To gain a competitive edge, every project needs to take a holistic approach to new channel development. Changes in one process or program will weave its way throughout an organization and its markets. When making changes to the marketing and sales channels, some work needs to be done early in the project to assess the implications of change. Failure to consider this may cause irreparable damage to the company’s sales, clients and reputation in the marketplace. In new channel development, the company knows current markets well and has setup programs and processes to support the existing channels. When a new channel is contemplated, there are many interrelated issues that must be dealt with. They include:
- The ability of the existing brand to support a new channel a. Co-op, merchandising, marketing, corporate communications, collateral materials, etc.
- How existing customers will be affected by this new channel
- Competitive responses
- Business processes to support the change or addition
- Vendors, distribution, facility space, volume fluctuations, personnel, capital requirements for inventory, facilities, collection float, etc.
- The expected Product Life Cycle and the ability to provide add-on services that will generate additional revenues during the PLC
Example: Let’s assume we have a product that is two stepped from distributors to doctors to consumers and that we want to sell the product through retail. Understanding the requirements of the new channel is critical. The company needs to consider the end user and the retail partner. Retail requirements will be very different. Retailers want to have well thought out merchandising and co-op programs. They want programs that will include volume discounts, local advertising support, brand building activities and they may want exclusivity in the retail channel. Retailers may want you to buyout the product in the shelf space you want to occupy. They will have unique shipping requirements. In the case of Wal-Mart, they may want you to do vendor managed inventory.
All of these issues will require a change in the way the client does business. Those changes will affect the cost structure of the business and impact existing channels of distribution. Of major concern is whether or not existing customers will feel threatened by the new distribution channel. Some investigation is required to assess the potential impact. Preserving the existing client base is a high priority to protect the company in case the new channel doesn’t meet expectations. If this example, if there is alternate product in the marketplace that is exclusive to the channel, the doctors will exit the product rather than try to compete with retailers. One approach to dealing with this issue is to create another brand that will not impact the existing channels. This approach has a higher initial cost but protects the existing business. Another approach is to differentiate the product offering to the channel that provides additional services, training, spare parts, etc. that extend the revenue generating capability of the product and also provide an opportunity to further develop the end user relationship. Spending some project time on financial impact is an important part of any project. If existing customers are threatened by the new channel, then an analysis needs to be done to assess the impact of sales moving from one channel to another.
In the previous example, profit margins are historically higher with distribution through doctor’s offices than retail. Because there is a significant swing in volume, the project needs to address the expected impact to the income statement. There are other impacts to the income statement that need analysis. Understanding the cost for a retail rollout is critical to the company. Retailers want to be assured that there is sufficient inventory and manufacturing capacity for their product. They don’t want empty shelves. This may require expenditures for increased inventory levels and additional manufacturing capacity. Other expenses include marketing the product, the initial sell-in costs and store set-up kits for each retail location. Training costs are often forgotten, but when implementing a new channel, the company may have to create parallel systems and processes because of their unique support requirements. This requires training for the sales, marketing, customer service and supply chain people.
Good ideas have often failed because of poor preparation and implementation. Businesses need to be prepared to anticipate the gut wrenching change that new channels bring and understand the implications throughout the organization and its financials. If the company is using a consulting company to help with the implementation, they need to pick a firm that has experienced people who have lived through those changes and know how to effectively implement them.
About the Author: Jim Gitney is the CEO of Group50 Consulting. During his career, he has been responsible for designing and implementing many product strategies including complex control systems at GE, Snakelight and DeWalt at Black & Decker. Group50’s Market Effectiveness Practice has the required expertise to properly define a product, evaluate the opportunities to create incremental revenues during the Product Life Cycle and execute the plan in the market place. If you would like to find out more about Group50’s capabilities in new channel development, request more information here, send an email to firstname.lastname@example.org, or call (909) 949-9083.
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