---
title: "No Middlemen Is the Biggest Marketing Lie (Part 3): Scientific Top-Level Channel Design"
description: "Why are Coca-Cola's direct-operated terminals and Master Kong's channel intensive cultivation traps for most companies? How does 'Lao Gan Ma', which has almost no sales staff, manage to do solid and meticulous market groundwork? This article reveals the ultimate answer to improving channel efficiency and ending the mutual friction between manufacturers and distributors."
author: "苗庆显"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2016-07-26"
language: "en"
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# No Middlemen Is the Biggest Marketing Lie (Part 3): Scientific Top-Level Channel Design

> Why are Coca-Cola's direct-operated terminals and Master Kong's channel intensive cultivation traps for most companies? How does 'Lao Gan Ma', which has almost no sales staff, manage to do solid and meticulous market groundwork? This article reveals the ultimate answer to improving channel efficiency and ending the mutual friction between manufacturers and distributors.

Introduction
**Why are Coca-Cola's direct-operated terminals and Master Kong's channel intensive cultivation traps for most companies?**
**How does 'Lao Gan Ma', which has almost no sales staff, manage to do solid and meticulous market groundwork?**
**How to end the mutual friction between manufacturers and distributors and improve channel efficiency? This article reveals the ultimate answer!**
After two issues of preview, the top-level channel design is now in full swing. This is a long article full of dry goods. To make it as 'vivid' as possible, we'll start with a few 'chestnuts' (examples).
Ten years ago, when Dali began making beverages, the industry was pessimistic.
Dali started out making pastries and biscuits, and their channel management was particularly loose. At that time, they had about a dozen salespeople but over a billion in sales. In the words of distributors, Dali's salespeople only knew how to 'push targets, chase payments, and force stock'. Meanwhile, the beverage industry was dominated by big names like Coca-Cola, Wahaha, and Master Kong, whose channel management was meticulous and down-to-earth. Many predicted Dali would stumble here.
Even now, you can find online predictions from industry insiders at that time: 'Just advertising won't work', 'Beverages aren't played this way', etc. There wasn't a single favorable analysis. Old Miao (the author) discussed this with industry insiders and media at the time: judging by channel tactics alone is too superficial. Looking at category development and market acceptance trends, I was optimistic about Dali. Of course, in that environment, Old Miao's view was considered 'idealistic'. (Damn, there are always people in this world who, when you talk to them with basic marketing theory, think you're idealistic, but in the end, nothing escapes these basic laws. It's truly anti-intellectual.)
The results are well known: Dali slapped many faces. Dali's beverages continued to be 'loose' as usual: a few hundred people doing tens of billions in sales. Distributors still said Dali's salespeople only knew how to 'push targets, chase payments, and force stock', and the distributors Dali recruited were mostly not the so-called 'professional' beverage distributors.
Compared to those who dismissed Dali merely because its channel tactics didn't conform to 'convention', Dali's vision was clearly higher, deeply understanding the essence of channel operations.
They started with top-level channel design, letting distributors take on the main regional promotion functions, while giving them greater incentives, setting higher thresholds and targets, and bringing in many non-beverage distributors (many so-called professional beverage distributors had actually degenerated into mere delivery agents, holding big brands but lacking real competitiveness, and thus of little value to Dali). Once the key link was grasped, everything fell into place: distributors' potential was unleashed, and some distributors who originally 'didn't know how' to do beverages began to do them well.
**It's simple to say: don't imitate other large beverage companies blindly. Companies should do what companies should do—produce good products, build brands, communicate with consumers—and not overstep their bounds. Let distributors do what distributors should do: regional operations. But set high standards for distributors. With clear responsibilities, rights, and interests between manufacturers and distributors, distributors' initiative is activated, and the company saves itself trouble.** (See 'No Middlemen Making a Profit Is the Biggest Marketing Lie (Part 2)' for the eight value functions and three core values of distributors.)
Many might think Old Miao is talking nonsense. The awesome Master Kong did channel intensive cultivation, and the even more awesome Coca-Cola did direct-operated terminals, and both were successful. So according to you, they were wrong? Well, Old Miao will continue to tear into this (skipping a 300-character story about 'carving a boat to find a sword'—i.e., being rigidly inflexible).
