Cash Flow

Steering Customers to the Right Channels

Migrating customers to a new channel can be a pain for them, the company, and its channel partners. But the rewards can make the effort worthwhile.
The McKinsey QuarterlyNovember 16, 2004

A single channel used to be all that companies needed to deliver products or services to their customers. But now companies, responding to customer demand for ever more channel choice, reach out through many routes. Multichannel customers spend 20 to 30 percent more money, on average, than single-channel ones do, and channels such as the Internet and overseas call centers promise big cost savings.

Yet multichannel marketing is harder than it might appear. Too often, companies multiply their channels only to face a host of unintended consequences that actually raise costs or cut revenues. In retail banking, for example, less expensive channels such as ATMs and the Internet have helped reduce average transaction costs over the past 15 years by nearly 15 percent. During the same period, however, transaction volumes more than doubled, since customers check their balances and make withdrawals more often than they did in the days when they had to wait in line at a branch. The result has been an increase in the overall cost of serving each customer. Similarly, serving customers over the Internet has saved airlines roughly $10 to $15 per booking. Nonetheless, Web-based channels facilitate the price transparency that, at some airlines, makes the average online fare an estimated $50 to $100 lower than that of a ticket purchased through other channels. Meanwhile, companies in some industries have seen their competitors mimic their expensive new channel approaches very quickly.

These are not isolated examples. As a result of proliferating channels, sales and marketing executives in a wide range of industries have lost control of their customers, with damaging financial consequences. The problems won’t be easy to solve. Companies can’t go “back to the future” by reducing the number of channels, because customers have grown accustomed to — and indeed are increasingly demanding — a broad range of options and might well defect if companies discontinued them. What’s more, common tools for improving the efficiency of channels, such as changing distributors, tweaking incentives, and upgrading the sales force, often fail to close the gaps between the desires of customers and the realities of channel economics. (For a broader summary of channel options, see John M. Abele, William K. Caesar, and Roland H. John, “Rechanneling Sales,” The McKinsey Quarterly, 2003 Number 3, pp. 64–75.)

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To gain control of multichannel interactions, companies must begin to constrain the channels customers use by subtly guiding them through the sales and service process, from awareness of the product through purchase and postsales support. This “rerouting” allows companies to shape when and where they interact with the people who buy their products and services. By encouraging the use of different channels at distinct stages of the sales process, leading companies balance the preferences of their customers with the economics of their channels. The rewards can be substantial. They include reducing the cost to serve customers by as much as 10 to 15 percent, increasing revenue per customer (through higher retention rates or an enhanced mix of products and services) by as much as 15 to 20 percent, and gaining the chance to penetrate previously underserved segments. Moreover, carefully tailored “routes to market” can become powerful sources of sustainable differentiation because they are difficult to imitate and often become linked in the customer’s mind with actual product or service offerings.

Trailblazing companies in industries from mobile telephony to high-tech manufacturing to transportation equipment are beginning to enjoy the benefits of migrating their customers to new channels in this way. Many more, though, seem afraid to start — understandably, since channel migration is risky business. A company can easily make poor strategic decisions about whether or where to migrate its customers, and a botched transition can derail even the best strategy. To mitigate these risks, the company must understand its channel economics, use incentives to guide its customers to the right channels at the right times, provide a safety net to control any backlash by customers and channel partners, and develop a communication program that inspires its internal and external constituencies. Armed with such tools, it should at long last be ready to fulfill the promise of multichannel marketing.

Setting Strategy

Customers may always be right, but allowing them to follow their own preferences often increases a company’s costs while leaving untapped opportunities to boost revenues. Instead, customers must be guided to the right mix of channels for each product or service. How can a company determine this optimal mix? When should it dispatch salespeople to close deals face-to-face or use outbound telesales channels to generate leads? In what circumstances does it make sense to reach out to customers through the Internet? Which service inquiries from high-value customers merit the attention of sales representatives rather than a lower-cost interactive voice-response system? Companies can find answers to these thorny questions by rethinking the economics and customer channel preferences that together shape their channel architecture and by examining the incentives they employ to influence the behavior of both customers and sales personnel.

