Engineering 245 The Lean Launch Pad Session 5: Channels Professors Steve Blank, Ann Miura-Ko, Jon Feiber

Channels  How does each customer segment want to be reached?  Through which interaction points? 1

Test Hypotheses: Channel 2

Two Critical Questions about Channels First one is obvious: How do you want to sell your product? 3 1 Second one is subtle, but more important than the first: How does your customer want to buy your product? 2

How Do You Want to Sell Your Product? Yourself Through someone else Retail Wholesale Bundled with other goods or services 4

How Does Your Customer Want to Buy Your Product? Same day Delivered and installed Downloaded Bundled with other products As a service … 5

Nature of Product Impacts Channel: Atoms or Bits?  Access to customers changes dramatically  Logistics related to product complexity  People as products 6

The Sales “Channel” 7 Web System Integrators Direct Sales Force Value-Added Resellers (VARs) Dealers Distributors Retail/Mass Merchants Your Company Your Customers

Types of Channels  OEM  VAR  Reseller  Distributor 8 DirectIndirectLicensing

The Channel as a Customer  Some products are embedded in others (OEM)  Some products are resold by others (VARs)  Some products are distributed by others  Who’s the customer? 9

Distribution Complexity 10 Evangelists Service Technicians Higher Value Added Higher Volume Direct Sales VARs Retail Web, Telesales Systems Integrators Mainframes Minis LANs PC Servers Desktop PCs Printers Keyboards Toner WANs Global Systems Solution Complexity Marketing Complexity

How Are Channels Compensated?  Commission  Percentage of sales price  Discounted pre-purchase 11

How Are Channels Motivated or Incented?  Money! – what makes them the most?  Training  Marketing to the channel  SPIF 12

Channel Economics: “Direct” Sales 13 Cost of Goods (Supply Chain) Profit + SG&A + R&D End Consumer EU Discounts Revenue List Price Source:Mark Leslie, Stanford GSB

Channel Economics: Resellers 14 Cost of Goods (Supply Chain) Profit + SG&A + R&D End Consumer EU Discounts Reseller Revenue List Price Source:Mark Leslie, Stanford GSB

Cost of Goods (Supply Chain) Profit + SG&A + R&D Channel Economics: Distributors/Resellers 15 End Consumer EU Discounts Reseller Distributor Revenue List Price Source:Mark Leslie, Stanford GSB

Channel Economics: OEM or IP Licensing Your Product Becomes Your Customer’s COGs 16 Source:Mark Leslie, Stanford GSB End Consumer Reseller Profit + SG&A + R&D Cost of Goods (Supply Chain) EU Discounts ResellerDistributor Master Distributor Profit + SG&A + R&D Cost of Goods (Supply Chain) Revenue List Price

Example: Book Publishing 17 Publisher National Distributor PrinterWholesalerRetailerCustomer

Book Publishing Percent of Retail 18 For their efforts, distributors take an additional 10% of retail. That means you get 35% of retail, the distributor gets 10%, the wholesaler gets 15% and the retailer gets 40% less any discount they offer the end customer Publisher National Wholesaler DistributorRetailerCustomer 35%15%10%40% $7.00$3.00$2.00$8.00$20.00

Book Publishing Economics 19 Publisher National Distributor WholesalerRetailerCustomer Wholesale costs Markup Allowances Payment guarantees Payments Bills Credit guarantees Payment guarantees Return rights Credits

Book Publishing Delivery 20 Publisher National Distributor PrinterWholesalerRetailer Merchandise titles Sell magazines Acknowledge returns Determine allocations Dispose of returns Prepare film (content)  Establish identity  Create demand Prepare galleys Receive  Schedules  Print orders  Bundle counts  Film Print and ship magazines Deliver orders

Bits vs. Atoms 21 Bits Physical Product WebPhysical Channel

Product and Channel Are Bits 22 Bits Physical Product WebPhysical Channel  Rapid Agile and Customer development  Fastest to acquire early customers and scale

Web 2.0 – Product and Channel Are Bits 23 Bits Physical Product WebPhysical Channel  Google  Twitter  Facebook  Zynga  Cloud Services

Product Is Bits, but Channel Is People 24 Bits Physical Product WebPhysical Channel  Rapid Agile and Customer development  Fastest to acquire early customers and scale  Rapid Agile and Customer development  Traditional sales channel  May require installation

Traditional Enterprise Software 25 Bits Physical Product WebPhysical Channel  Google  Twitter  Facebook  Zynga  Cloud Services  Microsoft  SAP  Oracle

Physical Products Sold Over the Web 26 Bits Physical Product WebPhysical Channel  Rapid Customer development  Logistics, shipping and manufacturing critical  Customer service  Rapid Agile and Customer development  Fastest to acquire early customers and scale  Rapid Agile and Customer development  Traditional sales channel  May require installation

Killing Traditional Storefronts 27 Bits Physical Product WebPhysical Channel  Zappos  Amazon  Cafepress  Netflix  Consumer electronics  Google  Twitter  Facebook  Zynga  Cloud Services  Microsoft  SAP  Oracle

The Factories May Be in China 28 Bits Physical Product WebPhysical Channel  Rapid Customer development  Logistics, shipping and manufacturing critical  Customer service  Rapid Agile and Customer development  Fastest to acquire early customers and scale  Longer customer feedback cycle  May require large capital requirements for scale  Rapid Agile and Customer development  Traditional sales channel  May require installation

We Still Make Things that Need Salespeople 29 Bits Physical Product WebPhysical Channel  Zappos  Amazon  Cafepress  Netflix  Consumer electronics  Google  Twitter  Facebook  Zynga  Cloud Services  Cars  Solar panels  Wind turbines  Bookstores  Consumer electronics  Microsoft  SAP  Oracle