Multi-channel distribution

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Multi-channel distribution
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Multi-channel distribution - is the use of two or more distribution channels by one company to reach its customers, either the same segment through several routes or different segments through different routes. Kotler and Keller describe multichannel marketing in exactly these terms: a single firm using two or more marketing channels to reach one or more customer segments[1]. A manufacturer of garden tools that sells through DIY chains, an own web shop, an online marketplace and a team of sales representatives calling on landscaping firms is running a multi-channel system.

The opposite is a single-channel company, one that goes to market only through distributors, or only through its own sales force. That used to be the norm in many industries. It isn't anymore. Today the real question for most firms is not whether to use several channels but how many, which ones, and how to stop them from undercutting each other.

Background

Channel diversity is old. Mail-order catalogues ran alongside department stores in the late 19th century, and insurers combined tied agents with brokers for decades. What changed in the 1980s was scale and deliberateness. Companies started adding telemarketing, direct mail and value-added resellers to existing sales forces in order to cut the cost of serving smaller customers.

Rowland Moriarty and Ursula Moran captured this shift in a 1990 Harvard Business Review article. They noted that most companies had once gone to market one way only, and that firms were now adding new channels to existing ones to defend their turf, expand coverage and control costs. In their words: "As they add channels and communications methods, companies create hybrid marketing systems"[2]. Their practical tool, the so-called hybrid grid, splits the selling process into tasks (generating leads, qualifying them, pre-sale work, closing, post-sale service) and assigns each task to the channel or method that does it best at the lowest cost. A sale can then start with a mailing, be qualified by a telephone team and be closed by a field representative. One customer, three channels.

The internet pushed the idea much further. In 2005 Rangaswamy and Van Bruggen observed that customers were increasingly choosing for themselves when and through which channel to deal with a firm, often researching online and buying offline; they called such buyers multichannel customers and the strategies aimed at them multichannel marketing[3]. A year later Neslin and co-authors defined multichannel customer management as "the design, deployment, coordination, and evaluation of channels through which firms and customers interact, with the goal of enhancing customer value through effective customer acquisition, retention, and development"[4]. Note the shift. Distribution had become a question of customer value, not just of moving boxes.

Multi-channel, cross-channel and omnichannel

The three labels get used as synonyms. They aren't. Beck and Rygl proposed a widely cited classification based on two questions: can the customer move between channels during a purchase, and does the company integrate the channels behind the scenes[5]?

Type What the customer can do Degree of integration on the company side
Multi-channel Uses one channel per purchase; switching mid-way is not supported Channels run side by side, often with separate stock, prices, teams and targets
Cross-channel Can combine some channels, e.g. order online and collect in store Partial integration of selected processes (inventory visibility, returns)
Omnichannel Moves freely between all channels and touchpoints Full integration of data, inventory, pricing and customer service

Verhoef, Kannan and Inman argued that the move from multi-channel to omnichannel retailing widens the scope well beyond classic distribution channels: mobile apps, social media, customer-to-customer touchpoints and in-store devices all count, and the boundaries between channels blur from the shopper's point of view[6]. They also discuss the "research shopper" who gathers information in one channel and buys in another. Showrooming (see it in the shop, buy it cheaper online) and webrooming (the reverse) are the familiar forms.

For a manufacturer the practical consequence is simple. A multi-channel system can be built by bolting channels together. An omnichannel system can't; it needs shared customer records, one view of inventory and pricing rules that hold across every route. That is much harder and much more expensive.

Types of distribution channels

Channels differ in length (how many intermediaries stand between producer and buyer), in ownership and in the tasks they take over. The main options:

  • Direct sales channels - own stores, own web shop, mail order, telemarketing and field sales. The producer keeps the whole margin and the customer data but carries all the cost. The article direct distribution covers this route in detail.
  • Own sales force - representatives calling on business customers or large retailers. Expensive per contact, so it is usually reserved for complex products and big accounts.
  • Retailers - chains, independents, specialist shops, department stores. They provide shelf space, local presence and impulse purchases, and they take a sizeable cut. See retailer in supply chain and retail strategy.
  • Wholesalers and distributors - buy in bulk at a wholesale price, hold stock, break bulk and serve thousands of small outlets the producer could never visit itself.
  • Agents and brokers - do not take ownership of goods, earn commission. A sales agent is a common way to enter a foreign market cheaply.
  • Online channels - own e-commerce store, mobile app, social commerce.
  • Online marketplaces - third-party platforms where the producer sells under its own name but pays referral and often fulfilment fees. Huge reach, thin control.
  • Franchise networks - independent operators selling under the brand on contract terms.

How many outlets to use within each type is a separate decision, the one about channel width, from intensive through selective to exclusive distribution. A firm can be selective in retail and at the same time intensive online.

