What it means
A channel strategy usually covers four decisions: which routes to use, which customer segments each route serves, what the discount and pricing structure looks like across them, and what rules apply when two routes meet the same customer. Writing those decisions down is what separates a strategy from a collection of accidents.
The economic logic behind it is cost to serve against customer value. A field sales visit costing several hundred dollars is sensible for a customer worth $200,000 a year and absurd for one worth $2,000, so most businesses build a ladder from self service through inside sales to partners and finally direct account management.
Route choice also depends on what the product needs around it. Something that must be specified, installed and maintained points towards technical partners, while something simple and repeatedly bought points towards retail, marketplaces or subscription sold direct.
Pricing architecture is the part most often neglected. If the discount given to a distributor leaves it unable to make a margin after supplying a retailer, the route quietly stops working, and if direct prices undercut partners the vendor teaches partners to sell something else.
Strategies also need to change over time. Many businesses start with partners to reach a market quickly and later take the largest accounts direct, which is legitimate but has to be planned, communicated and compensated rather than done by stealth.
In practice
Real-world examples.
Example
A cloud software company puts self service sign-up on its website for teams under ten users, an inside sales team for mid sized firms and named account managers for enterprises. The split keeps acquisition cost proportionate to contract value across a range from $600 to $400,000 a year.
Example
A furniture maker decides not to sell direct at all in markets where its retail partners hold showrooms, and only opens its own online store in countries with no retail presence. The rule removes the main source of partner complaints and makes recruiting new retailers easier.
Example
A speciality tea business shifts from wholesale only to a mix of wholesale, its own subscription service and a single marketplace listing. It sets different pack sizes for each route so partners never see the identical product undercut online.
Think of it
“Channel strategy is your plan for getting products to customers-which paths to market.
Formula
Calculation
Contribution per unit by route = selling price to that route - unit production cost - cost to serve per unit
A garden equipment maker sells a trimmer for $120 direct to consumers and offers distributors 30% off that price, which is $84. Production costs $50 per unit. Serving a direct customer, including marketing, packing, delivery and support, costs $30 per unit, while serving the distributor costs $6 per unit because it orders by the pallet.
Contribution per direct unit is $120 - $50 - $30 = $40. Contribution per distributor unit is $84 - $50 - $6 = $28. It therefore takes roughly 1.43 distributor units to match one direct unit, since $40 / $28 = 1.43.
Last year the company sold 20,000 units direct and 50,000 through distributors. Direct contributed 20,000 x $40 = $800,000 and distributors contributed 50,000 x $28 = $1,400,000, for a total of $2,200,000. The strategy question is not which route has the better margin per unit, since direct clearly does, but whether the company could reach anything like 50,000 buyers on its own.Case study
Seen in the real world.
This is an illustrative and entirely fictional example. Tollgate Safety Equipment, an invented supplier of protective gear, sold everything through industrial distributors for twenty years and grew steadily until two of its distributors merged and demanded a further 8 percentage points of discount. Losing that partner would have removed a third of revenue overnight.
In this fictional case the board did not simply refuse or accept. It costed three routes side by side and found that its 200 largest end customers, all of whom bought through distributors, represented 60% of volume and could realistically be served by a small direct team at a lower cost to serve than the discount being demanded.
Tollgate's illustrative strategy took those 200 accounts direct over eighteen months with the distributor's knowledge and a transition payment, kept the distributor for the long tail of small customers, and held the original discount for everyone else. Revenue dipped by 4% during the transition and contribution rose the following year, which is roughly what the model had predicted.
Watch out
Common mistakes.
- Adding channels one at a time as opportunities appear, so the business ends up with overlapping routes, inconsistent prices and partners who no longer trust it.
- Choosing routes on gross margin alone and ignoring cost to serve, which usually flatters direct selling and understates the value of partners.
- Moving accounts from partners to a direct team without warning or compensation, which damages the rest of the partner network far beyond the accounts involved.
Questions
People also ask.
How is channel strategy different from a sales plan?
The strategy sets which routes exist and what each is for, while the sales plan sets targets and activity within those routes.
Should a business ever use a single channel?
Yes, if that route reaches the whole target market efficiently, though single channel businesses carry concentration risk if the route changes its terms.
How do you stop channel conflict?
With written rules of engagement, deal registration, segment or territory boundaries and consistent pricing, backed by a willingness to enforce them internally.
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