The art and science of channel architecture. Most companies have some understanding of the volumes and margins of their channels. Few, however, truly know the cost of serving customers in each of them or a channel’s associated customer “quality” — that is, the value to the company of the products or services purchased through a particular channel. Even fewer grasp the economics of specific sales and service activities, such as the cost incurred to generate a lead, or which channels customers prefer. It is little wonder, then, that many corporations are unable to readily establish a channel architecture that retains customers (Exhibit 1), much less one that routes them effectively.

Economics. Developing a true picture of channel economics starts with understanding the cost of serving similar customers (or of providing similar products) across channels. It’s vital to consider often-overlooked cost categories such as freight and returns; seemingly attractive channels may turn out to be less than desirable or vice versa (Exhibit 2). Building such an understanding can also reveal opportunities to reduce costs in some channels. (A powerful tool for conducting such an analysis is the pocket margin waterfall. Using it involves subtracting direct product costs and costs incurred specifically to serve an individual account from the price paid by the end customer. See Michael V. Marn, Eric V. Roegner, and Craig C. Zawada, “The Power of Pricing,” The McKinsey Quarterly, 2003 Number 1, pp. 26–39; and John M. Abele, William K. Caesar, and Roland H. John, “Rechanneling Sales,” The McKinsey Quarterly, 2003 Number 3, pp. 64–75.)

Once a company makes its “apples-to-apples” comparison of the cost of serving similar customers across various channels, it should take into account differences in the quality of the customers drawn to them. The experience of the US wireless industry shows why such differences matter. Wireless operators once focused on a simple metric to compare the effectiveness of their channels: the cost per gross add (CPGA), which represents the typical expense of acquiring a new customer. Many channels with similar CPGAs had wildly different customer profiles, however. Only after wireless operators examined their margin per customer and the churn associated with different channels did they realize that some channels, such as company-owned retail stores, helped them acquire and retain a disproportionate share of their highly attractive customers. Not surprisingly, the carriers — which as the industry matures are looking more and more closely at such distinctions — have opened more retail stores.

An accurate view of aggregate channel profits isn’t enough, though. Since customers jump between channels as they move through the purchase process, companies can guide them effectively only by understanding the economics of each channel at every stage of sales and service. It is necessary, for example, to know how much time telesales people spend generating leads as opposed to providing customer service, to say nothing of the return on that time. To learn all this, companies must have transaction-level cost and revenue figures or, if data are hard to find, estimates. (Calculating transaction-level cost and revenue figures typically involves extracting order-quantity, price, and manufacturing-cost data from internal systems (for instance, enterprise-resource-planning and electronic-data-interchange systems) and then conducting activity-based analyses of each channel’s contribution to different kinds of transactions. See Timothy E. Lukes and Jennifer E. Stanley, “Bringing Science to Sales,” The McKinsey Quarterly, 2004 Number 3, p. 16.)

Preferences. If economics is the science of channel architecture, customer preferences are the art. Customers, of course, frequently prefer some channels to others for certain transactions, and specific channel combinations often engender loyalty or create cross-selling opportunities. Research on customers and statistical analysis (such as the kind that marketers use to build brands) can help identify the preferred channel combinations.(For details on branding tools, see Nora A. Aufreiter, David Elzinga, and Jonathan W. Gordon, “Better Branding,” The McKinsey Quarterly, 2003 Number 4, pp. 28–39.)

Marrying insights into channel economics and customer preferences can be very worthwhile. A major industrial distributor, for example, compared the real costs and benefits of serving customers that placed large orders infrequently, on the one hand, and those placing smaller orders more often, on the other. It became clear that the company’s channel strategy placed too much emphasis on the latter. Knowing the preferences of different segments, in turn, enabled the distributor to determine which of them could be served by face-to-face salespeople or by telesales personnel and other remote channels. When it acted on these insights, it raised its margins by 15 percent. Similarly, a high-tech company is on course to cut its service costs by 20 percent and to raise its sales by 10 percent because a clear understanding of channel preferences, revenues, and costs is helping it realign its channel resources toward the most valuable customer segments.

