lecture9 distribution
TRANSCRIPT
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What is a Distribution Channel?
. . . the set of inter-dependent organizations
nvo ve n e process o ma ng a pro uc or
service available for use or consumption.
A channel is characterized by its:
Structure
e.g., direct vs. indirect, or how many levels
Organization or governance mechanism
e.g., vertical integration (ownership) or market Intensity of coverage, effectiveness of resellers
e.g., number of resellers, activities of resellers
No Intermediary
b = cost per contact, n = 5 customers, m = 2 manufacturers
C C
CC
M
C C
CC
M
C C
Note that the contact cost is multiplicative: b*n*m
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With Intermediary
b = cost per contact, n = 5 customers, m = 2 manufacturers
C C
CC
M M
I
C
Note that the contact cost is linear: b*(n+m)
What are Buyers Needs?
Information Logistics
What kind ofinformation is needed?
What kind of logisticsneeds exist?
What is the mosteffective and efficientway to provide it?
What is the mosteffective and efficientway to provide it?
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Information Needs
Primary information
uca on a ou as c pro uc ene s
Demonstrations and training
Advice and consultation on early use
Comparative information
Product comparisons (e.g., versus competition)
,
Quality assurance
Customization of transaction or product
Build to order, complex contract terms, etc.
Logistics Needs
Product variety
Breadth and depth of offerings
Convenience/accessibility
Ease of locating point of sale
Travel time
Time between order and receipt of goods
Lot size flexibility
Minimum order size or product size
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Informational and Logistic Needs
Economics
Information
Suppliers are typically lower cost providers of complex
information than channel intermediaries
Where information is critical, channels tend to becomeshorter
Logistics
Tends to improve as intermediaries hold inventory
Suppliers are typically higher cost providers of high logisticalservices than channel intermediaries
Where critical to the end-user, channels tend to becomelonger
Distribution and the Product Life
Cycle
Home Video Specialist
Circuit City Walmart
Ebay
Introduction Growth Maturity Decline
Information NeedLogistic Need
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A Channel Strategy Framework
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Channel Selection
ManagingDirect Sales
Activities
ManagingDistributorActivities
Managing Direct Sales
Productivityof the = Efficiency X Effectiveness
Salesforce (At Bats) (Batting Avg)
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Productivity Factors
Efficiency
ze ccoun coverage, ca ra e
Allocation (Territories, Products, Customers, etc.)
Organization (Specialty vs General Line)
Effectiveness
Compensation (Level, Salary vs Commission)
, ,
Tradeoffs can occur (e.g., a specialized sales force
will be less efficient but more effective)
Approaches to Sales Force Sizing
The same as last year method
,
Sales expense set as a percent of revenue
Budget process, match competition, etc.
Workload activity breakdown/buildup
Customers to be contacted
Call capacity per sales representative
Sales response analysis
Marginal returns versus marginal costs
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Response Analysis Approach
How does selling cost varywith sales force size?
0
2
4
6
8
10
12
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Costs and
Contribution Linear assumption illustrated atright
(Note: may also need toaccount for variablecompensation in an analysis)
How does dollar contributionum er o aes eps
Contribut ion Selling Costs
vary w t sa es orce s ze
Diminishing marginal returns
expected
How to determine this?
Sales Force Compensation
Overall level of sales rep compensation What should be the target compensation (total rep
income) for good selling performance?
Labor market factors will govern this
Assess via industry surveys, turnover rates
Salary vs Incentive What proportion of total target compensation
should be fixed salary versus commission? Role in sorting potential recruits
Insights from the principal-agent research
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Salary vs Commission
100% commission (A)
Dollar Sales
Compensation When would you
use Plan A vs Plan B?
Who is attracted toPlan A vs Plan B?
Dollar Sales
Compensatio
nUS average is:
60% salary40% variable
Managing an Indirect Channel
Setting the Level of Distribution Intensity
Managing Conflict
Vertical
Pepsi bottlers wanting to bottle Dr. Pepper
Horizontal
Car dealers complaining that other local dealers
are too aggressive in pricing
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Distribution Intensity
Having many outlets increases customers
It may also reduce the exclusivity of yourproduct
Both jeopardize margins
The Three Classic Alternatives
Exclusive Selective Intensive
Only One
Strong
LimitedNumber
Moderate
MaximumPossible
LowResellerSupport
Resellers pertrading area
None Moderate HighIntra-BrandCompetition
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Sources of Vertical Conflict
Some producer-reseller tension is inherent
oa vergence supp er vs rese er econom cs
Conflicting perceptions of roles (e.g., who ownsthe customer, who built the business)
Note: no noise at all could be a warning sign
Vertical conflict becomes a problem when the
end users the channel services (e.g.,
information and logistics) its marketingstrategy requires
Managing Reseller Efforts:
Building Supplier Power
Value of Brand
Reseller Efforts
ranc se x enof Consumer Pull Intensity
- - yRelations &Support
Programs
ResellerSwitching
Costs
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Balancing Power and Control
Control Over Reseller Actions
Demanding RelaxedSupplierPower
High Tight Relationship Free Riding Potential
LowVertical Conflict Loose Relationship
Sources of Horizontal Conflict
Distributors versus Direct Sales
e.g., HPs distributors vs. on-line direct sales
Dealers vs. dealers
Independents vs. captives,
e.g., Macys vs. Ralph Lauren Stores
Full service vs. discounters
e.g., Nordstrom vs. Mervyns vs. Costco
Intra-brand distribution too intense
e.g., Frys vs. CompUSA vs. Circuit City vs. Good Guys
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Some Strategies for Managing
Horizontal Conflict
Establish clear boundaries between channels
Delineation by product classification
Segmentation by size-of-order
Set appropriate level of distribution intensity
As distribution becomes more selective, reseller supportand merchandising efforts increase
Introduce multiple brands Different brands for different channels Private brands
Summary
Channel selection should be guided by the
needs for channel services (information,logistics)
When going direct, getting sales force sizingand compensation right are key success
When going indirect, setting intensity andmanaging conflict are key success factors
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Next class:
HP Printers
Second individual assignment due
Recommend & justify one of 3 options
Refer to syllabus for format and directionsOne page of text (11-point font size, single
spacing, and one-inch margins)
Optional one page of exhibits (spreadsheets,calculations, etc.; 11 point font size or larger and
one-inch margins)