Like most things in channel strategy, there's been decades of research that converge on what the most common set of channel flows or buckets of channel functions are used by most firms. Now this list that we have here is not exhaustive, but it represents a good starting point. As always, this list needs to be more detailed to reflect your unique context. My co-author on the book likes to use the acronym SIFCO to capture these six channel functions: sales and promotion, inventory and holding, financing, contracting and relationship management, ordering and payment and risking. In the reading today, you read the scope of what these topics entail. So I'm not going to rehash it here. Why is it important for us to know what the most common channel functions are? Well, it gives us options for channels design. It gives us a starting point for beginning to think about which channel members should be doing what activities in order to create the channel benefits that customers seek. Almost just importantly, if not more importantly, it guides our compensation and ultimately your negotiation with these channel members. You see, each of these channel functions carry an important cost. So for example, as we look at sales and promotion, sales and promotion involves costs such as personal selling, advertising, publicity, public relations, inventory holding, and transportation functions carry a lot of storage and delivery costs. These are known both to the channel member and to the channel captain. Financing is going to involve the cost of credit, the terms and conditions of sale. All of these things are quantifiable and recordable. Contracting relationship management will involve time, legal costs, it will involve the costs for personnel who were skilled bidders. It'll involve the costs of IT systems and account management, order processing costs, collections, and maybe the cost of bad debt. Risking costs will include price guarantees, warranties, the cost of insurance, the cost of repair, and other after-sales service cost. Any channel function can be assigned a cost. This might come through an ABC costing process, or it might come from knowing what you already paid for these activities from other channel members. There is always an intermediary who's willing to offer an activity for a price. This is why many say that there is a, "An Uber for everything". With smartphone apps and a growing concierge economy, you can have a maid, a masseuse, doctor, chef, a valet, a personal shopper, a florist, and a bartender arrive at your door in as little as 10 minutes. Check these firms out on this slide. So Washio is a company that has someone do your laundry. Sprig and SpoonRocket will cook your dinner and Shyp will mail things out so you don't have to brave the post office. Zeel delivers the massage therapist who comes complete with a table. Heal sends a doctor on a house call while Saucy will rush over alcohol. Eaze will re-up medical marijuana supply for you and Luxe is a personal parking valet. So all of these provide the channel benefit of convenience and some can even save you money. In other words, you don't have to be a billionaire to live with the same conveniences that they do. From a channel management standpoint, knowing that every cost of channel functions is important because channel companies should reward their channel members as a function of the value of the channel flow that they perform. In other words, channel members should be rewarded in proportion to the value that they generate for the channel system. So this is what we call the equity principle. In other words, if a channel member incurs 30 percent of the cost of providing a solution to end customers, that channel member should be compensated in a manner that's consistent with this. So let's consider Groupon whose margin is 50 percent. In other words, the way this works is if a hotel owner offers 218 hotel rooms through Groupon at $99 a night and 50 of them are sold, then half of that 49-50 in revenue goes to Groupon. So the question for the hotel owner is whether or not that is a fair margin for what they do. If Groupon is able to create revenue from capacity that would have otherwise gone unused, is a 50 percent share fair or unfair? Is it worth it? So as you can see, this is where the conversation begins in a channel negotiation. The equity principle results from the underlying reality that every channel function not only contributes to the production of value channel benefits, but every function also costs something, and this is a key reference point for the channel partners.