Both examples highlight an alignment between channel economics and what customers want. Large customers, for example, may place a high value on face-to-face contact when they decide which products to buy but may have less need for it during postsales service. The obvious choice: focus the face-to-face sales force on presales activities and move postsales interactions to a lower-cost channel, such as an inside team that offers customers telephone support. What if they want more personalized sales and service than the company can provide economically? In these all-too-common situations, the key is to provide incentives that quickly guide customers to the right place.

Incentives. Incentives frequently combine a “carrot” and a “stick.” The carrot is something (typically, discounts or improved service) that customers value highly and receive only when they use the preferred channel. The stick might be fees or reduced service, both of which work best when they are reasonably opaque and switching costs are embedded in the product or service. Many airlines introducing self-service check-in, for example, installed large numbers of kiosks to offer customers the carrot of extremely short wait times for automated service. But they also employed a stick: longer wait times for service at counters (as a result of reducing personnel levels there).

Charles Schwab has taken its use of the carrot-and-stick approach to the next level by guiding different customer segments to different channels. Schwab’s investors open roughly 70 percent of all new accounts in branches. The company encourages affluent customers and those who want advice (and are often amenable to cross-selling) to go on using the branches by making it easy for these people to schedule appointments there.

But for most customers who look after their own investments, the value to the company of subsequent branch interactions is low and the cost of providing them high. Schwab takes several steps to increase the likelihood that such investors will execute transactions via the Web or a call center. For starters, when customers open their accounts in a branch, they learn how to trade on the Schwab Web site. This training continues when they phone a call center for brokerage transactions: if they are willing, sales reps walk them through the transactions on the Web. Finally, while branches continue to be an engine for acquiring customers, efforts are made to avoid reintroducing the installed base into this higher-cost service channel: investor education seminars, for example, often convene at third-party locations. By guiding customers through the sales and service process, Schwab has succeeded in offering them the benefits of a multichannel model while containing the cost of providing it.

Customers are not alone in requiring incentives. A company’s sales force must receive them as well. Few salespeople object to a channel change that frees them to focus on their highest-potential customers and leaves service and the generation of leads to lower-cost alternatives — as long as their compensation doesn’t dip.

Finally, the thoughtful use of incentives can help companies manage the response of their channel partners. Even when the threat, perceived or real, of channel conflict is acute, “win-win” arrangements can eliminate many problems. A leading home-equipment manufacturer, for example, began selling products to big-box home-improvement centers despite the potential for conflict with its core channel, a dealer network. Before entering the home center channel, the manufacturer made sure that its dealers had strong financial incentives to continue pushing its products. First, it gave dealers a revenue stake in the new approach by ensuring that they handled postsales inspection and service on items purchased in home centers. Second, it gave dealers exclusive rights to certain product lines. In the end, the dealers significantly increased their revenues from its products and services, since they captured incremental service revenues from a new customer segment and overall awareness of the brand increased. Meanwhile, the manufacturer made double-digit gains in market share.

Of course, “win-win” incentives don’t always exist. In these cases, companies should estimate the true magnitude of the backlash risk by taking a hard look at the realistic alternatives available to each partner. Sometimes they will conclude that they must refrain from tinkering with channels, but often they will decide that the risk is worth taking — particularly when a good transition plan is available to mitigate it.

Managing the Transition

No matter how good a company’s channel migration strategy may be, it can founder if customers think that service is deteriorating or if problems with channel partners and employees emerge. The secret to managing the transition is getting the timing right, providing safety nets that help everyone involved deal with the change, and developing a communication approach that builds momentum for it.

Getting the timing right. It is easier to open up new channels if supplies are tight, demand is strong, or competitors are in decline, because these conditions reduce the likelihood that customers or channel partners will defect. When a particular class of chemicals was in short supply, for example, one leading manufacturer migrated its transactionally oriented customers, representing more than 20 percent of its accounts and 10 percent of its volume, to telesales. That freed up face-to-face salespeople to focus on new prospects that were promising but time-consuming to develop, as product demonstrations were required. To make the migration easier, the company placed experienced salespeople in the telesales role — a tactic that helped customers to accept the lack of face-to-face contact and to preserve preexisting relationships — even when supplies were no longer short.

Providing safety nets. Once the migration starts, its participants need different forms of support, such as specialized training, pilots to introduce the new approach, and realigned commission structures.

Customers, for example, often require access to the touchpoints of both the old and the new channels, as well as hands-on training in the new one. W. W. Grainger, a large US supplier of maintenance, repair, and operations (MRO) parts, provided for these needs when it migrated customers from its personal sales staff to the Internet (to cut its costs) without making them less satisfied with its service. The company’s 1,200-strong face-to-face sales force visited customers to show them how to order parts using the new Web-based system. Grainger made sure that its salespeople would invest enough energy in these training activities by adjusting its compensation system to give them credit for all sales in their territories, regardless of channel. (This approach also helps ensure that salespeople who support the Web channel pass on good leads to face-to-face sales personnel. General Electric undertook similar efforts when migrating customers to its Polymerland Website.) Today the sales reps spend much of their time on higher-value activities, such as finding new prospects and building customer loyalty, while the company has raised its e-commerce sales from less than $100 million in 1999 to nearly $500 million in 2003. Grainger has not only become the largest supplier of MRO parts through the Internet but also profoundly differentiated itself from its competitors, many of which now find themselves burdened with outmoded sales forces and underused Web sites.

Channel partners also need support. Many of them are wary, even when the migration of customers to different channels seems likely to create new after-sales service opportunities or to enhance the brand in ways that would benefit them. Companies can give dealers some comfort by guaranteeing that they will continue to receive sales support or by arranging for special commissions during the transition. We have seen companies give channel partners — for six months or more — up to half of the commissions they would have earned on sales that moved to a new channel.

Finally, companies that migrate their customers must have the safety net of a carefully sequenced rollout that can debug problems before they get big. An office supplies distributor, for instance, moved its small accounts to telesales in four phases. To improve the odds for success, the company began with a single division, whose strong leadership was committed to improving its performance substantially. Next the rollout moved to four midsize divisions — one a weak performer, two mediocre, and one fairly strong — in four different markets. Only after learning a diverse set of specific lessons from each of these divisions was the company ready for a more extensive rollout that put the results of four of its largest business units on the line. When the shift to telesales succeeded there, the same approach was applied to the remaining 70 or so divisions. A two- to four-week break followed each phase of the rollout. During this time, pilot teams reassembled to share their experiences and, along with managers from the groups in the next phase of the rollout, to plan future improvements.

Creating a buzz. Customers and employees migrate to new channels more quickly when a company creates a compelling story line around their advantages Customers and employees are quicker to migrate to new channels when a company creates a compelling story around the advantages of the new approach and identifies advocates who will champion it and perhaps even make it more widely known through the mass media. Delta Air Lines, for example, has been especially effective in selling its airport-lobby self-service model to customers. Delta began building interest through advertisements in national newspapers and on television and radio. Then each of the major cities where Delta revamped its airport lobby got a media blitz of customer testimonials through articles in local newspapers and interviews on television news shows. The testimonials eventually began to spread organically to the kiosks themselves as frequent travelers helped less-experienced ones use them. (Delta personnel initially played this role, but customers assumed it when they realized that by doing so they speeded up check-in for everyone.) During 2003 the buzz Delta created helped raise the number of self-service check-ins by several million, made the airline more productive, and cut its costs by tens of millions of dollars.

Internal communication is vital as well. Often, the migration of customers to new channels forces companies to redeploy personnel, redefine roles, and realign incentives. Since each of these moves can be uncomfortable for employees, it’s important to develop and repeat a consistent story that emphasizes the benefits of the new approach. A travel services company, for example, began communicating very early to its telesales people the strategic importance of a new initiative that required them to develop cold-calling skills. Instead of providing service to customers who phoned in of their own accord, the agents would replace face-to-face personnel in identifying attractive corporate leads. Early communication created excitement about the shift and the training it required, and the efforts of the telesales reps helped the company to grow more rapidly.

Although customers want access to many channels, companies need not provide it solely on the customers’ terms. With the right strategy and transition plan, companies can migrate their customers to different channels while still keeping the customers happy.

About the authors: Joe Myers is an associate principal and Evan Van Metre is a principal in McKinsey’s Atlanta office; Andrew Pickersgill a principal in the San Francisco office. The authors wish to thank Jennifer Stanley for her contributions to this article.