Designing a multi-channel system

There's no formula that spits out the right channel mix, but the reasoning tends to follow a sequence:

  1. Segment the market by buying behaviour, not only by demographics. Large buyers who want negotiation, small buyers who want convenience, consumers who want to touch the product first. Market segmentation comes before channel choice.
  2. Map the tasks each segment needs: information, demonstration, credit, delivery, installation, after-sales service. This is the logic of the hybrid grid.
  3. Assign channels to tasks and segments, comparing the cost of each task in each channel with the value it creates.
  4. Set rules of engagement: which accounts belong to which channel, who gets credit for a sale that started online and ended in a shop, what happens to leads.
  5. Coordinate prices and margins (see below).
  6. Measure each channel on contribution, not on revenue. And measure the whole system, because channels feed each other.

Neslin et al. list five challenges that keep coming back in this work: data integration, understanding consumer behaviour across channels, channel evaluation, allocation of resources across channels and coordination of channel strategies[4]. The third one is where many firms go wrong; a web shop may look unprofitable on its own while sending a lot of buyers to retail partners.

Channel conflict

Put several channels in one market and they will compete. Kotler and Keller distinguish vertical conflict (between levels of the same channel, e.g. manufacturer versus retailer), horizontal conflict (between members at the same level, e.g. two dealers) and multichannel conflict, which arises when the producer has set up two or more channels that sell to the same market[1]. The third type is the defining risk of multi-channel distribution.

Typical triggers:

  • the producer's own web shop undercuts the prices of its retailers;
  • a distributor's big customer is "taken over" by the producer's sales force;
  • marketplace sellers (sometimes the producer's own distributors) dump stock at low prices;
  • retailers provide demonstration and advice, customers then buy online elsewhere (free riding);
  • different channels get different promotional support or product ranges.

Some conflict is healthy. It keeps intermediaries alert and stops them from becoming complacent. Too much of it, though, and partners cut shelf space, stop recommending the brand or switch to a competitor. Retaliation is a real cost and it rarely shows up in the original business case for a new channel. How much pressure each party can apply depends on channel power; a brand that customers ask for by name can impose more rules than one that depends on retailer recommendations.

How companies manage conflict

Webb, writing at the time when manufacturers were adding the internet to established channel networks, emphasised that the new channel had to be fitted into a deliberate multiple-channel strategy with explicit mechanisms for coordination, rather than being added in isolation[7]. In practice the tools include:

  • Segment or territory separation - accounts above a certain size go to the sales force, the rest to distributors; or the web shop serves only regions without dealers.
  • Product differentiation - channel-specific models, pack sizes or bundles that make direct price comparison difficult.
  • Role differentiation - the web shop serves as an information hub that passes orders to local dealers, who deliver and install.
  • Compensation for cross-channel sales - dealers receive a commission on online sales in their territory, so they lose nothing when the customer buys on the website.
  • Price discipline - published price lists, minimum advertised price policies and consistent discounts. The legal limits differ by country; fixing the resale price is restricted or banned in many jurisdictions (see resale price maintenance).
  • Communication and joint planning - regular partner councils, shared forecasts, clear dispute procedures. The general rules of conflict management apply here too.

Pricing and margin coordination

Each channel has its own cost structure, so the same list price produces very different net prices for the producer. A retailer keeps a sizeable share of the shelf price, a distributor usually less, a marketplace charges a referral fee plus fulfilment, and the own web shop pays for payment processing, picking, shipping and online advertising. Charging everyone the same price would leave money on the table. Charging very different prices invites arbitrage and anger.

The usual compromise is a price corridor: one recommended consumer price, with net prices to intermediaries set so that each channel earns a margin proportional to the work it does. The producer's own direct channel is often priced at or slightly above the street price of retailers, deliberately, so it doesn't start a price war against its partners. Charging different customer groups different prices on purpose is a form of price discrimination, and it only works when the groups can be kept apart.

Margin coordination also covers trade promotions, listing fees, return policies and payment terms. Small differences add up. A 2% extra early-payment discount for one distributor will be known to the others within weeks.

Example of multi-channel distribution

The following example is hypothetical. A manufacturer of cordless power tools sells one product line at a recommended retail price of €100. Variable production cost is €45 per unit. It uses five channels; "channel cost" covers channel-specific variable costs such as fulfilment, payment fees, trade promotions, marketplace fees and sales commissions. Unit contribution = net price − production cost − channel cost (see contribution margin).

