Data can also be shared with partners, says Dent.  "Why should one distributor cost 7.6% to do business with and another 3.4%?  If you can understand this, then you can either push business to the lowest-cost channels or you can encourage your other partners to move towards better models."

An alternative approach is to carry out an end-to-end analysis.  This aggregates the total costs of the supplier and its channels to come up with total go-to-market costs. This can be split down by function.  Thus a supplier can establish what it is spending on product returns or marketing and what additional sums its distributors and dealers are also spending on this (see IBM and HP case studies).

Dent suggests that it is time companies started to include the customer’s costs when they measure real end-to-end profitability. "How many suppliers are measuring the internal costs incurred by the end-user in purchasing their product?  In some areas, such as selling technology products to small and medium businesses, this is an increasingly important issue."

Whatever approach is adopted, the benefits for suppliers who put the right system in place are enormous. 

One large supplier switched from a loss of over ten million euros in one country to a similar profit. In this case the trick was axing a long tail of unprofitable business and accepting lost market share. 

For another supplier, its understanding of channel financial dynamics is a tool to keep competitors out.  Peter Nolan, senior vice president, Electrolux, said: "We want very close relationships with profitable retailers.  We want to set up firewalls around them.  Equally, we want to actively divert our competitors to work with expensive channels that we don’t think will work.  Let them deal with the retailers who only want to buy on price."

A cost-to-serve analysis at IBM revealed a massive duplication of costs, said Martin Beckwith. “We found that often five resellers, each working with a different IBM salesman, were all competing to sell IBM to the same account.”  IBM responded by keeping a closer eye on its direct-sales teams and by helping its partners to develop unique skills sets, leading to less competition.

End-to-end profit analysis meant that HP was able to spot areas where it, its distributors and their dealers were duplicating their efforts.  Why have three companies handling the return of a single product?

The data can also be used to shift products to lower-cost channels. Dent says: "It is very hard to argue with hard numbers. Often you find suppliers are reluctant to shift mature products to commodity channels. To do so may damage existing relationships. Equally, you often find that the best account managers are focused on the higher-margin channels. That can also lead to institutional inertia. If you know the real profitability of different channels you can ensure that products are moved at the right time."

Our Analysis: Unless you have a clear understanding of channel profitability, you cannot select a winning channel strategy. Even more importantly, unless you understand channel profitability on an ongoing basis, you cannot hope to implement it successfully.  It is no exaggeration to say that whether or not you understand and measure channel profitability is what determines whether you are an amateur or one of the tiny minority who can claim to be real professionals!