Advice and Insights From A Practitioner

Building Robust Distribution to Support Strategy – Updated October 2012

Introduction

During the past year and a half, I have been working with a variety of different client companies to develop and improve their distribution networks. Distribution really matters when you consider that, on average, half of the price of the product is absorbed by activities related to getting that product from producer to the purchaser as an integral part of the value chain. [1]

As a case in point, in the individual life insurance business, distribution costs can exceed 100% of the first year premiums.  Many of the top companies, such as Coca-Cola, who have formed superior distribution relationships, excel while others who treat distribution in a cavalier manner seem to stumble along towards mediocrity and even failure.  With the increased fragmentation of markets, media, globalization and the proliferation of more players operating as distributors, distribution is increasingly more complex and harder to manage.

In “marketing 101”, we learned all about the importance of the 4 P’s of marketing where E. Jerome McCarthy, proposed a Four P classification of the marketing mix, in 1960, which has enjoyed wide use.[2] One of the critical 4 P’s is “Place” which includes distribution. Distribution is the pipeline or path(s) a product or service takes from producer to purchaser.  The paths to the customer impact your brand and the customer experience so it is critically important that distribution consistently delivers on the brand promise. In some cases, the producer of goods or services decides that a direct distribution model provides the highest level of control and therefore, is the most desirable distribution method. In other businesses, an indirect or intermediary model is considered the most appropriate distribution method.  Some businesses choose to deploy both a direct and indirect approach – which is akin “to having their cake and eating it too”.

Back in the early days of the Internet “disintermediation” was considered a constant challenge or threat to the traditional distribution models – particularly in the insurance industry – with the rise of direct-to-consumer insurers and aggregators that supplanted field agents with lower cost call center agents. Traditional distribution-based companies like Allstate (with their recent acquisition of Esurance and Answer Financial from White Mountains Insurance Group for $1 billion in cash) are exploring direct-channel distribution approaches out of necessity.  Distribution is an evolutionary pursuit and requires thoughtful discourse among the leaders of the business who are involved in the strategic planning process.

The Indirect, Intermediary Approach

With the indirect approach, determining “Best strategic fit” for the “Place” (of the 4 P’s) and placement of your product or service requires the careful consideration of the following: distribution objectives, value chain analysis, product and distribution fit and matching distribution with customer segment needs.

5 Common Distribution Objectives include the following:

  • Obtain a premium price for your product that provides superior profit vs. the competition.
  • Favorably position your company in a poorly differentiated marketplace.
  • Achieve the right match of distribution to key product requirements (decision support and target customer segment(s)).
  • Meet the growing and changing demands of your customers: transparency, value, accessible, convenient, green, friendly, etc.
  • Leverage data mining (including traditional data mining, web mining and social mining), advanced analytics, marketing best practices (segmentation, content, messaging, imagery, creative and format) and sequencing that achieves the best product offer >through the optimal channel >at the best time > directed at the right prospect (aka what I like to call the “Holy Grail of Direct Marketing”).

The Importance of Formulating Distribution Objectives that Covers the Value Chain Activities

The value chain is the essence of the organization’s business model.  It is a term popularized by Michael Porter in 1985 that describes the actual activities your business performs and how these activities create value (a product or service) for the end customer.  (Source: Competitive Advantage: Creating and Sustaining Superior Performance by Michael Porter).

More specifically, it is the sequence of activities your company performs to design, produce, sell, deliver, and support its products. In turn, your value chain is part of both your competitive advantage and a larger value system – the larger set of activities involved in creating value for the end user, regardless of who performs those activities. Typically, competitive advantage stems from the combination of a strong customer value proposition and the organization’s value chain and it’s ability to perform similar activities better than rivals (through operational excellence) and certain unique activities that rivals may not perform. Furthermore, in the book Understanding Michael Porter, the author states:

Competitive advantage is not about beating rivals; it’s about creating superior value and about driving a wider wedge than rivals between buyer value and cost. Competitive advantage means you will be able to sustain higher relative prices or lower relative costs, or both, than your rivals in an industry.”

(Source: Magretta, Joan (2011-11-22). Understanding Michael Porter: The Essential Guide to Competition and Strategy (Kindle Locations 985-991). Perseus Books Group. Kindle Edition.)

An analysis of the value chain begins with Peter Drucker‘s two simple questions that start to define the fundamentals of the business and the business model: Who is the customer? and “What does the customer value?” The strategist then looks at what the predominate distribution model(s) is/are active in the industry, what rivals are doing, the cost drivers, performance metrics, opportunities for differentiation, better ways to deliver the product and ways that distribution can enhance the value proposition. Michael Porter states this best:

“Thus the value proposition and the value chain—the two core dimensions of strategic choice—are inextricably linked. The value proposition focuses externally on the customer. The value chain focuses internally on operations. Strategy is fundamentally integrative, bringing the demand and supply sides together.” 

Source: Magretta, Joan (2011-11-22). Understanding Michael Porter: The Essential Guide to Competition and Strategy (Kindle Locations 1559-1560). Perseus Books Group. Kindle Edition.

Taking the formulation of objectives one step further, the product producer/manufacturer develops distribution objectives with intermediaries in mind, who, in turn, create value in one or more of the following ways:

  • Provide Market knowledge, domain expertise, intelligence, support and positioning the product via customer value proposition and points of differentiation, tailored to resonate with a specified target market.
  • Offer what I call real “Paths of least resistance” to accelerate new market entry and/or current market initiators, customers, decision makers and buyers.
  • Enables your company to “tap into” a wellspring of trust and leverage from channel partner experts, consultants and influencers who have a relationship and history with the prospective client/consumer/end-user.
  • Offer resources and scalability– via shared service capabilities in the form of:
    • Forward flow: market research, co-marketing, demand generation, lead generation, lead qualification, quotation/proposal preparation, sales and promotional support; product management, negotiation of terms, point-of-sale transactions, supply chain integration, systems, delivery, problem solving, operational integration, training, order fulfillment.
    • Backward flow: billing issues and handling cancellations/returns, renewals, retention, “win back” programs, data sharing (CRM), etc.
  • Synergies – through co-development of new products, capabilities, risk sharing and/or reverse flow opportunities (reciprocal arrangements).
  • Added competitive advantages – or points of differentiation gained from intermediary products in the form of product line extensions and/or enhancements.
  • Pursuit of common financial goals – they also aspire to meet the same or similar financial (i.e. production, sales and profit) goals. See Strategic Marketing Plus, LLC Channel Partner Scorecard spreadsheet.
  • Information and knowledge sharing – a necessary feedback loop to improve efforts along the marketing, sales and customer decision journey (See McKinsey Quarterly June 2009).

Achieving Strategic Fit Between Product and Distribution 

Strategic fit between a product and a given distribution strategy is realized when, versus other alternative forms of distribution, value can be increased at the same or lower costs.  As an example, consider an outside sales team that, when compared to an inside sales team, is less productive in generating revenues yet costs significantly more than an inside sales team. As a manager, all other things being equal, a concerted effort should be made to shift more of the sales resources from outside to inside.

Fit Requires Consideration of these 9 Attributes

Friedman and Furey, in their book The Channel Advantage, have identified these 9 critical attributes to consider when determining fit between product and distribution:

  1. Definition – the extent to which product is known and recognized by the customer or end user.
  2. Customization – the amount of product adaptation, if any, required by the customer.
  3. Aggregation – is the product stand alone or does it need to be bundled (example: smart phone insurance sold in conjunction with the smart phone product).
  4. Exclusivity – the uniqueness of the offer (common in both sponsored or direct channels).
  5. Customer education and training needs – before and after the sale.
  6. Substitution – the ease with which a product can be replaced by a competitive offering (i.e. auto insurance).
  7. Maturity – the stage in the adoption phase or product life cycle – more mature products require low touch and vice versus.
  8. Customer downside risk – the potential consequences of a wrong decision, the switching costs involved (and the associated risks a customer faces in switching from one product to another – and maybe back again).
  9. Negotiation – the degree to which the scale and complexity factor into the transaction.

