Download - Channels Stu Summer 2008
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Channel Strategy: Going to Market
XMBA 206.1
Session 8
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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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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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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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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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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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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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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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Channel Conflict and Coordination
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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Channel Conflict and Coordination
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.