Hybrid Distribution System

A company must manage a hybrid distribution system to avoid chaos and maximize efficiency. Responsibilities, relationships and compensations among various channel members must be made clear.

A company received its distribution system in legacy. The company started its journey with serving a particular type of customers. The company probably targeted big businesses initially, so it set up a team of salespersons to serve and manage these big accounts. But soon it found that smaller businesses were interested in its product. It used its existing sales force to serve those small accounts as well but soon discovered that it was not economical to serve these small accounts with their existing sales force. So the company  appointed a team of telemarketers to serve these small accounts.

But the salespersons remained accountable for the smaller accounts lying in their territory. The telemarketers were also asked to deal with routine matters of the big accounts to free up some precious time of the salespersons. As the markets for the product grew, the company decided to appoint independent distributors to stock and sell its products. A separate group of marketers looked after this part of this business.

Soon there was confusion galore. Nobody knew whom he had to sell to, and who was someone else’s customer. The same customers were being solicited by different members of different channels with different types of offers. More than one person claimed compensation for one sale. The customers did not know whom to contact for specific queries or problems.

It was not that the company could have avoided this chaos by continuing to sell only by employing a direct sales force. It would have been prohibitively costly to serve small accounts by using direct sales force. Similarly if the company had started out with independent distributors serving small accounts, it would have had to appoint salespersons to serve big accounts if such opportunities came their way. Independent distributors cannot be trusted to provide the services that big accounts expect.

Therefore, as the customer set of a company becomes more diverse, maintaining a single channel of distribution will either become ineffective or uneconomical. Adding new channels is imperative when requirements of customers become diverse. But the process can be accomplished in a more thoughtful and deliberate manner rather than being a knee-jerk reaction to growing diversity among customers.

Three issues are important in this task:

a) Which channel is supposed to serve which customers?

b) Which channel does what tasks of the sales function, and for which customers?

c) Which channel gets compensated for which customers and for what tasks?

These are tricky questions and there will be no straight answers. But it is important to ask these questions each time the company decides to add another channel because each time a channel is added, the existing relationships, responsibilities, and compensation structures among various channel members are altered. And the company has to debate and fix the new relationships, responsibilities and compensation structures as precisely as possible. Customer’s reactions to these new relationships and responsibilities are very important. If a customer is inconvenienced by the new arrangement, he is likely to shift his business.

For example, assume that telemarketers are added as a new channel over the direct sales force that the company previously deployed. Earlier the sales force did all the tasks of the sales function for the existing accounts, most of them of which were big, though the company had started focusing on acquiring small accounts. The sales force received all the commission emanating from these accounts.

The new responsibilities may run as follows: The telemarketers do all the tasks of the sales function for the small accounts but if they feel that a visit by a salesperson would help them clinch a lucrative deal, they can ask the salesperson serving the big accounts of that territory to solicit the account by making a visit. The salespersons would do most of the tasks of the sales function for the big accounts but the telemarketers would be required to take manage routine matters with them under the guidance of the respective salespersons.

Compensation structure has to be designed in a manner that salesperson is happy to seal a small account at the request of a telemarketer because he will get compensated for the task of making a visit. Similarly, the telemarketer would not mind sharing a part of his commission because he understands that if it were not for the salesperson’s help, the smaller account would not have been converted. Similarly the salesperson is content to part with a portion of his commission from the big accounts as he has more time to pursue new accounts and the telemarketers do not mind some extra income for making a few extra calls.

The big accounts are happy that there are also some people in the seller’s company besides their salesperson who can sort out small difficulties, and they do not have to be completely dependent on him or wait for his visit to get their problems solved. The small accounts are happy as their objections and queries have been personally taken care of by a representative of the seller’s company.

The new responsibilities, relationships and compensation structures may not look so neat especially if many channels are trying to serve a large pool of diverse customers but it need not necessarily be as messy as most hybrid channels are. The essential idea is to raise these tough questions and answer them as squarely as possible. There may still be confusions and conflicts and they have to be constantly addressed and redressed.

A company usually gets into problems by pushing the uncomfortable questions of responsibilities, relationships and compensation structure under the carpet, and hoping that the members of various channels will automatically sort out these issues among themselves in due course of time. They may, but that will not be in the best interests of the company and its customers. When it comes to managing a hybrid distribution system it does not help to be expedient.

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