After identifying a range of potential sales channels, it is necessary to evaluate those on the basis of economic factors. Both cost and revenue are important factors for economic evaluation of channels.
Cost—Channel profitability can be used to assess the cost associated with a channel. A channel’s profitability ratio is usually expressed in terms of expense to revenue ratio (E/R). A channel’s E/R is equal to its cost per transaction divided by the average order size. The lower the E/R, the lower the selling costs for each unit of revenue, which means a higher profit to the company for each sales transaction.
In order to calculate the E/R, the average order size and the channel’s cost per transaction should be known. The average order size—the total revenue divided by the total number of transactions—is easier to determine. It is generally difficult to determine the average cost per transaction. It may already be available from industry records, or it may be extracted by analyzing competitors’ channel usage or by reviewing other industries that use similar channels. If it is not readily available, it can be calculated by dividing the total selling expenses by the total number of transactions. The total selling expenses for a particular channel can be defined by using a channel cost model in the absence of existing data. A channel cost model defines the different categories of selling expenses that may be incurred by the channel. Each channel being assessed for profitability should be allocated the same or similar set of cost factors. This model can be developed either internally or externally with the help of subject matter experts or consultants.
Revenue—Channel capacity, which is the channel’s capability to generate the desired level of revenue, is another factor that should be considered for economic analysis. It can be defined as the product of channel selling unit productivity (revenue generated per unit) and number of units (number of channel members such as sales partners/representatives, etc.). It is very important to have a realistic estimation of both channel productivity and channel size for accurate assessment of channel capacity.
Choosing the right channels that fit the business is a critical component of corporate sales success. It is preferable to take a flexible and balanced approach that considers channels based on various factors such as service, cost, and revenue. If only cost is considered, for instance, then a company may end up with the lowest cost channel, but the channel may not have the potential to generate the required revenue, or the channel may need additional investment to provide the required level of service or to generate the required revenue. Hence, consideration of various factors enables a company to select those channels that best serve their market and provide the greatest potential for meeting sales objectives.
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