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Channel Strategy: Going to Market

XMBA 206.1Session 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 GoodyearGarages 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

Retailer(Independent Dealer)

Market

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.