Channel Design Decision: Meaning, Importance, and Steps

What is Channel Design?

Channel Design is a design or plan prepared for the distribution and movement of goods and services from the manufacturer to the customer. Thus, Channel Design Decisions refer to the strategic choices and actions taken by a company to create an effective distribution and communication network for its products or services. These decisions involve determining the types of channels (such as direct, indirect, or hybrid), the number and location of intermediaries, and the integration of various communication and delivery methods. Channel design decisions also encompass considerations, such as channel length, breadth, and depth. The goal is to design a channel system that efficiently and effectively connects the company with its target customers, ensuring the right product reaches the right place at the right time while also maximising customer satisfaction and achieving business objectives.

Importance of Channel Design Decisions

Channel design decisions are crucial as they directly impact the effectiveness and efficiency of a company’s distribution and communication efforts. By strategically designing channels, businesses can optimise the flow of products or services from production to end-users. This ensures that the right products reach the right customers at the right time, maximising customer satisfaction and loyalty. Effective channel design decisions also help minimise costs, streamline operations, and improve overall channel performance. By carefully selecting distribution channels, businesses can expand their reach, penetrate new markets, and gain a competitive edge. Ultimately, well-designed channels contribute to the overall success and profitability of a company.

Steps to Channel Design Decisions

Step 1: Analysing Consumer Needs

The first step in channel design decisions is to analyse consumer needs and desires from the channel. This involves understanding customers’ preferences, expectations, and behaviours regarding how they want to access and purchase products or services. It can be done by answering the following questions:

• Do the customers want to buy from a nearby location, or are they willing to go to a place away from their home to buy the product or service?
• Do they want to purchase the product or service online, in person, or by phone?
• Do they want specialised products or services or value breadth of assortment?
• Do the consumers want add-on services with the main product, such as delivery, installation, repair, etc., or are they ready to get these services from some other place?

It is not possible for any company to provide all the desired services to the consumers as the company and its channel members may not possess all the required skills for the same. Also, if a company provides higher service levels to the consumers, then it will increase the cost of the channel, ultimately increasing the prices for consumers. Therefore, it is essential for the company to maintain a balance between consumer needs, feasibility and cost of meeting those needs, and customer price preference. Besides, through the success of discount retailing, it can be said that consumers will be ready to get lower services if they have to pay lower prices for the same.

Thus, by gaining insights into consumer needs, businesses can tailor their channel design to meet those requirements and deliver an enhanced customer experience.

Step 2: Setting Channel Objectives

After analysing consumer needs, the next step is to establish clear channel objectives. It means that the company, in this step, will have to state its marketing channel objectives according to the targeted level of customer service. For this, a company has to first identify different segments of consumers who want different service levels, and then decide which segment they should serve along with the best channel for each of the selected segments. The basic motive of the company for each segment is to minimise the total channel cost of meeting the requirements of customers-service.

Other factors that influence the channel objectives of a company include the company’s nature, its products, marketing intermediaries, competitors, and the environment. For example, a company can decide between which marketing function to handle itself and which to give to the intermediaries through its size and financial situation. Besides, the companies selling perishable products may use more direct marketing so they can avoid delays and too much handling of the product.

Step 3: Identifying Major Alternatives

In this step, businesses need to identify major alternatives for their distribution channel. This involves considering the types of intermediaries, determining the number of marketing intermediaries, and defining the responsibilities of channel members. 

a) Types of Intermediaries: Different types of intermediaries can be considered based on the nature of the product, target market, and distribution strategy. Some common types of intermediaries include:

• Retailers: These can include brick-and-mortar stores, online retailers, department stores, supermarkets, or specialty shops.
• Wholesalers: Wholesalers purchase products in bulk from manufacturers and distribute them to retailers or other businesses.
• Distributors: Distributors act as intermediaries between manufacturers and retailers, specialising in specific industries or geographical areas.
• Agents/Brokers: Agents or brokers facilitate transactions between buyers and sellers without taking ownership of the products. They earn commissions or fees for their services.

A company has to identify the different types of channel members that are available for its channel work. Some companies use many channel members to provide their customers with their products. For example, earlier, Dell used to sell directly to its final consumers and businesses through internet marketing and its sophisticated phone. It also used to sell directly to large institutional, government, and corporate buyers through its direct sales force. But, in order to reach more consumers, and to match its competitors (such as Lenovo, HP), the company, besides the older ways, now sells its product indirectly with the help of retailers like Croma, Big Bazaar, Wal-Mart, and E-Zone. Along with the retailers, it also sells through independent distributors, value-added resellers, and dealers who develop computer applications and systems based on the needs of small and medium-sized business customers.

b) Number of Marketing Intermediaries: The decision regarding the number of marketing intermediaries depends on various factors, such as the complexity of the product, target market coverage, and distribution efficiency. Options to consider include:

• Intensive Distribution: It involves placing products in as many outlets as possible to maximise market coverage. The basic aim of this strategy is to make the products available where and when the consumers want. This approach suits low-cost or convenience products. For example, toothpaste, candy, chips, etc. Companies like Coca-Cola, Hindustan Unilever, Nestle, etc., use this way to distribute their products.
• Exclusive Distribution: It involves granting exclusive rights to a single intermediary or a limited number of intermediaries in a particular geographic area or market segment. This strategy is often employed for luxury or specialised products. For example, Rolex watches are sold by limited authorised dealers. This strategy helps a business in enhancing its brand image and allows it for higher markups.
• Selective Distribution: It involves selecting a limited number of intermediaries based on their ability to effectively reach specific market segments. This strategy is often used for products with unique characteristics or targeted customer segments. For example, Television, Refrigerator, Home Appliances, Furniture, etc. Companies like Whirlpool, Sony TV, and General Electric uses this approach to sell their major appliances/products through selected large retailers and dealer networks.

c) Responsibilities of Channel Members: Each channel member has specific roles and responsibilities within the distribution process. It is the duty of the producer and the intermediaries to agree on the terms and responsibilities of each of the channel members. They should agree with each other on the price policies, sale conditions, services to be performed by each party, and territorial rights. For this, the producer has to first prepare a list price and set a fair discount rate for the intermediaries. It is essential to define the territory of each channel member and be careful while placing new sellers. Also, it is important to carefully spell out the mutual duties and services (especially in the case of franchise and exclusive distribution channels).

Step 4: Evaluating the Major Alternatives

Once the major alternatives have been identified, businesses need to evaluate them based on factors, such as cost, efficiency, market reach, customer satisfaction, and compatibility with overall business objectives. This evaluation helps in selecting the most suitable channel design alternative. For better evaluation, it is essential to check each alternative against economic, control, and adaptive criteria.

• Economic Criteria: With the help of this criteria, a company can compare the likely sales, profitability, and cost of different alternatives.
• Control Criteria: If a company is using intermediaries for distributing its products to consumers, it generally means giving the intermediaries some control over the marketing of the product. Some intermediaries have more control over the marketing than others. Besides, keeping other things equal, a company always prefer to keep as much control as possible with itself.
• Adaptive Criteria: Even though the channels involve long-term commitments, a company tries to keep the channel as much flexible as possible so that it can easily adapt to environmental changes.

Therefore, to be a better alternative, a channel with long-term commitments should be superior in terms of economic and control criteria.