Channel challenges

As cross-channel organizations pave their way towards omnichannel, they face some serious channel challenges. An important one is evaluating the profitability of your channels. Unfortunately this is also a difficult one, since channel profitability is closely linked to customer and product profitability.

Measuring profitability entails analyzing channel costs. Typical channel costs include:

• General
  – direct product and service costs + additional costs of services offered by the channel (packaging and posting for offline channels; for websites think domain costs, web site production, maintenance and analytics)
• Incremental administrative costs
  (e.g. more returns due to special terms or invoicing)
• Marketing costs
  (the cost of marketing campaigns on that channel)
• Sales costs
  (staff and capital)

You need to analyze these costs in order to see which of your channels are unprofitable and what activities make them unprofitable. Usually channel unprofitability is very closely linked to product profitability. Obviously your margin decreases if you use expensive channels for marketing, sales and support of a particular service/product. Sometimes, however, you can’t just get rid of a channel because even though it’s more expensive, it’s a lot more efficient. It is a difficult choice companies have to make. This is what happened to the Dutch roadside assistance, insurance, and travel agency ANWB. The variety of products and services they offer justifies their multi-channel strategy: they have a physical and online shop, and members and/or customers can buy products and receive support in the shops, online, via a mobile app and of course, the service desk. This week ANWB decided to terminate sales of trips and insurances in their physical shops. From November customers can only purchase these services online. The argument behind this change was that selling trips and insurances in the shop has become unprofitable.

The consequences for a member-based organization such as ANWB are substantial. The sole message about the looming change lead to an outburst of angry reactions online. “Don’t members’ opinions count?” or “We were so happy with the service when we booked our trip at the local ANWB in Hertogenbosch”. While half of the reaction blamed the ANWB for making a wrong choice, others were actually glad that the union decided to shift resources from selling services which were not part of its core business.

As a non-biased bystander, who is not personally affected by this decision, I could not help but wonder if ANWB made a good choice in getting rid of the physical shop for sales & service of insurances.  

-          From the customer’s perspective, is it a good idea to deprive them of service channels?  After all, a physical shop is essentially not just a sales but also a service channel.

-          From a business perspective, how can you be sure it is the right channel to get rid of? Is your cost reduction not compromised by other losses? (customer satisfaction, cross/upsell opportunities, employee morale?)

Taking both perspectives into account, I came up with the following pro and con arguments (please feel free to  add more):

-          Yes

1.       Channel profitability – First of all, insurances in the Netherlands are predominantly bought online, because there are many good comparison sites which help you choose the best insurance. So the ANWB is trying to respond to what it the customers want. They want to buy online? – let them buy online. Another argument is there are too few insurances bought in the shop to justify the costs of maintaining sales staff there. Naturally, in November there will be work force reduction. Third, ANWB is seen as an innovative organization offering a multi-channel experience to its customers, and the web is currently seen as THE ultimate sales and service channel. ANWB also expects to bring down its cost to serve by directing consumers to a cheaper self-service channel. All these arguments boil down to one thing: brick-and-mortar stores cannot compete with the profitability of the online channel.

-          No

1.       Product profitability – while it may be cheaper to sell an insurance online, everyone knows that insurance are high involvement products, for which customers require a lot of advice. No wonder that independent comparison websites are so successful. However, for a member-based organization as ANWB, members will prefer buying the insurance from the store (along with other products) instead of going online. This is because they trust and appreciate the advice of the sales staff. The profitability of the insurance as a product is not only affected by the channel through which is sold. A product has a lifecycle just like customers, and this lifecycle includes maintenance and usage. If an ANWB member purchases an online insurance he will no longer be able to visit the shop for advice on his coverage or damage claims. He will have to call the service desk, which immediately affects the margin of the sold insurance since it is the most expensive service channel. Of course, one contra argument would be that ANWB knows her customers very well and they belong to the “upwardly mobile” generation who like doing everything online. However, I think the majority of ANWB customers/members do not belong to this generation. Therefore, it would have been better to have the customer both buy and get service for his insurance in the shop (as well as online), since the shop personnel is paid to be there anyway, the sell many other products in the meantime.

2.       Customer profitability – or lifetime value. The net present profit per customer during his whole relationship with the company. Companies increase it by selling more to the customer. Since products and services also have their own lifecycle and cannot be utilized endlessly, a company needs to sell more things to the same customer to retain them longer. The longer the customer stays and the more he buys, the higher his lifetime value. A traditional technique is cross/upsell: selling relevant add-ons to products or services already purchased. A store is the perfect place for cross/upsell because the contact is personal and the salesperson can react to the needs of the customer with a relevant offer. Of course, cross/upsell are done online as well (think Amazon and their intelligent book suggestions), but with smaller effectiveness. With the elimination of shops as a sales and service channel for insurances, ANWB may compromise her ability to grow customer profitability.

Of course, the coin has two sides. There are enough arguments for a Yes or a No. For instance, to sustain channel profitability of the shops and still sell insurances there, the ANWB can charge service fees. People are willing to pay a one-time fee of 1% (or more) of the price for a personal advice, especially for products like insurances. However, as it is a member-based organization, this would not be a wise policy towards its members. Scrapping insurances from the shop product portfolio also means laying off shop personnel, which could also positively impact the profitability of this channel, but has negative consequences for overall employee morale. Not to mention customer satisfaction, an important metric nowadays, especially for member-based organizations. ANWB currently occupies the # 9 position of this year’s Most Empathic Brands list (companies who best react to needs of their customers). However, it is still a controversial one since an organization like ANWB after all has to remain profitable and keep all the costs mentioned in the beginning of this article at an acceptable level.