Ideas for Leaders #252

The Effect of Pruning Sales Channels

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Key Concept

A firm that eliminates a search or purchase channel, such as a catalogue, will lose customers who prefer that channel. The decision to eliminate a channel can still be profitable in the long run, as long as the savings from the elimination is greater than the lost revenues. Managers can help the math by taking proactive steps to reduce the level of lost revenues.

Idea Summary

This is the age of multichannels. Companies today are selling their wares through the Internet, catalogues and bricks-and-mortar stores. Not all channels, however, are cost-effective, especially given the low-cost opportunities offered by moving customers to the Internet.

What happens when a retailer eliminates one of its channels? Will customers comfortable with that channel migrate to alternative channels? Will they decide to move to competitors offering the channel they prefer (as some have argued)? Will the company end up losing money?

These are the important questions addressed by the research of an international team of academics from the U.S. and the Netherlands. To conduct this research, Umut Konus of the University of Amsterdam Business School, Scott Neslin of the Tuck School of Business at Dartmouth, and Peter Verhoef of the University of Groningen Faculty of Economics and Business used five year’s worth of data from a retailer that had conducted a field test in which it eliminated its catalogue for a random group of customers.

The data was especially revealing because it covered not only the period leading up to the elimination, but also two years past the decision. Thus, the researchers were able to measure whether any impact from the channel elimination was temporary or more permanent.

The results of the research revealed insights on the results of eliminating the catalogue channel:

  • The overall number of purchases went down. The impact was especially felt in purchases from consumers who had previously used the telephone to make their orders. In short, the company lost customers who had been using the channel, and overall revenues suffered as a result.
  • For those customers who stayed, the average order size of a purchase increased. Combined with the overall decrease in purchase occasions, this suggests that eliminating a channel increases customer “shopping costs”, so they go through the process less frequently but make larger orders when they do purchase.
  • Customers who had agreed to receive email marketing were less impacted by the elimination of the catalogue. They continued to order as much as before.
  • Customers identified as loyal fans of the company and its products were also less impacted by the elimination of the channel.
  • The adverse effect of eliminating a channel is not ephemeral. For the company studied by the researchers, the impact on revenues was being felt two years — and counting — after the elimination.
  • The loss in revenues from departing customers was mitigated by loyal fans and others who moved to the Internet, and by the savings that came from the channel elimination. Revenues went down, but overall profits increased.

Business Application

The research has clear implications for managers seeking to eliminate a costly channel in favour of less costly and more effective channels.

First, be prepared for the shock. Some customers will go away, and revenues will fall.

Second, go gradual. Don’t surprise the customers with a sudden elimination. Managers can mitigate the adverse effect of the elimination by gradually ‘deemphasizing’ a channel instead of suddenly taking it away from customers. In the case of a catalogue, for example, the company might start gradually decreasing the frequency of the mailings, as well as decreasing the size of the catalogue. The idea, of course, is to encourage customers to make the decision to switch channels on their own.

Third, reach out to the at-risk customers. Identify the customer segment(s) that will be most affected, and launch marketing strategies aimed specifically at these customer segments. The transactional background of customers will indicate which segments might be more at risk. For example, a company can determine which purchase channel is most closely affiliated with the channel that will be eliminated, and develop strategies targeted to users of that purchase channel — in this case, the telephone channel, which was favoured by most catalogue buyers. If the goal is to move customers online, email marketing campaigns can be particularly effective.

Before eliminating any channel, companies must ensure that the savings from that elimination will more than make up the expected loss in revenues. This can be achieved by anticipating the adverse impact and taking proactive steps to alleviate that impact.

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Authors

Institutions

Source

Idea conceived

  • January 2014

Idea posted

  • November 2013

DOI number

10.13007/252

Subject

Real Time Analytics