Guide: Channel Selection

A channel is the path a product takes to reach the end consumer, which is usually the next step(s) along the value chain from you.

There are three broad levels of decisions to make for channel: medium, method, and model

1. Medium

The simplest channel starting point is the medium as this is usually online vs. offline which is pretty self-explanatory. As such we incorporate it within other areas of the strategy table. When making your decision, you need to think about the cost of each approach vs. the percentage of sales going through that medium (cost:benefit).

2. Method

The second channel aspect relates to method of which there are three generic types: retail, wholesale, distributor. These terms are more commonly used for goods businesses, but we’re going to apply them to services as well since it’s important for service businesses to think about how to productise their offering in order to scale up. There’s no reason a services business couldn’t wholesale what they do either e.g. a business improvement course run by someone else.

3. Model

The third channel decision relates to the specific channel model and therefore specific channel partners in your space that could sell your product. There are often many options, and this list below is not exhaustive, but should give you a good starting point.

CONSIGNMENT

For goods businesses, there is one other form of wholesale which is stock sent out on consignment (AKA “sale or return”).

In essence, the retailer/reseller gets your stock without having to make any payments, sells your stock at retail prices and then uses the proceeds to pay you back the wholesale price.

While this can sound like a great way to get into new stores, you are essentially acting like a bank to fund that customer’s cash flow (that’s your cash sitting on their shelves!). Generally, when a business can’t/won’t pay for your stock, then it’s a sign that they are in financial trouble and may not be able to pay you back even if they sell all your stock. It also shows a lack of support for your product so will they really push it? This is why so few wholesalers offer consignment nowadays.

A similar concept in retailing is “appro” which was more common in the 80’s and 90’s, especially for fashion items. It allowed customers to take items home without paying for them, show the end-consumer (often a husband or child) and then return the unwanted items and pay for the ones they wanted to keep. Obviously an administrative nightmare, and superceded by a money back guarantee.

CHANNEL CONFLICT

When evaluating new channels to play in, be mindful at how some of your existing channels might react. This is most common when a wholesaler shifts to being a retailer, especially an online retailer who can sell to any region in the world.

XERO’S CHANNEL SUCCESS

In developing a piece of software that makes a large part of an accountant’s 
role redundant, it would have been very easy for Xero to take an aggressive 
approach and focus on how to beat the accounting channel (a win-lose mentality).

However, realising the immense reach of accountants into the business community, 
they saw a better way. They focused on how they could all win together 
(a win-win) by giving the accountants a sales commission for recommending 
their product over other platforms.

The other really smart channel play they made was to “play with everyone” 
rather than sign exclusivity deals with particular firms. This allowed them 
to reach the entire market and scale up much more quickly. It also avoided a 
lot of messy admin and exclusivity contracts.
Bitnami