Channel Patterns: The Effect on Customers

As power and influence shift downstream, closer to customers, distribution channel players become more important. As new players create new, more specialized channels, and as traditional players expand their repertoire to serve customers better, the result is a rich profusion of new ways to bring products to customers. Not all customer channels continue to thrive as market conditions change.

Multiplication • Channel Concentration • Compression • Reintermediation

Multiplication

A variety of market conditions can trigger the channel multiplication pattern. The first market condition is multiplication of customer types. Today, customers want to buy in differnet ways. They look for more buying options and have become far more varied in their needs and preferences. Significant technological change is another trigger. The rapid evolution of the Internet has created a new channel for transactions and distributions globally.

Deteriorating economics due to channel dysfunctionality also encourages the multiplication pattern. If a channel is poorly matched to how the customer wants to buy, it creates inefficiencies, has high costs, and results in low profitability. A channel very closely matched to how customers want to buy can be asset-efficient and highly profitable.

Many manufacturers are uncomfortable with channel multiplication. It disrupts their established market system and invades the comfort of their existing channel relationships. Some companies hesitate to adopt new, more customer-friendly channels for fear of angering their traditional partners. Whether real or imagined, this channel conflict holds them back. This can be well justified since traditional distributors are often very turf-sensitive — particularly when the distributors' value added is weak. In the short term, avoiding the issue earns peace for the manufacturer and the distributor, but in the long term, it undermines the competitiveness of both. To deal with the conflict, a two-pronged approach has been used by some:

1. Develop new programs that will address some of the key concerns of the existing channel, and
2. Aggressively pursue the new channel opportunities.

What do you do when you're in a Multiplication pattern? If you're the manufacturer, use the new channels early. Be their first choice. If you're a traditional channel, launch new channel business designs that respond to how your customers and prospects want to buy.

Channel Concentration

The multiple dysfunctionalities of the fragmented system (inefficiency, inconvenience and time lost) of many small-scale outlets are the ideal preconditions for triggering the channel concentration pattern. In this pattern, value shifts when a newcomer brings economies of scale to a fragmented, high-cost market. The innovators consolidate the small fragmented shops and service offerings into larger units. A concentration pattern can fundamentally transform the retail landscape.

A new pattern emerging in retail channels is called the "Customer Occasion" channel format. It is based on an understanding of the important purchasing occasions and activities consumers would like to cluster together in their in their daily, weekly or less frequent rhythms. By clustering these activities under one roof, the channel creates a format that mirrors the combination and sequence of a consumer's activities on that shopping occasion.

Customer Occasion channel strategies are process reengineering on behalf of customers. They use research to understand what processes consumers would like to cluster, then they do the clustering for them. Customer Occasion strategies show the value of segmenting customers by identifying the intersection of identity-based and occasion-based attitudes.

What do you do when you're in a Channel Concentration pattern? Lead the process. Always be thinking of what the next generation model should be.

Compression

Multistep distribution systems functioned to break bulk and bring products closer to customers, but their function was achieved at a price: long cycles, high costs and low responsiveness to changing conditions. Two forces put pressure on these multistep systems: consumers' search for lower prices and greater convenience and manufacturers' search for greater distribution efficience. As the gap between these two priorities has widened, the channel compression pattern has been triggered in many industries. The result has been the compression or disintermediation of traditional distribution channels in favor of more efficient, closer or even direct relationships between customers and suppliers.

Channel compression removes steps in the distribution system. In its most extreme form, channel compression leads to complete disintermediation: low-value-added distributors are eliminated, and the direct link formed between supplier and customer creates enormous benefits for both. Costs fall, assets are reduced and the quality of mutual information flow is vastly improved. In the future, sellers will make electronic pathways their key distribution channels at an accelerating rate. To gain the best information and the lowest prices, customers will migrate to new channels or to direct relationships with the suppliers themselves.

What do you do when you're in a Compression pattern? As buyer and manufacturer, create direct links early. If you are still "the old channel," create new value-added offerings, or disinvest, before you are disinvested by your value chain neighbors.

Reintermediation

The channel compression, or disintermediation, pattern eliminates traditional distributors and creates direct relationships between a company and its customers. In a small but growing number of cases, however, a pattern of reintermediation follows and allows the "ousted" distributors or new players to come back into the picture in another role. Companies that recognize the key gaps and unmet needs can reenter the system as value-added intermediaries.

These new intermediaries return to do one of two things: provide customers with new, important value-added services not provided in the new direct customer-supplier relationship; or provide customers with significantly more efficient means of transacting business. With either activity, the result is a new distribution channel built on a meaningful new value proposition for the customer.

The greater the number of sellers, the greater the need for buyers to gather information about sellers, make decisions about which sellers to use, and find ways to contact each one at each level. On the selling side, having too many fragmented buyers means high marketing costs, high distribution hurdles and complicated logistical issues.

In this variant of the reintermediation pattern, the fundamental shift that occurs is from a fragmented state to a highly organized switchboard that magnetizes the loyalty of buyers and achieves the grudging acceptance of sellers. In this pattern, there is an opportunity for a farsighted player to move into the inefficient void between buyers and sellers. The player becomes a high-value intermediary by creating a switchboard or hub business design that significantly increases the efficiency of both buyers and sellers. Being that hub can lead to profitability and strategic control within an industry.

What do you do when you're in a Reintermediation pattern? As buyer and supplier, use the new channel early. It will save you money. As the new channel, maximize the value added and accelerate your investment program, to minimize the window available for the number two entrant.

Page content is based upon Profit Patterns, written by Slywotzky, Morrison, Moser, Mundt and Quella, published by Times Business, Random House, copyright © 1999 Mercer Management Consulting, Inc.