Channel Strategy: Going to Market

XMBA 206.1 Session 8

Ganesh 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 dealer service and support

 

Dell targeted the expert market

sold thru 1-800 number. Direct marketing cut out the channel fat piggybacked upon IBM open architecture

Ganesh Iyer

Key Learning Integrated Channel and Pricing Strategy



Channel decisions must always go hand in hand with Segmentation, 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.

Ganesh Iyer

Learning


Coordinating channels is critical for efficient behavior of retailers. Channel decisions go hand in hand with the other elements of the marketing mix. Channel decisions have greatest the most long-term impact and are the hardest among all marketing strategy to change.

Ganesh Iyer

Why Use Channel Intermediaries?

Without Intermediaries Milk P1 Bread P2 ShampooP3 Soap P4

C1

C2

C3

Reducing Transaction Costs

With Intermediaries P1 P2 Wholesaler or Retailer C1
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P3

P4

C2

C3
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Why Channel Intermediaries?

Customers buy baskets or assortments of goods. Economizes on the time 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 demand fluctuations for the manufacturers. Financing Examples automobiles or appliances

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Types of Channel Intermediaries Goodyears Distribution

Industry Garages W. House clubs Mass Merchandisers Manufacturer Owned Independent Other 6 6 12 9 63 4 Goodyear 0 0 0 27 58 (50 indp. 8 franchises) 15

What does this imply?

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Goodyears Distribution
Goodyear penetration 4400 outlets vs. Michelin 7000 outlets. What are the pros and cons of Goodyear's selective distribution. What does Goodyear gain from its focus on the independent dealer channel? What is the role of Goodyears company-owned outlets?

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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 manufacturer desires This is called Channel Conflict Key problems with independent channels = Channel Conflict. Each member has her own private interests or profits in mind. Retail perspective may be more short term short-term profits than 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 down stream channel member no worse than before. Shared with the channel members to reward them for providing better service. The challenge is to get the retailers to behave in a conventional channel with independent retailers

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Channel Conflict and Coordination Double Marginalization

C = 10 Demand for Goodyear Tiempo at your dealership

Manufacturer
Goodyear
W First stage

P 30 40 50

D 10 6 2

Retailer
(Independent Dealer)
P Second stage

Market
D(P)
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Double Marginalization
P 30 40 50 30 40 50 30 40 50 30 40 50
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D 10 6 2 10 6 2 10 6 2 10 6 2

Ret_Profit 20*10 = 200 30*6 = 180 40*2 = 80 10*10 = 100 20*6 = 120 30*2 = 60 0 10*6 = 60 20*2=40 X 0 10*2=20

Mfg_Profit 0 0 0 10*10 = 100 10*6 = 60 10*2 = 20 200 20*6 = 120 20*2=40 X 180 30*2=60

Total_Profit 200 180 80 200 180 80 200 180 80 X 180 80

W = 10

W = 20

W = 30

W = 40

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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 little demand 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 it helps the manufacturer to lower wholesale price without sacrificing profits.

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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 of Franchises



Exclusive territories: Retailer is guaranteed all consumers in a territory? 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. Less of a threat for independent dealers. Warehouse clubs are more of a threat.  Mass merchandisers sell only 34% of private labelless interested in bait and switch.  Independent dealers are becoming less Goodyear loyal. Using Goodyear name to bait-and-switch to private labels. Going to mass merchandisers might counterbalance 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 customers into the store and then sell other higher margin brands (Baitand-Switch)
Possible problem with Goodyear dealers as the market matures and becomes more competitive.

Solution  Exclusive Dealing Contract: Requirement not to carry other brands.

Provides incentives to retailers to invest in service to build up the product and therefore the manufacturer to invest in advertising and brand building.

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Channel Conflict and Coordination Manufacturer Free-Riding



Manufacturer may not provide the promised advertising support for the retailers local market. Manufacturers may open supply to competing retailers after a retailer has invested in developing the manufacturers product.

Solution  Exclusive territories.



Why are automobiles often sold through exclusive dealerships in exclusive territories.

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Consumer Segmentation and Channel Design

Design channels to serve the needs of target consumer segments. 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 TV advertising determines how important is the role of retail information Primary information (education, demonstration, service) Early phase of product life cycle PLC. Need a dedicated authorized dealer channel which does not deal with 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 which display products side by side.
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Ganesh Iyer

Learning


Coordinating channels is critical for efficient behavior of retailers. Channel decisions go hand in hand with the other elements of the marketing mix. Channel decisions have greatest the most long-term impact and are the hardest among all marketing strategy to change.

Ganesh Iyer

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