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?

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Measuring channel performance

Performance measures

Effectiveness EquityEfficiency

Performance Measurement

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Channel performance

Effectiveness : Providing the required service most cost effectively.

a. Delivery : A short term, goal oriented measure of on time deliverye.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.

Performance Measurement

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Channel performance

Equity : Extent to which marketing channel serves problem riddenmarkets 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 freightPayout by the manufacturer & greater effort by distributor.

Providing After sales service to the Coke ( NCFC ) refrigeratorsrequired tremendous training effort & investment in infrastructure.

Performance Measurement

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Channel performance

Efficiency: Output / Input

1. Productivity : The efficiency with which the output is generatedfrom 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 & marginsb. Control on overhead costsc. Cost & use of funds

Performance Measurement

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Measuring performance of marketing channels Normally tracked by H.O.

1. Productivity tracking of manpower ( call reports, DSR )2. Profitability tracking ( branch level contribution / prod. Mix ).3. Market Penetration tracking ( Network expansion objectives ) .4. Market share tracking ( ORG studies, internal reports ).5. Budget Vs actual.

Internal data analysis.Dependence on market research.

Objectivity of measurement.

Performance Measurement

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

Indirect channelDirect channelChannel segmentation

Product A Product C Product AProduct B Product B Product C

Corporate Profitability

(a)

(a) Segmentation analysis by channel & product category

Indirect channelDirect channelChannel segmentation

Corporate Profitability(b)

East EastWest West

A B CA B C A B C A B C

Territory segmentation

Product segmentation

(b)Segmentation analysis by channel, territory and product category

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

Retail channel Total company

RevenueLess: Variable Cost of goods soldVariable Gross ProfitLess: Variable direct costGross segment contributionLess: fixed direct costNet segment contributionLess: indirect fixed costNet profitNet segment contribution

100,00042,00058,000

6,00052,00015,00037,000

37%

150,00075,00075,00015,00060,00021,00039,000

26%

250,000117,000133,000

21,000112,000

36,00076,00041,00025,00030.4%

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

Contract Industrial suppliers

Government OEM Total commercial

Gross profit 27371 10284 136 2461 40256

Selling expenses

Commissions

Advertising

Catalog

Co-op advertising

Sales promotion

warranty

Sales administration

Cash discount

total

General & Admin expenses

Operating profit

Operating margin

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

%

Other current assets

Accounts receivable

Inventory

Fixed expense

Variable expenses

Cost of goods sold

Sales

%

Current assets

Fixed assets

Total assets

Sales

Return on net worth

Financial Leverage

Return on assets

Net profit/net worth

= x

Total assets / net worth

Net profit/ total assets Assets turnover

Net sales/ total assets

Net profit/ net sales

Net profit margin

Net profit

sales

Gross margin

Total expenses

(-)

(+)

(+)

(+)

(+)

÷

÷

Strategic Profit Model

• 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