(Source: Gorchels, Linda (2004-04-23). The Manager’s Guide to Distribution Channels (Kindle Locations 1336-1337). McGraw-Hill – A. Kindle Edition.)

Product and Channel Fit By Customer Segment

Once all product attributes are considered and finalized, the distribution approach needs to be tailored by the product and customer segment.  The following is an example for insurance products that require different distribution approaches based upon the relative price to the customer, product complexity and acquisition cost.

Common Types of Distribution Relationships:

  1. Value Networks and Marketing Channels[3].   A value network is a combination of two or more value chains operating together to form a networkPhilip Kotler provides these two definitions for distribution and marketing channels:

“A Value Network is a system of partnerships and alliances used by a firm to source, augment, and deliver its product or service offerings…

Intermediaries that help get the product from manufacturer to business, consumer or end users form the Marketing Channel(s).”

2. Captive (company-owned and operated), Exclusive (through appointed independent organizations) and Non-exclusive distribution arrangements. Typical boundaries in scope of distribution relationships include:

  • By Geography
  • By Vertical (single industry i.e. affinity)
  • By Horizontal (multiple industries)
  • By Product line
  • By Market – B2B, B2C or, however else you finely slice the market(s).

3. Direct and Indirect. Indirect has one or more intermediary levels or layers beginning with the manufacturer. Example: Insurance industry, from producer to purchaser, in cascading order, there are 2 to 4 tiers to distribution for any given product line:

  • Insurance Company
  • Aggregator, Wholesaler, Program Manager, Broker, MGA or MGU
  • Sub producer, Agent, Advisor or Financial Planner
  • Consumer

4. Embedded or Standalone– where your product or service is embedded in another product or service or sold standalone.

5. Value-added, Broad-line or Fulfillment Distribution:

  • Valueadded – focuses on products where there is a limited number of distributors, usually in early market entry stage and very common with technology companies.
  • Broad-line – provide the mainstream market coverage in terms of both products and market coverage.
  • Fulfillment – where products are bought, not sold (i.e. office supplies).[4]

Common Characteristics of Robust Distribution

Robust distribution, what is also called “Best fit”, supports the whole reason for engaging with intermediaries – knowledge, resources, expertise, market presence, etc. and is key to execution of the strategic plan –

  • Similar or the same Target Customer(s) – where the intermediary has a presence, and ideally, an installed client or customer base that can be leveraged.
  • Operates a network of professional distributors – who meet certain minimum requirements (licenses, credentials, appointments, approval process, contractual agreements in place, etc.), adhere to guidelines, rules and written procedures and/or standards (quality standards, Service level agreements, minimum production levels, production quotas, etc.).
  • Adds value – as mentioned above, to a set of complimentary products and/or services.
  • Repeatedly, Efficiently and Productively delivers – the product or service to the intended purchaser on a consistently basis thereby delivering on the producer’s brand promise.
  • Speeds up the sales cycle – and purchasing process and embraces continuous improvement initiatives.
  • Possesses similar logistical and operational integration opportunities – similar operational characteristics, systems, touch points and service capabilities that can be leveraged.
  • Competitive intelligence – keeps an external market focus and operates as part of an “early warning” system to signal competitor moves and changing market dynamics (both good and bad).
  • High touch/Low-touch decision support and direct and indirect considerations, as described above. See the following example:

Preventing Channel Conflict

The distribution channel champions, stewards or managers of distribution relationships must prevent, detect and minimize any channel conflict immediately.

Using Benchmarks, Key Performance Indicators (KPIs) and a Scorecard to Set Goals and Evaluate Performance

It is critical in any relationship to establish benchmarks, KPIs, distribution relationship goals (including training, etc.) and periodically evaluate the performance of the channel partner(s). In addition to listing the contact people responsibilities and roles, typical performance measures include:

  1. Sales forecast – by product, by target market, units, lives and total revenue.
  2. Marketing Campaigns – description.
  3. Sales contest(s) – Budget vs. Actual.
  4. Market Development Funds– Budget vs. Actual.
  5. Marketing, Communications and Promotional Funds – Budget vs. Actual.
  6. Persistency /Client and Customer retention and Agent turnover.
  7. ROI: Total Revenue/Total Cost – Forecast vs. Actual.

