Channel Economics: navigating the fine line between customer and commercial outcomes

In today’s digitally-enabled environment, many organisations have taken action to become more customer-centric – however this can have a significant financial impact on shareholders. Everyone is striving to be a market leader or a disrupter, but they’re all too often faced with the trade-off between exceeding customer expectations and ensuring returns for their investors.

One of the ways to solve for this is through channel innovation; transforming the ways in which you surface products or services to your customers. For example, touchpoints; such as field sales, inside sales, digital, social, chat bots, or through a path to market; such as distributors or intermediaries (e.g. brokers). In balancing customer and commercial outcomes, the question is: which do you prioritise, invest in and commit to? The key is to think about your channel choices as a way to unlock commercial benefits as well as delivering the right experience for your customers. 

Quantifying the cost and value of each distribution pathway by calculating profit and loss by customer, channel and journey stage helps bring to light the pockets of value in your current channel strategy, identify areas of unprofitability and ultimately unlock the commercial potential from your future strategy.

While the mechanics of Channel Economics can be complicated, here are four key steps for how to approach it:

1. Define your channels and their role across the customer journey for your segments

Consider how your customers interact with your organisation along with the various touchpoints to define your channels. Then identify how you’re currently supporting the customer experience at each moment across the journey. Getting this baseline understanding of your channels offers insight into what is working and what isn’t. Organisations that have not yet achieved multi-channel maturity may only employ one channel across the whole journey and all customer segments, while others may see a sporadic and ad-hoc application of channels which aren’t cost-effective or don’t reflect the desired customer experience.

Key question: Is my channel strategy optimised based on segment value and desired customer experience?

2. Understand drivers of activity and resource usage and its impact on revenue and experience

It is a fundamental truth that every part of your business has a role in delivering the ideal customer experience, each also having an impact on revenue. Therefore, every cost line in the organisation ultimately needs to come back to a customer or channel so you can pinpoint exactly where your resources are going.

For each channel, you must understand the variable and fixed costs, along with what drives each one, e.g. number of campaigns run, number of calls, field visits, volume of admin tasks, etc. This will provide insight into how to allocate variable and fixed costs to each customer and channel.

Key question: Which channels am I investing most in and are they driving customer and financial outcomes?

3. Build a baseline of revenue and cost by customer and channel

A full P&L is typically represented by product line however, for actionable insights it needs to be demonstrated in a unit which uncovers more about customer value. Therefore, define the dimensions of data based on the problem you are trying to solve for, by the variables that matter most in a financial contribution cube. As seen in Figure A, you must consider customer, channel and activity to represent customer value in your P&L. Getting to this level of detail is crucial when identifying areas of opportunity to redistribute resources.

Key question: Where are we spending too much and where can it be redistributed?

Figure A
4. Model the financial impact of channel strategy initiatives

Now that you understand the baseline cost for each activity across every channel – you’re in the best place to experiment with growth and cost-out initiatives. This will enable you to assess the commercial validity and uncover true value of your revenue and cost opportunities. Then you will be armed with insights to design a channel strategy which is commercially sustainable and provides a customer experience aligned with value needs.

Key question: What is the right balance between commercial and customer outcomes?
Customer-centricity and innovation is an oft-quoted goal, but the path forward is rarely clear and getting stakeholders to agree on it, is even more difficult. Understanding and uplifting the economics of your channels can give you the key to delivering a better customer experience without sacrificing the bottom line.

Co-authored by Abhik Sengupta and Jessica Flynn.

To find out more about Blackdot's approach to channel strategy, contact us now: