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  • Distribution Channels in the Business Model Canvas

    12 min read

    Innovation

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    We may have the greatest product or service in the history of humankind, but without the necessary sales channels to make customers aware of our business and deliver value, we are doomed to failure. Reaching potential customers is a lynchpin for every company’s success, and in Digital Leadership’s terms, efforts to reach customers should encompass some of every company’s key resources.

    The importance of customer acquisition is reflected in the Business Model Canvas, and a significant element of innovation is sorting out the best channels to use for newly developed value propositions. Distribution channels play a key role in innovation. Using them well, and making opportunities where you can, are some of a business’s key activities. In this article, we unpack some of the ideas behind the channels section of the canvas, what it means to your overall business model, and how changes to distribution channels impact new and previously-developed products and services.

    eXtended Business Model Canvas
    The UNITE eXtended Business Model Canvas
    Designed by: Digital Leadership AG – Building on the work of Alexander Osterwalder, the Lean Canvas and the thinking of Patrick Stahler

    What is the Distribution Channels Building Block of the Business Model Canvas?

    The innovation process is simple at its core: you start with one Business Model component and cover all of its available alternatives. With every iteration of this one component, you reassess whether you have made progress. For example, you could consider using the same Business Model but selling through a different distribution channel. With every iteration of this one component, you reassess whether you have made progress by testing with external and internal customers and gaining quantitative validation before moving forward. Do not forget to then think about how changing this element of the Business Model Canvas affects the other elements. This will require iterations of those as well. A change in one area can often create a ripple effect on other areas, so consider the effects of changes carefully.

    In the UNITE Business Model Canvas, Distribution Channels appear as part of the Experience Model. There, they create value through the way of delivery. Because they represent how a company communicates and builds customer relationships, they are directly connected to your Operating Model section of the canvas.

    Distribution Channels Building Block in the Business Model Canvas
    Distribution Channels Building Block in the Business Model Canvas

    The channels are the touch points through which a business communicates its capabilities and value propositions to potential and current customer segments. Through it, the company interacts with the market, facilitates sales, and develops the customer experience with its work.

    The 3 Types of Distribution Channels

    Direct Distribution Channels

    In a direct distribution strategy, companies skip traditional retail channels and connect directly with customers. Usually, products and services are sold through a producer’s website or their own retail store.

    Direct Distribution Channel Examples

    Customers who walk into a bakery and purchase a cake made in-house are using a direct channel. Amazon manufactures the Kindle and sells it directly through its own e-commerce platform.

    Indirect Distribution Channels

    Businesses can use others as resellers who take responsibility for delivering offerings to the final user.

    Indirect Distribution Channel Examples

    Hybrid Distribution Channels

    Hybrid distribution channels use methods from both direct and indirect models. Manufacturers have relationships with a sales force or distributer, but also sell directly to customers themselves.

    Hybrid Distribution Channel Examples

    Apple computers follow this model. You can purchase goods directly from their stores, or from a third-party retailer.

    Several multi-level marketing companies use hybrid distribution channels.

    Selecting Your Distribution Channels in the Business Model Canvas

    How you deliver on your value proposition is in a constant relationship with your customer segment. Particular customer segments expect certain methods of delivery, so it’s important to regularly re-evaluate your customer journey and the experience you are providing customers.

    Decisions behind how to deliver to customers – physical channels, virtual channels, direct, indirect, hybrid, etc.–are influenced by a number of factors. Each presents different challenges and opportunities based on specific company and customer needs.

    1- Customer Segments and Market Size

    Customer Segments are likely the best places to concentrate your efforts in exploring future innovations. Remember, however, that it is not necessarily the biggest gap that will be the easiest or best fit for your company, as we will discuss next. You may also uncover different clusters of opportunities fit for different customer segments. Make sure to group gaps into logical categories before you move to the next step.

    Types of Customer Segments
    Types of Customer Segments

    Use what you know about your customers to drive your decisions about various channels. If you’re a new business, developing strong customer relationships will play a critical role in your success going forward. Don’t offer your products and services in the way you think is right; meet your customers where they are.

    2- Investment Required in each of the Distribution Channels

    At a basic level, the resources you have available will drive the decision you make about the channel and market you choose to target.

    Some channel types require minimal investment: a website or youtube channel that funnels customers into an online store wouldn’t cost much, and depending on your expertise might only require an investment of your time. Knowledge of search engine optimization is a must if you’re focused on online distribution.

    A direct sales force can work on commission. Most of us know someone or have been someone, who worked solely on commission. This can create lower margins on the profit side of things, but an informed and dedicated sales staff can go a long way to raise awareness of your product and develop a strong relationship between you and your customers. We at Digital Leadership believe in treating salespeople well; make sure your expectations for your direct sales force are reasonable and their compensation appropriate.

    Trade shows can be expensive propositions, and aren’t appropriate for a company on a shoestring budget. On the other hand, there may be no other opportunity to reach so many high-value potential customers at once. In the event of a small budget, you’ll need to decide if attendance at one of your industries trade shows is the one channel worth such a highly proportional investment.

