Channels to Market Guide

This section focuses on some of the basic concepts behind channels to market in order to create a common vocabulary of channels.  
Most people, in their daily lives come across channels to market although most people would not consider them such as they are part of our daily lives.  When we walk down to the local shop and buy a newspaper we are engaging in economic activity associated with channels to market.  In this situation we are purchasing our morning newspaper not from the publisher, but from a retail outlet, which has been supplied by a distributor, who purchased the product from the publisher or potentially a wholesaler.  It is a strange fact, but nevertheless true, that the lower the value of the product, the longer is the chain of intermediaries between the manufacturer of the product and the end user or consumer.  In most circumstances aeroplanes are purchased by airlines (in this instance the end user) directly from the manufacturer.  In the case of Mars Bars the chain of intermediaries can be at least three or possibly even four or more.

WHY DO CHANNELS EXIST?

The question that needs to be asked is why do channels exist?  The answer to this depends on which industry we are talking about.  In the case of high value, complex items like Aeroplanes or Power Stations the answer is that channels tend not to exist.  In lower value items the reasons they exist can be many fold.
The following diagram should in part help to explain why Channels come into being in any given industry.
Imagine a scenario where there are 5 potential customers and 5 products which all the customers want to buy.  In terms of supplier/purchaser relationships then each supplier has to maintain 5 relationships with the buyer company and vice versa.  In purely economic terms then that creates 25 economic relationships which need to be maintained.  (fig 1) Essentially figure 1 defines an end-user relationship model whereby each of the suppliers creates economic relationships with as many buyers are available to it.  As we’ve already said, where the product is of high value, or highly complex then it’s possible this is the correct model.

Fig 1. Multiple relationships – end-user selling model

Fig 2. Comparative situation with intermediary

In the scenario outlined in figure 2 the economic relationships reduce from 25 in the total system down to 10.  Economically at least, the model has become much more efficient as there are now only 10 relationships to maintain.  Each supplier in effect only needs to maintain one relationship with the intermediary instead of 5.
Therefore one of the primary arguments in favour of channels is quite simply that they are more efficient than direct selling relationships.  This efficiency also leads to better choice for end users/consumers.  The problem for the suppliers is how to control the intermediary/buyer dynamic and ensure their products are purchased.

END USERS AND THE CHANNEL

It is often difficult in channels to keep focused on the most important factor in all of channel development.  The suppliers and the intermediaries in the channel must always bear in mind that the end user or consumer is the single most important element.  Often suppliers will try to dictate to the market how their products should be purchased, from where, and at what price.  In certain industries, especially in Europe, there are block exemptions in place which allow suppliers to dictate where consumers are allowed to buy products, these exemptions are for High Fidelity, Perfumes and Automobiles.

More and more however these artificial barriers are being broken down and in 2006 the Automobile block exemption disappeared and consumers will start to dictate where they wish to buy their cars.  Suppliers wishing therefore to build sustainable, scalable channels should try wherever possible to build them around the wants and needs of end users, the channels will be more robust and better able to meet everyone’s objectives, including the intermediaries and the consumers as well as the suppliers.

CONCLUSIONS

One last point to note is that surveys of channel relationships show that in over 75% of cases channel transactions are one off events and result in no further business being conducted.  We will always advise our clients that sometimes, these one off relationships may be tactically valuable but the whole point about channels is that you develop a long term, mutually beneficial, arrangement.  That can only be achieved by building a robust channel strategy and implementing it with rigour.

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