channels stu summer 2008

8/6/2019 Channels Stu Summer 2008

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1Ganesh Iyer

Channel Strategy: Going to Market

XMBA 206.1

Session 8


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2Ganesh Iyer

Dell Direct

Fostered a new age of price competition. Priced 20 to 30%below IBM and consistently

22 yr old UT Austin marketing major, initial seed capital of 80K

IBM open architecture,

investment in R&D, advertising and sales force support.

Sold through regular distribution channels. Depended upon dealerservice and support

Dell targeted the expert market

sold thru 1-800 number.

Direct marketing cut out the channel fat

piggybacked upon IBM open architecture


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Key Learning

Integrated Channel and Pricing Strategy

Channel decisions must always go hand in hand withSegmentation, Pricing and other elements of the marketing mix.

Dells direct was possible because it was an integrated strategy Right target identification

Direct marketing, no distribution or salesforce cost.

no advertising

And so lower price can be delivered to the price sensitive target

consumer.


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Ganesh Iyer

Learning

Coordinating channels is critical for efficient behavior ofretailers.

Channel decisions go hand in hand with the other elements ofthe marketing mix.

Channel decisions have greatest the most long-term impact andare the hardest among all marketing strategy to change.


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Ganesh Iyer

Why Use Channel Intermediaries?

Wholesaleror Retailer

With Intermediaries

Milk P1 Bread P2 ShampooP3 Soap P4

C1 C2 C3

P1 P2 P3 P4

C1 C2 C3

Without Intermediaries

ReducingTransactionCosts


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Why Channel Intermediaries?

Customers buy baskets or assortments of goods. Economizes on thetime cost of shopping

Retail Service is most efficiently provided by an intermediary

product demonstration, after-sales service

Inventory carrying

Intermediaries provide inventory buffer. Hedge against demandfluctuations for the manufacturers.

Financing

Examples automobiles or appliances


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Ganesh Iyer

Types of Channel Intermediaries

Goodyears Distribution

Industry Goodyear

Garages 6 0

W. House clubs 6 0

Mass Merchandisers 12 0

Manufacturer Owned 9 27

Independent 63 58 (50 indp. 8franchises)

Other 4 15

What does this imply?


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9Ganesh Iyer

Managing Retail Intermediaries

Channel Conflict

When each member of the channel is an independent business,retailers might not behave according to the manufacturerdesires

This is called Channel Conflict

Key problems with independent channels = Channel Conflict.

Each member has her own private interests or profits inmind.

Retail perspective may be more short term short-term profitsthan the manufacturer.

National vs. Local perspective


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Solution to Channel Conflict:

Channel Coordination

General Principle

Manufacturers must find ways to maximize total channel profits.

Why?

The incremental profits can be used in two ways:

Absorbed by the manufacturer leaving the retailer or other downstream channel member no worse than before.

Shared with the channel members to reward them for providingbetter service.

The challenge is to get the retailers to behave in a conventionalchannel with independent retailers


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Channel Conflict and Coordination

Double Marginalization

ManufacturerGoodyear

Retailer

(Independent Dealer)

Market

C = 10

W

P

P D

30 10

40 6

50 2

D(P)

Demand forGoodyear Tiempo at your dealership

First stage

Second stage


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12Ganesh Iyer

Double Marginalization

P D Ret_Profit Mfg_Profit Total_Profit

30 10 20*10 = 200 0 200

40 6 30*6 = 180 0 180

50 2 40*2 = 80 0 80

W = 10

30 10 10*10 = 100 10*10 = 100 200

40 6 20*6 = 120 10*6 = 60 180

50 2 30*2 = 60 10*2 = 20 80

30 10 X X X

40 6 0 180 180

50 2 10*2=20 30*2=60 80

W = 20

W = 40

30 10 0 200 200

40 6 10*6 = 60 20*6 = 120 180

50 2 20*2=40 20*2=40 80

W = 30


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Double Marginalization Problem

What wholesale price will the manufacturer charge?

Manufacturer wants high W,

But this forces retailer to charge high retail prices with too littledemand

Can the manufacturer do better?


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14Ganesh Iyer

Solution to Double Marginalization

Two-Part Tariff: McDonalds charges Upfront Franchise Fees from its franchise and a

variable royaltyWhy?

Two part tariff =F

+ Wq Suppose the manufacturer asks the retailer for an upfront Franchise Fee (F= $195) and in return charges W = c = 10

What happens?

Manufacturer Profits = 195, Retailer Profits = 5 Retail price = low at 30

Demand = high at 10.

Upfront Franchise fees helps in solving channel conflict because ithelps the manufacturer to lower wholesale price without sacrificingprofits.


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Horizontal Conflict

Horizontal Retailer Free-Riding:

Services provided by one retailer helps other competing retailers McDonalds franchisees in a region.

Free riding of pre-sale informational services.

Goodyear selling to discounters and mass merchandisers.

Solutions

Random Monitoring ofFranchises

Exclusive territories: Retailer is guaranteed all consumers in aterritory? What are the benefits?

Saturn dealerships

Prevents free-riding of retail services.


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Should Goodyear Expand distribution to Mass

Merchandisers?


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Should Goodyear Expand distribution to Mass

Merchandisers?

Pros

Over of all tire buyers (emergency purchases) make same day purchases--be within an arms length of desire unplanned purchases.

Michelin and others already everywhere

Mass merchandisers account for a declining percentage of replacement

(12% in 91 28% in 1976). Their prices are 97% of independent dealers. Lessof a threat for independent dealers. Warehouse clubs are more of a threat.

Mass merchandisers sell only 34% of private labelless interested in bait andswitch.

Independent dealers are becoming less Goodyear loyal. Using Goodyear nameto bait-and-switch to private labels. Going to mass merchandisers might counter-

balance this

Cons

Increased Price Competition

Independent dealers might respond by supporting private labels

Intensive distribution Erosion of brand loyalty


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Vertical Retailer Free-Riding

Retailer may use the manufacturers brand to draw customersinto the store and then sell other higher margin brands (Bait-and-Switch)

Possible problem with Goodyear dealers as the market maturesand becomes more competitive.

Solution

Exclusive Dealing Contract: Requirement not to carry other

brands. Provides incentives to retailers to invest in service to build up theproduct and therefore the manufacturer to invest in advertising andbrand building.


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Manufacturer Free-Riding

Manufacturer may not provide the promised advertising supportfor the retailers local market.

Manufacturers may open supply to competing retailers after aretailer has invested in developing the manufacturers product.

Solution

Exclusive territories.

Why are automobiles often sold through exclusive dealerships inexclusive territories.


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Consumer Segmentation and Channel Design

Design channels to serve the needs of target consumersegments.

Which channel to use depends upon which consumer segment comparison shopper vs. product information vs. after-sales service.

emergency vs. planned

Evolution of consumer behavior to one-shop shopping has

affected tire channels.


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Information Needs and Channel Design

Customers could identify Aquatread as being differentgrooves

Can the role of this feature be easily communicated by TVadvertising determines how important is the role of retailinformation

Primary information (education, demonstration, service)

Early phase of product life cycle PLC.

Need a dedicated authorized dealer channel which does not dealwith competitive products.

Comparative information Later phase of PLC need to accentuate benefits versus

competition.

If you have a superior product you can move into channels whichdisplay products side by side.


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Learning

Coordinating channels is critical for efficient behavior ofretailers.

Channel decisions go hand in hand with the other elements ofthe marketing mix.

Channel decisions have greatest the most long-term impact

and are the hardest among all marketing strategy to

change.

channels stu summer 2008

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