    3- Product or Service Characteristics

    Some forms of business just don’t translate to every form of distribution. You can’t give someone’s car an oil change over email (though you can give directions if that’s your value proposition).

    As you work on your business model canvas channels portions, give significant thought to the service you offer. There may be an opportunity to reach customers and conduct business without being in the same space until the very last minute when the service is actually delivered.

    4- Control Over Distribution Channels

    As many businesses learned during the COVID-19 pandemic, we can’t control everything. Perhaps that’s inspiring companies worldwide to attempt to exert more control over what they can, including the channels we use to reach customers.

    So long as it doesn’t go against your Key Activities or disrupt relationships with Key Partners, controlling channels of distribution can give a business a competitive advantage.

    More information about Key Partners and Key Activities is available in How to Create Innovation, which you can request elsewhere on our website.

    5- Competitive Advantage

    And thinking about competitive advantage further, some distribution channels are more beneficial than others depending on the specific goods and services being offered by your company.

    Where will you find a competitive advantage? Again, it will depend on the specific value proposition you’re offering customers. Most importantly, be aware and watch for opportunities to distinguish yourself from competing enterprises.

    Distribution Channels Phases

    There are several phases through which a distribution channel passes as it’s employed by a company. Oftentimes, a channel is within more than one phase at a time. Distribution channel phases are not linear; be comfortable repeating phases where beneficial.

    Distribution Channels Phases
    Distribution Channels Phases

    1- Awareness

    Through advertising and marketing, build customer awareness of your services and products. Communication channels must be established so our message reaches potential customers.

    2- Evaluation

    The customer decides if your value proposition meets their needs, compared to other options currently on the market. When all information is taken into account, customers decide which value propositions make the most sense for them.

    3- Purchasing

    The customer takes the plunge. This phase should be as frictionless as possible. Ease of access is an important contributing factor to customer satisfaction.

    4- Delivery

    The customer receives our services and products. In the event of self-service or automated services value propositions, we must ensure that directions are clear. Ensure your business models have properly invested in this portion of the customer journey.

    5- Post-Purchasing

    Providing the proper care after the purchase helps in customer retention. Customers whose needs are met become advocates for our work and are more likely to make repeat purchases. Use the post-purchase phase as an opportunity to continue cultivating positive emotions for you and your products.

    The Importance of Distribution Channels Building Block of the Business Model Canvas

    In How to Create Innovation, we discuss the importance of distribution channels in the business model canvas. In the book, we outline how innovation often forces changes to the distribution model of a business.

    A change to distribution will likely have ripple effects on the rest of your business. Let’s take a look at what the ramifications of this change might be using the Business Model Canvas.

    As we can see, a Step Change to one component of the Business Model will more often than not have far-reaching implications and will affect the entire system. You will not need to just iterate and test that one part during a transformation, you will need to iterate and test the entire thing until you’ve gotten all the parts realigned and working together. Your organization has probably spent years aligning and optimizing your current Business Model across all silos. So, rethinking it will likely take some time.

    Getting that Step Change to one single component correctly configured is the big challenge of a (digital) transformation. Not understanding the implications of systemic changes, and not getting the required changes correctly configured across the entire business system, is the number one reason why step-change transformations fail.

    The UNITE Business Model Framework: A Framework for Innovation Success

    How to Create Innovation includes a number of canvases that focus on value creation and finding the right business model to meet your customer segment and customer needs. The framework is built to inspire drastic changes that help you find a competitive advantage. Our hope is that your company grows through business model innovation, and so we again encourage you to look deeper into our website and the book.

    Here is a summary of the key ingredients of the Business Model Framework:

    Business Model framework
    The UNITE Business Model Framework
    Designed By: Digital Leadership AG

    Business Models

    The centerpiece is the Business Model Canvas, which covers the six main areas of a Business Model (the Operating, Value, Service, Experience, Cost, and Revenue Models).

    The eXtended Business Model Canvas adds the immediate business context, including Business Drivers, customers, and the team, as well as the Unfair Advantage.

    Detailed Models

    A Business Model can be broken out into its numerous aspects. Depending on what challenges you face, you can zoom in on your area of interest using an appropriate tool or canvas:

    • Your Business Intention and objectives as well as your Massive Transformative Purpose summarize your drivers and give direction to what you do.
    • The Value Proposition Canvas details the central components of your offering (the product or service).
    • To dig into your Customer Segments, work with data-driven Personas.
    • The JTBD Customer Job Statement and Job Map frame the JTBD of your customers.
    • The Business Model Environment puts your Business Model in a market context composed of emerging trends and disruptive forces.
    • The Innovation Culture Canvas helps you understand and consciously shape a culture that supports innovation.
    • The Innovation team structure enables you to draft a team structure for your innovation initiative.
    • Using learning and growth metrics, you can measure progress at the initial stages of development. These metrics help you focus on what really matters instead of creating a detailed business plan that will not really help you. Later on, you can expand the financial aspect of the Revenue and Cost Models with a full business case.
    • The Operating Model Canvas helps you think through the Operating Model.
    • Business Capability Map: A Practical Business Approach

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