.
For many business-to-business companies selling through complex channels,
relationships with end-customers have been limited due to the role of the
intermediary. Recent studies indicate that many marketing managers do not realize
that effective channel management strategy cannot only provide collaboration and
visibility into the channel, but can also reach and serve customers by leveraging new
technology. Marketers and information officers should consider the following before
undertaking the search for a solution.
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1. Give channel partners a role in creating the solution, so they are then part of its
2. Add e-commerce through the channel to increase sales and visibility into
end-customer preferences. Incorporating e-commerce through channel partners to
to whom and with what frequency.
This can then be integrated into the customer relationship marketing (CRM), leads
allows partners to present fresh and pertinent product information with a minimal
amount of cost and resources.
3. Encourage partners to update product and pricing information. Empower partners
easy and time efficient as possible, the channel management solution should allow
4. Monitor end-customer satisfaction. Many organizations with a channel network
product and market needs and more.
5. Keep tabs on partners and make it easier for them to close sales. Every channel
management program should do what it says-manage channels. While giving
June 18, 2002.
In today’s economy, companies generate a staggering percentage of revenues by way of
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1. Approach channel management as a critical process that directly impacts overall
Management (CRM) carpet,” you risk alienating trusted sales partners and
forgoing significant revenue.
2. Companies limit the effectiveness of their channels through apathy and subtle
mapped appropriately with the sales process.
3. Don’t expect your partners to: 1) support your products if it requires too much
entrenched in your market.
4. Never forget that the market is glutted with products. Do not inundate the channel
channel partners to create services and downstream revenues surrounding your
products.
5. Ask yourself if your product is strategic to the channel’s business model. Find out
them for doing so.
6. Channels switch customers to known product brands greater than 60% of the
problem. Accordingly, be sure to allocate a significant portion of your marketing
7. Make sure you have a process defined to address channel conflict issues. They
explaining the reasons behind the decisions.
8. Automate channel management to cut costs and make it easy for partners to do
starting with the processes that can provide the greatest impact.
9. Make sure that your channel management systems provider has the expertise and
real-world knowledge to help you in the upfront planning and strategy work -
before applying technology.
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compelling - make changes.
IV. Case
CVS: The Web Strategy
HBS Case: 9-500-008, TN 501-064
Teaching Perspectives
succeed. It did not have to initiate a new behavior, merely to shift the behavior of its customer
base from direct mail to the Internet. This careful mapping of channel characteristics into
buying habits can be surprisingly informative to students, particularly to those who think that
they would never fall for the cavalier consumer behavior assumptions made by so many failed
dot.com ventures.
technology on the balance of power in the healthcare market. A policy clash between CVS.com
and a pharmacy benefit manager, Merck-Medco, serves to show how market power is shifting
as better information becomes available to the drug supply chain.
From the patient’s point of view, there may he some interest in having chronic medication
may be marginally easier to place the order at a Web site than over the phone, but the gains are
minimal, and surely not sufficient to drive consumers to this channel.
There is one niche that may respond to the Web, and that is the people behind the 11 percent or
$11 billion’s worth of prescriptions bought at retail and paid for by patients (Exhibit 5). Note
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drugs they buy don’t pass through a PBM’s hands. These drugs move directly from
manufacturer to drugstore. Drugstores had no incentive to convert them because they did not
want to channel business away from their stores. Now someone does have a wish to convert
them. The pure-play online drugstores have their sights set on this market, because they can
Questions
1. At the time of the case, the revenues of online drugstores would have been lost in the
When were they right—then or now? All it would take for e-pharmacies to really hurt
list the things that must happen for that scenario to occur.
2. Who is the most powerful player in the prescription pharmaceutical distribution
3. How closely should CVS integrate CVS.com into its business? What is your point of
pricing? How about orders placed online and picked up in a store?
4. What would you do if you were in charge of CVS.com and had to respond to the
demands of Merck-Medco?
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