Session 4 Part 2: Channel Design

Chapter 4: Supply-Side Channel AnalysisChannel Structure and Intensity

Channel Analysis Framework

CHANNEL DESIGN Segmentation Channel Structure Splitting the Workload Degree of Commitment Gap Analysis CHANNEL IMPLEMENTATION Channel Power Channel Conflict

Manage/Defuse Conflict Channel Coordination

INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS

Channel Design Challenges

Degree of Channel Intensity

Coverage Upstream member consider (Degree of selectivity) Downstream member (Category selectivity)
Combining different Channel Types by going to market in multiple ways Decision of market entry mode Direct vs. Indirect

Coverage VS. Assortment

Why more coverage is better for manufacturers of convenience goods Why downstream channel member dislike intensive distribution Can the manufacturer sustain Intensive Distribution Degree of Category Exclusivity

Why more coverage is better for manufacturers of convenience goods

Manufacturers like intensive distribution The more outlets, the more it will sell True for convenience goods Low involvement Low Risk Buyers tend to take what is offered Addition of few more outlets after threshold coverage increase market share due to coverage in small size high turnover stores. All else being constant, higher degree of distribution intensity will always boost sales. Like intra-brand competition Avoid channel complacency

Why downstream channel member dislike intensive distribution

Prefer exclusive distribution More coverage is negative Erosion of uniqueness Unable to differentiate on brands offered Prefer Exclusivity Clash of interest with upstream member Intrabrand price competition Free-riding

Response of downstream member to intensive distribution

Discontinue saturated brand Substitute another less intensively distributed Discontinue entire product category Carry the brand but convert customers to another brand Bait-and-switch

Efforts to Sustain Intensive Distribution

Problems
Defection of downstream channel members Lackluster sales support Bait and switch tactics

Possible approaches Contractual

Expensive Requires documentation Alienate other channel members Legal or muscular routes cause negative publicity
Brand equity Advertising and promotion Expensive Channel stuffing

Pull strategy

Efforts to Sustain Intensive Distribution

Possible approaches (continued) Resale price maintenance (RPM)
Set a retail price floor Allows channel members to have acceptable margins

Use more selective distribution

Generally most applicable solution Able to target desired channel members Better working relationships

Category Exclusivity
Downstream channel members decision How many brands to carry in a product category Length of product assortment Very broad (all brands) Narrower Exclusive Manufacturers want exclusive dealing Reseller wants assortment of brands Meet assortment demands of customers Benefit from inter-brand competition Importance of assortment

 Conflicts Manufacturer wants to Blanket a trading area but outlets prefer the reverse Downstream member prefer multiple brand but upstream members prefer the reverse Manufacturer wants downstream members to support their brands and take low margins, but the channel members prefer lower costs and higher margins

Striking a deal: How much selectivity to trade away

Threat of Complacency The nature of product category Service output demand Amount of search by consumer Right outlets Brand Strategy Positioning and Premium Pricing Target market Matching channel members with brands intended image Theme of Scarcity

Striking a deal: How much selectivity to trade away

Balancing selectivity through: Unusually demanding contracts Agreement to meet demanding goals

Bargaining for Influence on Channel Members

Desire to have inordinate control on downstream channel members Purchase of cooperation by skillful use of Selective Distribution

Bargaining for Influence on Channel Members

Desired Coordination Manufacturer Specific investment by downstream member Dependence Balancing: Trading Territory Exclusivity for Category Exclusivity Reassurance: Using Selectivity to Stabilize Fragile Relationship The Price of Concession: Factoring in opportunity Costs

Bargaining for Influence on Channel Members

Desired Coordination
Upstream Member requirement Merchandising Prices Stock level Selling effort Customer choice Downstream Member concerns: Interference Resistance Solution Use of selectivity as reward power

Bargaining for Influence on Channel Members

Manufacturer Specific investment by downstream member Idiosyncratic Knowledge Unusual handling or storage Brand specific parts and know how Customer training Mingling the identity of buyer and seller

Bargaining for Influence on Channel Members

Dependence Balancing: Trading Territory Exclusivity for Category Exclusivity Selectivity as a strategic tool to overcome reseller resistance Selectivity for Selectivity Market exclusivity Category exclusivity

 Upstream Member requirement Product display with right assortments Downstream Member concerns: Selective availability in market Conclusion For differentiated categories only low cost, low price resellers can do well with intensively distributed brands For reseller support manufacturer has to limit coverage

Bargaining for Influence on Channel Members

Bargaining for Influence on Channel Members

Reassurance: Using Selectivity to Stabilize Fragile Relationship Fears of vulnerable party Pull by manufacturer Direct selling by manufacturer Selectivity

Bargaining for Influence on Channel Members

The Price of Concession: Factoring in opportunity Costs Crucial factors Importance of market area Competitive intensity of the product category

Price of Concession
Opportunity cost Manufacturers costs are greater when: Important market area Competitive product category Downstream channel members costs are greater when: Major product category in their assortment Competitive product category

Simulating the benefits of selectivity while maintaining intensive coverage

Brand Equity New products with information sharing Brand Variants Mitigating the buyers cost of selective distribution

Limit Trading partnersSave Money

Associated costs with each account Master Distributors

More Trading Partners for More Revenue?

Generally, brands that are more widely available have higher sales and greater market share Is it because of the intensive distribution? Correlation but not causality Revenues or profits Remember opportunity costs

Multiple Channels
Different channels for the same goods Intended to serve different target markets Watch out for Conflict Cannibalization Free-riding

Dual Distribution
Manufacturer sells direct, competes with its resellers Conflict is common Value for demonstration

Carrier-Rider Relationships
One manufacturer (carrier) handles sales and distribution for another (rider) Piggybacking Works better between complementary products Reciprocal piggybacking