Channel Strategy: Going to Market

XMBA 206.1
Session 8

Ganesh Iyer

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

Ganesh Iyer

Key Learning
Integrated Channel and Pricing Strategy

Channel decisions must always go hand in hand with

Segmentation, Pricing and other elements of the marketing mix.

Dells direct was possible because it was an integrated strategy

Ganesh Iyer

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.

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.

Ganesh Iyer

Why Use Channel Intermediaries?

Without Intermediaries
Milk P1

Bread P2

C1

ShampooP3

C2

Soap P4

C3

Reducing
Transaction Costs
With Intermediaries
P1

P2

P3

P4

Wholesaler
or Retailer
C1
Ganesh Iyer

C2

C3
5

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

Ganesh Iyer

Types of Channel Intermediaries

Goodyears Distribution
Industry

Goodyear

Garages

W. House clubs

Mass Merchandisers

12

Manufacturer Owned

27

Independent

63

58 (50 indp. 8
franchises)

Other

15

What does this imply?

Ganesh Iyer

Goodyears 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 Goodyears company-owned outlets?

Ganesh Iyer

Managing Retail Intermediaries

Channel 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

Ganesh Iyer

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

Ganesh Iyer

10

Channel Conflict and Coordination

Double Marginalization
C = 10

Manufacturer
Manufacturer
Goodyear
Goodyear

Demand for Goodyear Tiempo at your dealership

30

10

Retailer
Retailer

40

(Independent
(IndependentDealer)
Dealer)

50

First stage

Second stage

Market
Market
D(P)
Ganesh Iyer

11

Double Marginalization

Ganesh Iyer

Ret_Profit

Mfg_Profit

Total_Profit

30

10

20*10 = 200

200

40

30*6 = 180

180

50

40*2 = 80

80

30

10

10*10 = 100

10*10 = 100

200

40

20*6 = 120

10*6 = 60

180

50

30*2 = 60

10*2 = 20

80

30

10

200

200

40

10*6 = 60

20*6 = 120

180

50

20*2=40

20*2=40

80

30

10

40

180

180

50

10*2=20

30*2=60

80

W = 10

W = 20

W = 30

W = 40

12

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?

Ganesh Iyer

13

Solution to Double Marginalization

Two-Part Tariff:
McDonalds charges Upfront Franchise Fees from its franchise and a
variable royaltyWhy?

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.

Ganesh Iyer

Upfront Franchise fees helps in solving channel conflict because it

helps the manufacturer to lower wholesale price without sacrificing
profits.

14

Channel Conflict and Coordination

Horizontal Conflict
Horizontal Retailer Free-Riding:
Services provided by one retailer helps other competing retailers
McDonalds franchisees in a region.
Free riding of pre-sale informational services.
Goodyear selling to discounters and mass merchandisers .

Solutions
Random Monitoring of Franchises

Ganesh Iyer

Exclusive territories: Retailer is guaranteed all consumers in a

territory? What are the benefits?
Saturn dealerships
Prevents free-riding of retail services.

15

Should Goodyear Expand distribution to Mass

Merchandisers?

Ganesh Iyer

16

Should Goodyear Expand distribution to Mass

Merchandisers?
Pros

Over of all tire buyers (emergency purchases) make same day purchases-- be
within an arms 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 labelless interested in bait and switch.
Independent dealers are becoming less Goodyear loyal. Using Goodyear name to baitand-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

Ganesh Iyer

17

Vertical Retailer Free-Riding

Retailer may use the manufacturers brand to draw customers

into the store and then sell other higher margin brands (Baitand-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.

Ganesh Iyer

18

Channel Conflict and Coordination

Manufacturer 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 manufacturers product.

Solution
Exclusive territories.

Ganesh Iyer

Why are automobiles often sold through exclusive dealerships

in exclusive territories.

19

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

Ganesh Iyer

Evolution of consumer behavior to one-shop shopping has

affected tire channels.

20

Information Needs and Channel Design

Customers could identify Aquatread as being differentgrooves

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.

Ganesh Iyer

21

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.

Ganesh Iyer

22