1 Ganesh Iyer Channel Strategy: Going to Market XMBA Session 8

2 Ganesh Iyer Dell Direct l Fostered a new age of price competition. Priced 20 to 30% below IBM and consistently l 22 yr old UT Austin marketing major, initial seed capital of 80K l IBM open architecture, »investment in R&D, advertising and sales force support. »Sold through regular distribution channels. Depended upon dealer service and support l Dell targeted the “expert market” »sold thru number. »Direct marketing cut out the channel fat »piggybacked upon IBM open architecture

3 Ganesh Iyer Key Learning Integrated Channel and Pricing Strategy l Channel decisions must always go hand in hand with Segmentation, Pricing and other elements of the marketing mix. l 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.

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

5 Ganesh Iyer Why Use Channel Intermediaries? Wholesaler or Retailer With Intermediaries Milk P1Bread P2ShampooP3Soap P4 C1C2C3 P1P2P3P4 C1C2C3 Without Intermediaries Reducing Transaction Costs

6 Ganesh Iyer Why Channel Intermediaries? l Customers buy baskets or “assortments” of goods. Economizes on the time cost of shopping l Retail Service is most efficiently provided by an intermediary »product demonstration, after-sales service l Inventory carrying »Intermediaries provide inventory buffer. Hedge against demand fluctuations for the manufacturers. l Financing »Examples automobiles or appliances

7 Ganesh Iyer Types of Channel Intermediaries Goodyear’s Distribution IndustryGoodyear Garages60 W. House clubs60 Mass Merchandisers120 Manufacturer Owned927 Independent6358 (50 indp. 8 franchises) Other415 What does this imply?

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

9 Ganesh Iyer Managing Retail Intermediaries Channel Conflict l When each member of the channel is an independent business, retailers might not behave according to the manufacturer desires »This is called Channel Conflict l 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

10 Ganesh Iyer Solution to Channel Conflict: Channel Coordination General Principle l Manufacturers must find ways to maximize total channel profits. »Why? l 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. l The challenge is to get the retailers to “behave” in a conventional channel with independent retailers

11 Ganesh Iyer Channel Conflict and Coordination Double Marginalization Manufacturer Goodyear Manufacturer Goodyear Retailer (Independent Dealer) Retailer (Independent Dealer) Market C = 10 W P PD D(P) Demand for Goodyear Tiempo at your dealership First stage Second stage

12 Ganesh Iyer Double Marginalization PDRet_ProfitMfg_ProfitTotal_Profit *10 = *6 = *2 = W = *10 = *6 = 12010*6 = *2 = 6010*2 = XXX *2=2030*2=6080 W = 20 W = *6 = 6020*6 = *2=40 80 W = 30

13 Ganesh Iyer Double Marginalization Problem l What wholesale price will the manufacturer charge? »Manufacturer wants high W, l But this forces retailer to charge high retail prices with too little demand l Can the manufacturer do better?

14 Ganesh Iyer Solution to Double Marginalization l Two-Part Tariff: »McDonalds charges Upfront Franchise Fees from its franchise and a variable royalty…Why? l 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? l Manufacturer Profits = 195, Retailer Profits = 5 »Retail price = low at 30 »Demand = high at 10. l Upfront Franchise fees helps in solving channel conflict because it helps the manufacturer to lower wholesale price without sacrificing profits.

15 Ganesh Iyer Channel Conflict and Coordination Horizontal Conflict Horizontal Retailer “Free-Riding”: l 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 l Random Monitoring of Franchises l Exclusive territories: Retailer is guaranteed all consumers in a territory? What are the benefits? »Saturn dealerships »Prevents free-riding of retail services.

16 Ganesh Iyer Should Goodyear Expand distribution to Mass Merchandisers?

17 Ganesh Iyer Should Goodyear Expand distribution to Mass Merchandisers? Pros l Over ½ of all tire buyers (emergency purchases) make same day purchases-- “be within an arm’s length of desire” unplanned purchases. l Michelin and others already everywhere l Mass merchandisers account for a declining percentage of replacement l (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. l Mass merchandisers sell only 34% of private label…less interested in bait and switch. l 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 l Increased Price Competition l Independent dealers might respond by supporting private labels l Intensive distribution  Erosion of brand loyalty

18 Ganesh Iyer Vertical Retailer Free-Riding l 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 l 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.

19 Ganesh Iyer Channel Conflict and Coordination Manufacturer Free-Riding l Manufacturer may not provide the promised advertising support for the retailers local market. l Manufacturers may open supply to competing retailers after a retailer has invested in developing the manufacturer’s product. Solution l Exclusive territories. l Why are automobiles often sold through exclusive dealerships in exclusive territories….

20 Ganesh Iyer Consumer Segmentation and Channel Design l Design channels to serve the needs of target consumer segments. l Which channel to use depends upon which consumer segment »comparison shopper vs. product information vs. after-sales service. »emergency vs. planned l Evolution of consumer behavior to one-shop shopping has affected tire channels.

21 Ganesh Iyer Information Needs and Channel Design l 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 l 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. l 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.

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