**There were two major premises for the success of channel intensive cultivation and direct-operated terminals back then.**
> **First, distributors were not professional.** At that time, distributors were generally 'sitting merchants' without market operation capabilities. Brand owners took the lead, at least demonstrating to them. Once distributors understood 'distribution', the cost for companies to operate regional markets would be much higher than for distributors, and most companies were also less professional than distributors.
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> **Second, labor costs were low.** You could hire a fresh college graduate, pump them up with enthusiasm, make them proud of their big company, pay them 800 yuan a month, and have them ride a bicycle to lay out a certain amount of Coca-Cola each day, or they'd have to drink it at home. Those days are gone forever.
Of course, another little scheme companies had was that by taking over the core functions of distributors, they could later control them at will.
In the marketing world, the most extreme examples are not Coca-Cola or Master Kong, but the health products industry in the 1990s.
In 1996, Sanzhu claimed to have done 8 billion in sales, but their distributors were the 'masters' from pharmaceutical companies who did almost nothing, so the company had to do everything itself. Thus, Sanzhu had over 600 branches nationwide and 150,000 marketing personnel, with per capita annual sales of just over 50,000 yuan. But at that time, it was already very profitable; now it would be a dead end.
Let's talk about a more brilliant example: Guiyang's 'Lao Gan Ma'. Tao Huabi, the 'national goddess' who claims not to understand marketing and is illiterate, has done channel operations very well and thoroughly.
While everyone was advocating 'channel intensive cultivation', she was still steadfastly adhering to the large regional agency system. Contrary to many companies that 'reduce vassals' when they grow big, Lao Gan Ma, after growing big, would expand the market area for well-performing distributors and let distributors manage distributors. Lao Gan Ma has very few salespeople, invests extremely little in this area, and market management is basically done by distributors.
In the words of a Lao Gan Ma distributor: 'Distributors managing the market are more diligent and reasonable than factory managers, and they will never speculate. Most importantly, they know how to coordinate internal conflicts among sub-distributors.'
What makes many companies ashamed is that Lao Gan Ma's seemingly loose channel model actually does extremely meticulous market work, and terminal performance is very strong. When Lao Gan Ma's chili sauce does a special offer, terminals rush to provide displays and DM. Healthy channel operations support Lao Gan Ma's billions in sales and rapid growth. The company also has more energy to do product innovation, brand building, strategic planning, and other things that companies should do.
Okay, after tearing through three types of cases, let's summarize.
The top-level channel designs of Master Kong, Coca-Cola, Sanzhu, and Hong Tao K were based on the premise that distributors were unprofessional or inactive, seized the opportunity of extremely low labor costs at the time, and used tough execution and 'human wave' tactics to complete the promotional functions that channel members should have done, thereby establishing their voice over channel members. These were extraordinary measures in a special market stage, achieving extraordinary results. So later imitators basically fell into the ditch because the market environment has changed.
Dali's success, though unusual to people at the time, was actually the most conventional. That is, 'Render unto God the things that are God's, and unto Caesar the things that are Caesar's.' Manufacturers do what manufacturers should do, distributors do what distributors should do, with clear responsibilities, rights, and interests. Everything has its own nature, and success comes from following its laws. Of course, with the strength of its brand, Dali's 'high standards and strict requirements' also put great pressure on distributors.
'Lao Gan Ma' directly ascended to immortality. Her channel operation has a professional term, which perhaps Tao Huabi herself doesn't know: 'vertical marketing system'. For professional details, you can refer to 'Marketing Management'. Old Miao will give a brief overview here.
Vertical marketing systems have developed rapidly in recent years and become the mainstream in European and American channel development because they solve a fundamental contradiction. As we mentioned in the previous article, producers, channel members, and retailers are three independent business entities loosely combined, with numerous contradictions. The repeated games among them generate a lot of internal friction, and the brand and the entire channel system easily fall into the 'tragedy of the commons'.
**A vertical marketing system is one in which producers, channel members, and even retailers form a unified alliance. The alliance can be a tightly integrated corporate system, a managed system, or a looser contractual system.**
Once this vertical system is formed, manufacturers and channel members have more common interests. Lao Gan Ma's large agency distributors gradually become 'branch offices' of Lao Gan Ma, and channel efficiency naturally improves significantly.
Perhaps Lao Gan Ma's vertical marketing system was an unintentional result of grasping the essence of channel operations. The truly deliberate and thorough vertical marketing systems are Gree and Wahaha's 'distribution alliances'. Efficient channels have always been one of the core competitive advantages of these two giants in their respective fields. If you understand this, you'll know that the so-called 1 billion bet between Lei Jun and Dong Mingzhu is simply a joke.
