The starting point in selecting the most effective channel arrangement is a clear determination of the target market for the company’s marketing effort and a determination of the needs and preferences of the target market.
- Where are the potential customers located?
- What are their information requirements?
- What are their preferences for service?
- How sensitive are they to price?
These are some of the questions that the channel manager should answer. Customer preference must be carefully determined because there is as much danger to the success of a marketing program in creating too much utility as there is in creating too little. Moreover, each market must be analysed to determine the cost of providing channel services. What is appropriate in one country may not be effective in another.
Channel strategy in a global marketing program must fit the company’s competitive position and overall marketing objectives in each national market. If a company wants to enter a competitive market, it has two basic choices.
- One option is providing incentives to independent channel agents that will induce them to promote the company’s product.
- Alternatively, the company must establish company-owned or franchised outlets.
The process of shaping international channels to fit overall company objectives are constrained by four factors: customers, products, intermediaries, and the environment. Important characteristics of each of these factors are discussed briefly.
Customer Characteristics
The characteristics of customers are an important influence on channel design. Their number, geographical distribution, income, shopping habits, and reaction to different selling methods all vary from country to country and therefore require different channel approaches. Remember, channels create utility for customers.
In general, regardless of the stage of market development, the need for multiple channel intermediaries increases as the number of customers’ increases. The converse is also true: The need for channel intermediaries decreases as the number of customers’ decreases. For example, if there are only ten customers for an industrial product in each national market, these ten customers must be directly contacted by either the manufacturer or an agent. For mass-market products bought by millions of customers, retail distribution outlets or mail-order distribution is required. In a country with a large number of low-volume retailers, it is usually cheaper to reach them via wholesalers. Direct selling that bypasses wholesale intermediaries may be the most cost-effective means of serving large-volume retailers. While these generalizations apply to all countries, regardless of stage of development, individual country customs will vary.
Product Characteristics
Certain product attributes such as degree of standardization, perishability, bulk, service requirements, and unit price have an important influence on channel design and strategy. Products with high unit price, for example, are often sold through a direct company sales force because the selling cost of this “expensive” distribution method is a small part of the total sale price. Moreover, the high cost of such products is usually associated with complexity or with product features that must be explained in some detail, and a controlled sales force can do this most effectively. For example, computers are expensive, complicated products that require both explanation and applications analysis focused on the customer’s needs. A company-trained salesperson or “sales engineer” is well suited for the task of creating information utility for computer buyers.
Computers, photocopiers, and other industrial products may require margins to cover the costs of expensive sales engineering. Other products require margins to provide a large monetary incentive to a direct sales force. In many parts of the world, cosmetics are sold door to door; company representatives call on potential customers. The representatives must create in the customer an awareness of the value of cosmetics and evoke a feeling of need for this value that leads to a sale. The sales activity must be paid for. Companies using direct distribution for consumer products rely upon wide gross selling margins to generate the revenue necessary to compensate salespeople. Amway and Avon are two companies that have succeeded in extending their direct-sales systems outside the United States.
Perishable products impose special form utility demands on channel members. Such products usually need relatively direct channels to ensure satisfactory condition at the time of customer purchase. In less developed countries, producers of vegetables, bread, and other food products typically sell their goods in public marketplaces. In developed countries, controlled sales forces distribute perishable food products, and stock is checked by these sales distributor organizations to ensure that it is fresh and ready for purchase.
Bulky products usually require channel arrangements that minimize the shipping distances and the number of times products change hands between channel intermediaries before they reach the ultimate customer. Soft drinks and beer are examples of bulky products whose widespread availability is an important aspect of an effective marketing strategy.
Selection and Care of Distributors and Agents
The selection of distributors and agents in a target market is a critically important task. A good commission agent or stocking distributor can make the difference between realizing zero performance and performance that exceeds 200% of what is expected. At any point in time, some of any company’s agents and distributors will be excellent, others will be satisfactory, and still others will be unsatisfactory and in need of replacement.
To find a good distributor, a firm can begin with a list provided by the Department of Commerce or its equivalent in different countries. The local chamber of commerce in a country can also provide lists, as can local trade associations. It is a waste of time to try to screen the list by mail. Go to the country and talk to end users of the products you are selling and find out which distributors they prefer and why they prefer them. If the product is a consumer product, go to the retail outlets and find out where consumers are buying products similar to your own and why. Two or three names will keep coming up. Go to these two or three and see which of them would be available to sign. Before signing, make sure there is someone in the organization who will be the key person for your product who will make it a personal objective to achieve success with your product.
This is the critical difference between the successful distributor and the worthless distributor. There must be a personal, individual commitment to the product. The second and related requirement for successful distributors or agents is that they must be successful with the product. Success means that they can sell the product and make money on it. In any case, the product must be designed and priced to be competitive in the target market. The distributor can assist in this process by providing information about customer wants and the competition and by promoting the product he or she represents.
The only way to keep a good distributor is to work closely with him or her to ensure that he or she is making money on the product. Any distributor who does not make money on a line will drop it. It is really quite simple. In general if a distributor is not working out, it is wise to terminate the agreement and find another one. Few companies are large enough to convert a mediocre distributor or agent into an effective business representative. Therefore, the most important clause in the distributor contract is the cancellation clause. Make sure it is written in a way that will make it easy to terminate the agreement. There is a myth that it is expensive or even impossible to terminate distributor and agent agreements. Some of the most successful global marketers have terminated hundreds of agreements and know success is based on their willingness to terminate if a distributor or agent does not perform.
The key factor is performance: If a distributor does not perform, he or she must either shape up or be replaced.
Environmental Characteristics
The general characteristics of the total environment are a major consideration in channel design. Because of the enormous variety of economic, social, and political environments internationally, there is a need to delegate a large degree of independence to local operating managements or agents.