A New Metric for Sales Channel Management (Channel Diversity Index)

Across numerous different sectors in an ever-increasing manner, companies are agreeing with external parties to serve as a part of their sales channels – and, in some cases, to serve as the sole sales channel. The traditional driving factors for this shift? Companies are trying to gain certain valuable benefits, such as increasing their number of sales points, utilizing external parties’ store traffic or decreasing the operational burden of sales and distribution.

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These benefits can bring with them some concerns as well. If and when one of the external parties begins to represent a significant source of a company’s sales, that party can cause havoc. With such bargaining power in hand, these kinds of partners can drive down margins and make demands on the parent company that can completely wipe out the benefits once obtained. Alternatively, they can take their business to the competitor if their demands are not met. Such is the situation that often happens when external partners grow too big.

To prevent such a nightmare scenario from occurring, companies should, and need, to keep a constant tab on the power of their sales partners. Executives who define corporate strategy, sales strategy or channel strategy need to ensure there is always enough diversification in their sales channels to prevent one partner from gaining too much bargaining power.

Although executives can manage diversification related issues when they have one or two partners, it is quite difficult to effectively manage the channel’s overall diversification without a numeric measure when the number of partners is greater. The Channel Diversity Index (CDI) can be used to measure and to monitor the power of any one given partner over time.

formula1

For a given number of sales channel partners, CDI increases when the equitability of the partners increases. For a given equitability of the partners, CDI increases when the number of partners increases. The bigger the CDI, the more diversified (and usually less risky) the channel composition is.

This index can be used to monitor the diversity of the channels that have relatively small number of elements as well as for those channels that have hundreds of thousands of sales points. For where the number of partners grows, CDI needs to be calculated more often, on a deeper level (i.e. region by region rather than on a national scale). Also CDI can be derived for different products or product groups. Diversity variation of different products in the channel will require extra attention from the product management/channel management perspective.

Calculation of the CDI index for a certain product is shown below, with a disguised and masked example. The figures are from a mobile operator in a developing country. In its dealer channel, the prepaid revenue figures are tabulated in Table 1, in the countries’ currency.

table11

Table 1 : Prepaid Revenues of the Channel Partners 2007-2008

As you can observe, there exist significant differences in the channel partners’ revenues between 2007 and 2008. In year 2007 the channel had 14 partners – in 2008 the company added another (Partner 9). After the new volume figures and new partner, CDI changed significantly. Table 2 shows the calculation of CDI for year 2007 and 2008.

table2

Table 2 :Calculation steps of CDI

The sum of p2 in 2007 was 0.142, CDI was thus calculated as 7.04. In 2008 the sum of p2 was 0.130 and CDI thus rose to 7.68.

This shift in CDI means the company achieved to have a more diversified channel in 2008 compared to 2007. The driving reasons behind this were the introduction of a new partner and the changes in revenue.

CDI can effectively be used by companies on an ongoing basis to assess the current state of their sales channels (i.e. to measure the importance of a given partner to the overall channel portfolio, the channel structure change over the years, etc.) as well as to design new channel strategies (i.e. initiation or cancellation of a partnership, partner favoring campaigns, etc.).

Although a diversified channel reduces some risks, it complicates the management of the channel with more players or comparably important partners. Companies should have proper channel management enablers (organization, channel segmentation, incentive systems, channel processes, etc.) to support effective management of diversified sales channels. Sustainable success in sales channel operations will then be realized.

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