Evaluating the Major Channel Alternatives
Category: Marketing
Suppose a company has identified several channel alternatives and wants to select the one that will best satisfy its long-run objectives. The firm must evaluate each alternative against economic, control, and adaptive criteria. Consider the following situation:
A furniture manufacturer wants to sell its line through retailers. The manufacturer is trying to decide between two alternatives.
1. It could hire ten new sales representatives who would operate out of a sales office. They would receive a base salary plus a commission on their sales.
2. It could use a manufacturer’s sales agency that has extensive contacts with retailers. The Break-even cost chart for the choice between a company sales force and agency has thirty salespeople who would receive a commission based on their sales.
Financial criteria. Each channel alternative will produce a different level of sales and costs. The first step is to determine the sales levels that would be produced by a company sales force compared to a sales agency.
The next step is to estimate the costs of selling different volumes through each channel. The fixed costs of using a sales agency are lower than those of setting up a company sales office.
But costs rise faster through a sales agency because sales agents get a larger commission than company salespeople. There is one sales level (SB) at which selling costs are the same for the two channels. The company would prefer to use the sales agency at any sales volume below SB. In general, sales agents tend to be used by smaller firms, or by larger firms in smaller territories where the sales volume is too low to warrant a company sales force.
Control criteria. Next, evaluation must be broadened to consider control issues with the two channels. Using a sales agency poses more of a control problem. A sales agency is an independent business firm interested in maximising its profits. The agent may concentrate on the customers who buy the largest volume of goods from their entire mix of client companies rather than those most interested in a particular company’s goods. And the agency’s sales force may not master the technical details of the company’s products or handle its promotion materials effectively.
Adaptive criteria. Each channel involves some long-term commitment and loss of flexibility. A company using a sales agency may have to offer a five-year contract. During this period, other means of selling, such as a company sales force, may become more effective, but the company cannot drop the sales agency. To be worthy of consideration, a channel involving a long commitment should be greatly superior on economic or control grounds.
• Summary
The choice of distribution depends on:
Customer characteristics, such as number of customers, geographical dispersion, purchasing power, purchasing pattern
Product characteristics
Intermediary characteristics
Company characteristics
Environmental characteristics
Time
Capacity
Knowledge available and needed
Existing distribution form
Wish or need for control of the market
Position of the competitors
Target group expectations.