Several of the ideas presented here are based on work by Louis W. Stern and Frederick D. Sturdivant, "Customer-Driven Distribution systems," Harvard Business Review, Vol 65 (July-August 1987)

While the implementation of a distribution channel system may be complex in reality, the ideas behind the design of such a system are relatively simple. They are simple because customers tend to purchase from channels that provide the "service outputs" that customer’s desire. But note that these service outputs are not product benefits. Product benefits are tied to the product, while service outputs are tied to the channel of distribution.

Let’s make this more concrete. Imagine a product market for computers. Now, think of all the service outputs that customers who buy computers might want from the channel where they purchase the computer. These might include product demonstration, flexible financing, repair, installation, delivery, product selection, product variety, technical assistance, information, convenience, ongoing/close relationships, and even the ability to provide products at low prices. Note that the channel, quite independent of the product, can provide these service outputs.

As with product benefits, not all customers want all of these service outputs. Instead, they tend to break up into groups of customers who want different service outputs. So, for the purposes of channel design, customers can be segmented into groups who care about the same service outputs. And again, remember that these are not necessarily different customers segments, but different groups of channel segments.

Continuing with our example, think about one group of customers who want convenience, product selection and variety, information and perhaps low prices for computers. Now consider another group of customers who want ongoing relationships, installation, repair, and technical support. This would represent two "segments" of customers who want different service outputs.

With this as a foundation, we can think about creating a distribution channel for the different channel segments. This is often a creative exercise. But first, let’s think of a straightforward exercise. Assume that one way to provide convenience, product selection and variety, information and low prices is through a mass retail outlet. But perhaps another way is through the Internet. These would then become two options that a firm would consider because they both provide the service outputs the customers require.

But we can be more creative by saying that convenience, product selection and variety, and low prices is provided by the Internet, but information is provided by a retailer. If you understand that customers don’t mind getting these service outputs from different sources, their needs are satisfied by this arrangement.

To see the possibilities more fully, imagine a customer segment (not a channel segment) that wants the benefit "high performance" for a seller's product. But this customer segment has two demographic "size" descriptors: small and big firms. Now let’s focus on the large firms and ask what are their service output requirements? Now assume they want technical information and support, close relationships, fast delivery and product variety. A firm that sells to this segment and descriptor may need to provide all these outputs, and indeed some firms can. But the seller can also group together various channel members who jointly provide these outputs. This could be seen in the following figure. Here salespeople provide the relationships and technical information, distributors provide the delivery, and agents provide product variety.