Distribution Partner Agreements

The distribution partner agreement outlines the specific contractual terms and conditions of the relationship between the parties. Incentives, rewards and recognition should be built into these agreements to reward the best performing distribution partners (and their front line employees).

8 Trends that Will Shape Insurance Distribution Over the next 5 Years

An alarming 63% of Insurers do not consider their current distribution model as a source of competitive advantage. (Source – Accenture Study “Accenture Global Survey Finds Insurers Will Invest $84 Million, on Average, Over the Next Three Years To Improve Distribution Strategy”, May 24, 2010)

Here are some of the distribution trends I see emerging:

  • Insurance company investments in emerging technologies, aligning IT infrastructure, data mining techniques and integrating CRM with distribution – enabling mobility and integrated, real-time communications to support, connect and engage agents and consumers.
  • Increasing shift from mandatory, defined benefits to defined contribution benefits – which involves a broader broker skill set (and training)  that includes a web-based, voluntary sales approach in addition to traditional face-to-face sales.
  • Insurance Company’s focus on lowering acquisition costs.
  • Agent/Broker as Adviser – subject matter expert, Choice editor, navigator, simplifier and advocate.
  • A much more intensive Regulatory climate with more pricing transparency.
  • More pressure on Agent Compensation through Minimum Loss Ratios.
  • Underwriting and deeper process automation via artificial intelligence, by-passing the agent and alleviating them from some of the mundane administrative tasks they now handle.
  • Distribution diversification – 75 percent of insurance companies said that developing relationships with “non-tied” channels (independent agents and brokers, and others) was a main priority. (Source – Accenture Study – “Accenture Global Survey Finds Insurers Will Invest $84 Million, on Average, Over the Next Three Years To Improve Distribution Strategy”, May 24, 2010). ♦

Bill Tyson is the CEO and Owner of Strategic Marketing Plus, LLC, an independent consultancy firm specializing in strategic marketing, distribution and sales optimization based in Santa Rosa Valley, CA. See http://www.strategicmarketingplus.com

If you need help with your distribution channel strategies give Bill a call.

For information about the changing dynamics of affinity distribution, please download this whitepaper “The Changing Face of Affinity Group Marketing” PIMA Branding – The Changing face of Affinity Marketing Distribution-July 15 2011 – Final co-authored by Al Drowne and I.

[1] Distribution Channels – Understanding and Managing Channels to Market by Julian Dent, Kogan Page Press, Philadelphia, PA 2008, 2011. Page 9.

[2] Basic Marketing, A Managerial Approach, E. Jerome McCarthy, PhD., Richard Irwin Books, 1981. Homewood, IL, 1981. Page 42.

[3] Marketing Management, by Philip Kotler and Kevin Keller, Chapter 14, 14th Edition, Prentice Hall, Upper Saddle River, New Jersey, 2012.

[4] Distribution Channels – Understanding and Managing Channels to Market by Julian Dent, Kogan Page Press, Philadelphia, PA 2008, 2011. Pages 32-33.

Copyright, The Savvy Strategist, All Rights reserved. 2011-2012. If you want a .PDF of this post please contact Bill Tyson below.

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Categorised in: Accountability, Best Practices, Bill Tyson Consulting, Bill Tyson's Blog Strategy-In-Action, Business, Business Model, Business Strategy, Change, Change leadership, Customer Engagement, Customer Value Proposition, Distribution channels, Execution, Innovations, Insurance, Insurance distribution, Marketing, Mission Statements, multichannel marketing, organizational change, Product Development, Research, Risk, Risk Management, Strategic Plan, Strategic Risks, Strategy, SWOT Analysis, Value Chain, Value Creation, Value Networks, Value proposition

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