Unfortunately, such vertical integration is too rare in the domestic market. Most companies are still playing games with distributors, scheming, and digging pits, full of tricks. The inefficiency and internal friction of channels are shocking.
**Another integration method is called a 'horizontal marketing system', where two or more companies that lack resources but can complement each other form an alliance, act together, and create synergy to better perform channel functions. It is also called 'symbiotic marketing'.** The allies are not necessarily channel members; they can be within the industry, outside the industry, or even competitors. The alliance can be contractual or through a jointly established company. This method is even rarer in the domestic market, lacking sample analysis. If you see a successful case, please let Old Miao know. Thanks in advance.
Okay, through the summary of the above cases, let's sort out the seemingly high-sounding top-level channel design.
**The premise is that your channel objectives and suitable channels based on product fit have been selected.**
**Step 1: Choose the number of channel levels and define the nature of the channel.**
Usually, consumer goods have a two-level structure of production, wholesale, and retail. Products with short shelf life, high transportation costs, or particularly niche products tend to reduce channel levels. Conversely, products that are hard to cover in certain areas can increase channel levels, becoming a three-level structure of production, wholesale, second wholesale, and retail. Bulk goods and industrial products often have a one-level structure of production and wholesale, and some are direct sales.
The nature of the channel refers to whether to choose professional or general distributors, intensive distribution or exclusive distribution, open or closed channels. If various channels are combined, which is the focus? What role does each channel play?
**Step 2: Formulate sales policies.**
When 'sales policies' are mentioned, many distributors and salespeople get excited, rattling off various rebates, discounts, purchase incentives, store entry incentives, distribution support, expense support, etc. These are all 'sales incentives', not sales policies. They are the 'branches', while the 'root' is the sales policy. If the sales policy is unclear, numerous sales incentives will only make things more chaotic.
Sales policies are used to define the responsibilities, rights, and interests of manufacturers and intermediaries. Where should the eight value functions of intermediaries we mentioned earlier be reflected? What benefits should they derive? **Sales policies are the fundamental outline for defining the responsibilities, rights, and interests of channel members**, and **the main carrier of sales policies is the distribution contract**.
Over the years, Old Miao has found that many distributors don't even read the contract, only caring about the numbers at the end: 'What's the target this year?', 'How much rebate?', 'How much expense?'. This is very problematic, and future manufacturer-distributor conflicts often stem from this. Of course, it's also related to the fact that many manufacturers make contracts full of empty words. Manufacturers and distributors, especially distributors, must learn to sign contracts, sign clearly, not just the distribution contract, but also sign supplementary agreements for every new situation, clarifying responsibilities, rights, and interests.
**Step 3: Match the price system with the sales policy.**
**A price system table is a channel profit distribution map.** Therefore, pricing a product is not just about setting an acceptable retail price for consumers. Pricing also determines how much profit is distributed and how. Channel profit distribution cannot exist in isolation; it must correspond to the responsibilities and obligations of each channel member. **The price system and sales policy are inseparable.**
**Step 4: Determine the integration direction.**
Conflicts between manufacturers and distributors often arise after a certain stage of cooperation. Early on, there are more common interests, but in loose cooperation, the divergence of interests grows over time. It's too late to fix things when major conflicts appear. Therefore, at the early stage of cooperation, it's necessary to clarify deeper future cooperation, form more mutual benefits, **not just paint a rosy picture, but form written agreements**. If possible, gradually establish horizontal or vertical marketing systems.
The seemingly high-sounding top-level design is actually these plain contents. A scientific top-level design should meet the following requirements:
Only after this comes channel evaluation and management, which includes incentives and penalties. Many people are obsessed with rebates, initial stock, and various rewards at this stage. In fact, if the top-level channel design is smooth, why would you need such a dazzling array of 'sales incentives'? Just look at Dali and Lao Gan Ma.
Chairman Mao said: 'Party building, armed struggle, and the united front are the three magic weapons for revolutionary success.' **In doing business in China, team building, marketing, and manufacturer-distributor alliances are the three magic weapons.** Don't turn 'united front targets' into marketing targets. Reduce scheming and mutual digging. Only by establishing a scientific top-level channel design can you fully unleash the power of the 'united front'.
-END-
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