Steering customers to the right channels

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The McKinsey Quarterly 2004 Number 436
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Steering customers to the right channels 37
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. None-
theless, 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.
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.
Joseph B. Myers, 
Andrew D. Pickersgill, 
and Evan S. Van Metre
The McKinsey Quarterly 2004 Number 438
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 accus-
tomed to—and indeed are increasingly demanding—a broad range 
of options and might well defect if companies discontinued them. What’s 
more, common tools1 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.
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 prefer-
ences 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 
1 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 (www.mckinseyquarterly.com/ 
 links/14509).
To gain control of multichannel 
interactions, companies must begin 
to constrain the channel options 
of customers by guiding them subtly
Steering customers to the right channels 39
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 cus-
tomers 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 
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The McKinsey Quarterly 2004 Number 440
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 cus-
tomers 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, on the previous page), 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 
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Steering customers to the right channels 41
may turn out to be less than desirable or vice versa (Exhibit 2).2 Building 
such an understanding can also reveal opportunities to reduce costs in 
some channels.
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 cus-
tomer 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.3 
Preferences. If economics is the science of channel architecture, cus-
tomer 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. 
2 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 (www.mckinseyquarterly.com/links/14511); and 
 John M. Abele, William K. Caesar, and Roland H. John, “Rechanneling sales,” The McKinsey Quarterly, 
 2003 Number 3, pp. 64–75 (www.mckinseyquarterly.com/links/14509). 
3 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 (www.mckinseyquarterly.com/links/14513). 
The McKinsey Quarterly 2004 Number 442
Research on customers and statistical analysis 
(such as the kind that marketers use to 
build brands) can help identify the preferred 
channel combinations.4 
Marrying insights into channel economics 
and customer preferences can be very worth-
while. 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 plac-
ing 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 prefer-
ences 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 per-
cent 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 
4 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 (www.mckinseyquarterly.com/links/14515).
Steering customers to the right channels 43
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 
salesand 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 
Few sales reps object to a channel 
change that frees them to focus on 
their highest-potential customers— 
if their compensation doesn’t dip
The McKinsey Quarterly 2004 Number 444
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 communica- 
tion 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 likeli- 
hood that customers or channel partners will defect. When a particular 
class of chemicals was in short supply, for example, one leading manu-
facturer 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 experi-
enced salespeople in the telesales role—a tactic that helped customers to 
accept the lack of face-to-face contact and to preserve preexisting relation-
ships—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.
Steering customers to the right channels 45
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 compen-
sation system to give them credit for all sales in their territories, regardless 
of channel.5 Today the sales reps spend much of their time on higher- 
value activities, such as finding new prospects 
and building customer loyalty, while the com-
pany has raised its e-commerce sales from less 
than $100 million in 1999 to nearly $500 mil- 
lion 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 con- 
tinue 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 
5 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 Web site.
The McKinsey Quarterly 2004 Number 446
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 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 createdhelped 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 cus- 
tomers 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 
Customers and employees migrate 
to new channels more quickly when 
a company creates a compelling 
story line around their advantages
Steering customers to the right channels 47
The authors wish to thank Jennifer Stanley for her contributions to this article.
•
Joe Myers is an associate principal and Evan Van Metre is a principal in 
McKinsey’s Atlanta office; Andrew Pickersgill is a principal in the San Francisco office. 
Copyright © 2004 McKinsey & Company. 
All rights reserved.
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. Q