Channel Design The Assumptions of The Channel Manager

Overview Overview of Channel Design perspectives of Coughlin, Anderson, Stern and El- Ansary. Alternative reality or gross margin perspectives. Retailer, or an “intermediary’s” perspective.

Segmenting Markets Different consumer segments will ultimately be best satisfied by a channel providing service output levels which minimize their costs of –Bulk breaking –Spatial convenience –Waiting or delivery time –Product variety The “Channel Manager” determines the needs of the segment(s) and the attractiveness of each group.

Consumer Search Consumers seek out the “channel” best designed to minimize their search costs knowing the distribution of prices in the market: –Spatial convenience, minimization of travel costs. –Assortment, relevant to either extensive or limited problem solving. Consumer determines the most successful channel

Selecting Output Suppliers Based on Cost Efficiency of Channel Flows Physical possession: Storage and delivery costs Ownership: Inventory carrying costs Promotion: Personal selling, advertising, sales promotions Negotiation: Time and legal costs Financing: Credit terms, conditions of sales Risking: Price guarantees, warranties, repair Ordering: Order processing costs Payment: Collections, bad debt costs

Zero-Based Channel Design “A zero-based channel design is one that (1) meets the target market segment’s demands for service outputs, (2) at minimum cost of performing the necessary channel flows that produce those outputs.” Zero-based channel design suggests the channel-members will driven to minimize costs of serving the “Channel Manager’s” target market. No channel intermediary has patentable technology protecting them from competition.

The Equity Principle If costs and benefit weights are assigned to eight flows for a channel and… The proportion of that tasks performance is allocated among the channel member(s)… A normative profit share can be estimated from the weight given to the flow and the proportion given to the intermediary

Gross Margin Reality Intermediary gross margins do no “mirror” normative profit shares, but are determined by market competition, and their “persistence” in the market. With few exceptions, gross margins must cover the costs of performing the flows. Competition, or protection of competition, is determined by (1) trade area geography and (2) assortment uniqueness.

Suppliers Offer Products to Distributors; Distributors Choose Suppliers What determines the products and lines selected by intermediaries? Can the supplier offer the distributor an exclusive trade territory? Could the distributor drop the line and “punish” the supplier if the exclusivity were to vanish.

Assortment Dimensions n Merchandise line: A group of closely related products intended for the same use. (Consistent with the Census of Retail Trade ML categories). n Variety: The number of broadly defined merchandise lines, such as sporting goods, housewares, women's clothing. n Breadth or assortment: The number of merchandise brands (suppliers), such as Nike, New Balance, Saucony, Adidas, found within a broadly defined merchandise line. n Depth: The number of SKUs (stock-keeping units) within each brand of merchandise line, sizes, colors, models.

Factors increasing depth: n Customers demands: consumer prefer stores which offer a choice. n Strategic demands: minimize dependence on one supplier. n Competitive demands: differentiation provides a means to non-price competition.

Consumer issues which increase assortment depth n Probability of a shopper finding the brand they need increases with depth. n Shoppers may pay a higher price if they can learn the price distribution during an in-store search. n Shoppers gain on a store visit by seeing new merchandise. n Brand loyalty, makes it difficult to eliminate an unprofitable brand.

Competitive issues affecting assortment depth n Differentiation: carrying unique SKUs which can't be compared on price. n Duplication: carrying competitors' products at a lower price (or matching the competitors price.) n Both tactics can increase the degree to which the store is shopped. n Changes with types of goods: – Stores completely differentiated: Furniture – Stores with most duplication: Grocery

Strategic issues which increase assortment breadth and depth n Heavy dependence on a single supplier lowers the retailer's "autonomy," and ultimately lowers the ability of the retailer to increase his gross margin. n An over-riding philosophy to keep supplier markets as competitive as possible is beneficial to the retailer's long- term interests. n There are rewards from maintaining good vendor relationships, but at the cost of: – Carrying more of the supplier's line. – Providing optimal display of their merchandise.

Determining Variety: Merchandise Lines n Specialty retailers frequently have difficulty being in a market which can only support one line--particularly if demand is seasonal for that merchandise line. n Look to maintain revenue (and profitability) by adding an additional line. n New merchandise line can provide a retailer access to: – Growth market – A line which increases the stores importance as a "destination" or point of purposeful shopping. – A market with less retail competition.

New product line should complement existing lines: n Specialty retailer should add a line important to it's target segment. n Product line could be a higher margin line sold with existing products. n New product line may need additional or "dedicated" personnel.