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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 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
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Key LearningIntegrated Channel and Pricing Strategy
Channel decisions must always go hand in hand with Segmentation, Pricing and other elements of the marketing mix.
Dell’s 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 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.
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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
Reducing Transaction Costs
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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 IntermediariesGoodyear’s Distribution
Industry Goodyear
Garages 6 0
W. House clubs 6 0
Mass Merchandisers 12 0
Manufacturer Owned 9 27
Independent 63 58 (50 indp. 8 franchises)
Other 4 15
What does this imply?
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Goodyear’s 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 Goodyear’s company-owned outlets?
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Managing Retail IntermediariesChannel 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 CoordinationDouble Marginalization
ManufacturerGoodyear
ManufacturerGoodyear
Retailer(Independent Dealer)
Retailer(Independent Dealer)
MarketMarket
C = 10
W
P
P D
30 10
40 6
50 2
D(P)
Demand for Goodyear 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 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 royalty…Why?
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 CoordinationHorizontal Conflict
Horizontal Retailer “Free-Riding”: Services provided by one retailer helps other competing
retailers» McDonald’s 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 ½ of all tire buyers (emergency purchases) make same day purchases-- “be
within an arm’s 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 label…less 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 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 manufacturer’s brand to draw customers into the store and then sell other higher margin brands (Bait-and-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 CoordinationManufacturer 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 manufacturer’s 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 different…”grooves”
» 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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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.