Evaluating Channel Performance
Measurement of
Channel Performance
• Performance may be define as‘ the sum of all
processes that will lead managers to taking
appropriate actions in the present that will
create a performing organisation in the future’
• or in other words, ‘ doing today what will lead
to measured value outcomes tomorrow’
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• Macro or societal perspective
• Micro or managerial perspective
Macro
• Does distribution cost too much?
• Are there people who are disadvantaged by
the current distribution system?(inner city &
rural areas)
• How do channel members at various levels of
distribution compare, in aggregate, in terms
productivity per employee?
• Has productivity been increasing more rapidly
in manufacturing, wholesaling, or retailing?
Measuring channel performance
Performance
Measurement
Performance measures
Effectiveness
Equity
Efficiency
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Performance
Measurement
Channel performance
Effectiveness : Providing the required service most cost effectively.
a. Delivery : A short term, goal oriented measure of on time
delivery
e.g – Number of times the order was serviced OTIF.
b. Stimulation of demand: What are the efforts made by the
channel member to increase customer base or increase the
usage of the product.
example: The cross marketing effort of Khimji & Sons,
Kalamandir & Panda enterprises in Marriage season.
Selling Maruti through Nalco Co-operative by Orbit Motors.
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Performance
Measurement
Channel performance
Equity : Extent to which marketing channel serves problem ridden
markets and market segments, such as disadvantaged or
geographically isolated consumers.
Examples:
Providing sales & after sales service to remote places
like Malkangiri by CD distributors ( even at credit ). Higher freight
Payout by the manufacturer & greater effort by distributor.
Providing After sales service to the Coke ( NCFC ) refrigerators
required tremendous training effort & investment in infrastructure.
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Performance
Measurement
Channel performance
Efficiency: Output / Input
1.
Productivity : The efficiency with which the output is generated
from the resources and inputs. Operational efficiency.
a. Manpower productivity:
Productive call %
Sales volume per call
b. Productivity of vehicle: Number of outlets covered
2.
Profitability: Essentially financial efficiency w.r.t R.O.I.
a. Stock turns & margins
b. Control on overhead costs
c. Cost & use of funds
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Performance
Measurement
Measuring performance of marketing channels
Normally tracked by H.O.
1.
2.
3.
4.
5.
Productivity tracking of manpower ( call reports, DSR )
Profitability tracking ( branch level contribution / prod. Mix ).
Market Penetration tracking ( Network expansion objectives ) .
Market share tracking ( ORG studies, internal reports ).
Budget Vs actual.
Internal data analysis.
Dependence on market research.
Objectivity of measurement.
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Micro
Question here focus on profitability & cost relative
to figure out
• Which channel member are solid run
• Which channel seems to produce highest returns
• Which suppliers/intermediaries will help the firm
generate the greatest end user satisfaction
• which of the marketing flows is best performed
by specific channel member
Managerial point of view
• We look at how an individual channel member
should go about evaluating its own performance
• How the channel member (Manufacturer)will
evaluate the performance of another channel
member (wholesaler)
• How an individual channel member might
measure & compare the various channel it
employs
Measuring financial performance
• Cost, revenue, & distribution channels can be
used by a firm to determine the relative
profitability and financial performance of
channels
• As a result of the financial analysis one or
more appropriate managerial action may be
taken. May be seek operational changes that
would result in changes in profitability.
Changes in frequency of sales calls, the size of minimum order,
promotional expenses might lead to changes in profitability.
Distribution channel segmentation
(a)
Corporate Profitability
Channel segmentation
Direct channel
Product A
Product B
Indirect channel
Product C
Product A
Product B
Product C
(a) Segmentation analysis by channel & product category
(b)
Corporate Profitability
Channel segmentation
Direct channel
Territory segmentation
West
East
East
A
B
Indirect channel
C
A
B
C
A
B
Product segmentation
West
C
A
B
(b)Segmentation analysis by channel, territory and product category
C
Revenue Cost Analysis
• Revenue and cost associated with each
segment must be analyzed
– Direct selling cost
– Indirect selling cost
– Advertising
– Sales promotion
– Transportation
– Storage and shipment
– Order processing
Identify the cost associated with serving specific channels,
territories, and products
Contribution margin approach
• CMA requires all cost be identified as fixed or
variable according to behavior of the cost
• Income statement in the CMA method of
analysis can be prepared that identify
probability for each segment by determination
of fixed, variable, direct and indirect cost
Contribution Margin Income Statement By Channel Segment
Health care
channel
Revenue
Less: Variable Cost of goods sold
Variable Gross Profit
Less: Variable direct cost
Gross segment contribution
Less: fixed direct cost
Net segment contribution
Less: indirect fixed cost
Net profit
Net segment contribution
Retail channel
Total company
100,000
42,000
58,000
6,000
52,000
15,000
37,000
150,000
75,000
75,000
15,000
60,000
21,000
39,000
37%
26%
250,000
117,000
133,000
21,000
112,000
36,000
76,000
41,000
25,000
30.4%
Net profit approach
• Net profit approach to financial assessment of
segments requires that all operating costs be
charged or allocated to one operating segment. all
of company's activity exists to support the
production and delivery of goods & services to
customer. Furthermore most of the costs that exists
in a firm are, in fact, joint or shared cost. In order for
the true profitability of a channel, territory, or
product to be determined, each segment must be
charged with its fair share of these costs.
Profits by commercial distribution channel
Gross profit
Selling expenses
Commissions
Advertising
Catalog
Co-op advertising
Sales promotion
warranty
Sales administration
Cash discount
total
General & Admin expenses
Operating profit
Operating margin
Contract
Industrial
suppliers
Government
OEM
Total commercial
27371
10284
136
2461
40256
Strategic profit Model
• SPM is an analytic tool frequently used to
determine ROI in a business firm. It is a tool
that incorporates both income and balance
sheet data and demonstrates how these data
relate to each other to result in RONW (return
on net worth)& ROA (return on assets)
Strategic objective of a firm is ROI
Gross margin
Sales
Net profit
(-)
Cost of
goods sold
Net profit margin
%
÷
sales
Net profit/
net sales
Total expenses
Variable
expenses
(+)
Return on net
worth
Financial
Leverage
=
Net profit/net
worth
Return on assets
x
Total assets /
net worth
Fixed
expense
%
Net profit/
total assets
Sales
Assets turnover
Inventory
÷
Net sales/
total assets
Strategic Profit Model
Total assets
Current
assets
(+)
(+)
Accounts
receivable
Fixed
assets
(+)
Other
current
assets
• Net profit margin- is defined as % net profit divided by net
sales how ever net profit margin actually measures the
proportion of each sales rupees that is kept by firm as net
profit
• Asset turn over- is a ratio of total sales divided buy total
assets. It actually measures the efficiency of management
in utilizing assets. Its shows how mush money in total sales
volume is generated by each dollar that the firm has spent.
• Leverage – the result by multiplying net profit margin
percentage times asset turnover ratio in return on
assets(ROA). For OR, ROA is a critical measure of
performance because it especially tells how well they have
used all the resources at their disposal to achieve profit