Channel Units Net price to producer (€) Channel cost per unit (€) Unit contribution (€) Revenue (€) Contribution (€) Contribution margin
Own online store 8,000 100.00 22.00 33.00 800,000 264,000 33.0%
Retail chains 30,000 60.00 5.00 10.00 1,800,000 300,000 16.7%
Wholesale distributors 15,000 55.00 3.00 7.00 825,000 105,000 12.7%
Online marketplace (price €95, 15% fee) 12,000 80.75 15.00 20.75 969,000 249,000 25.7%
Major accounts (sales force) 5,000 70.00 10.00 15.00 350,000 75,000 21.4%
Total 70,000 4,744,000 993,000 20.9%

What does the table show? Retail chains move 42.9% of the units but deliver only 30.2% of total contribution. The own online store sells 11.4% of the units and brings in 26.6%. On paper the conclusion seems obvious: push customers to the web shop.

Not so fast. Suppose the company runs a campaign that moves 3,000 buyers from retail to its own store:

  • contribution gained in the web shop: 3,000 × €33 = €99,000;
  • contribution lost in retail: 3,000 × €10 = €30,000;
  • net effect before any reaction: +€69,000.

Now the retailers notice. They cut shelf space and the brand loses another 4,000 retail units, i.e. 4,000 × €10 = €40,000. The net gain shrinks to €29,000. If the retaliation reached 6,900 units, the whole campaign would merely break even (€69,000 ÷ €10 = 6,900); beyond that it destroys value. And this ignores the fact that many buyers see the product in a store before ordering online. Cut the shelf space and some of those web shop sales disappear too.

The lesson: judge each channel by its contribution, but decide channel changes at the level of the whole system, with an honest estimate of partner reactions. The wider topic of channel costs is covered under distribution cost.

Advantages of multi-channel distribution

  • Wider market coverage - each channel reaches buyers the others miss.
  • Lower cost to serve - small customers go to cheap channels, large ones get personal attention; this was the original argument of Moriarty and Moran[2].
  • Customer choice - buyers can pick the channel that suits them at each stage of the purchase.
  • Risk spreading - losing one large retailer or one platform hurts less.
  • Better customer knowledge - direct channels supply data that wholesalers and retailers rarely pass on, which feeds customer relationship management.
  • Higher spending by multichannel customers - research reviewed by Neslin et al. points to multichannel shoppers tending to buy more than single-channel ones, although the direction of causality is debated[4].
  • Bargaining position - an alternative route to market reduces dependence on any single intermediary.

Limitations of multi-channel distribution

  • Channel conflict - the most frequent and the most damaging problem, discussed above.
  • Cannibalisation - a new channel may mostly steal sales from existing ones rather than add new customers.
  • Complexity and overheads - separate price lists, logistics flows, IT systems, contracts and teams.
  • Inconsistent customer experience - different prices, ranges or service levels in different channels confuse buyers and erode the brand.
  • Measurement problems - attributing a sale that touched three channels is genuinely hard, so budgets often follow the channel with the easiest metrics.
  • Free riding - customers consume the advice of one channel and buy in another, which weakens the incentive for partners to invest in service.
  • Legal constraints - competition law limits how far a producer can dictate resale prices or restrict where partners sell.

Related approaches

Multi-channel distribution sits inside the broader distribution channel strategy and distribution strategy of a firm. The choice of channels shapes the physical distribution network and is one of the decisions grouped under route to market planning. At the opposite end of the spectrum stands a pure direct model; between the two, many companies use dual distribution, where the producer competes with its own independent dealers in the same territory. Omnichannel management, described above, is best seen as the integrated next step rather than as a different concept.

References

Footnotes

  1. ↑ Kotler P., Keller K.L., Marketing Management, 13th edition, Pearson Prentice Hall, 2009, chapter on designing and managing integrated marketing channels
  2. ↑ Moriarty R.T., Moran U., Managing Hybrid Marketing Systems, Harvard Business Review, 1990
  3. ↑ Rangaswamy A., Van Bruggen G.H., Opportunities and challenges in multichannel marketing, Journal of Interactive Marketing, 2005, pp. 5-11
  4. ↑ Neslin S.A. et al., Challenges and Opportunities in Multichannel Customer Management, Journal of Service Research, 2006, pp. 95-112
  5. ↑ Beck N., Rygl D., Categorization of multiple channel retailing in Multi-, Cross-, and Omni-Channel Retailing, Journal of Retailing and Consumer Services, 2015, pp. 170-178
  6. ↑ Verhoef P.C., Kannan P.K., Inman J.J., From Multi-Channel Retailing to Omni-Channel Retailing, Journal of Retailing, 2015, pp. 174-181
  7. ↑ Webb K.L., Managing channels of distribution in the age of electronic commerce, Industrial Marketing Management, 2002, pp. 95-102
Multi-channel distribution — recommended articles
Distribution channel strategy — Direct distribution — Channel power — Channel width — Route to market — Retailer in supply chain — Distribution cost
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