Case synopsis----quick finish in 4 hours
DISTRIBUTION & CHANNEL DECISIONS
LECTURE 7
DISTRIBUTION & CHANNEL DECISIONS
AN EXAMPLE – ANKI
Anki
> In 2013, Tim Cook introduced Boris Sofman, CEO of Anki at the Apple World Wide Developers Conference (video)
> Anki: a robotics and artificial intelligence company that had been operating in stealth mode, launched its products on one of the world’s largest and most visible stages.
> The product became one of the top-selling products in U.S.-based Apple stores during the holiday season.
> How and why?
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DISTRIBUTION & CHANNEL DECISIONS
AN EXAMPLE – ANKI
Anki
> Anki could not have paid to gain such tremendous exposure.
> The company earned the right to launch in such grand fashion by delivering a compelling, sustainable advantage not only to its end users, but also to its lead distributor.
> Anki’s value proposition consistent with Apple’s positioning − reinforced Apple’s design-centric brand
− delivered a compelling customer experience
− increased traffic and sales in Apple stores
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DISTRIBUTION & CHANNEL DECISIONS
DISTRIBUTION CHANNELS
> Distribution channels are the means by which you reach customers when they are ready to buy.
> Effective channel strategies serve many objectives − expanding your reach into the market
− build awareness
− reinforce your segmentation and differentiation
− provide opportunities for customers to evaluate and try your offering
− enhance the value proposition to customers
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DISTRIBUTION & CHANNEL DECISIONS
BASIC FUNCTIONS OF A DISTRIBUTION SYSTEM
> Effective distribution delivers the right product or service to the end customer at the right place at the right time in the right quantities.
> Three basic functions − Reassortment/sorting:
Supplier (large quantities, small assortment) => Customer (small quantities, large assortment)
− Routinizing transactions: standardize products and services and automate transactions
− Facilitating search: easier for sellers to find buyers easier for buyers to find their best purchase
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DISTRIBUTION & CHANNEL DECISIONS
POSITIONING AND DISTRIBUTION DECISIONS
> As technology and the environment change, you must constantly review your distribution options according to your positioning
> Understanding the target market segment your are trying to reach − Your distribution channels should be the most efficient and effective way to
reach your target market among all other options
> The product-offering bundle that the end customer sees must reinforce your differentiation
− Distribution channel delivers additional information to customers
> However, you never get exactly the “optimal”
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DISTRIBUTION & CHANNEL DECISIONS
DISTRIBUTION SYSTEM DESIGN—DIRECT VERSUS INDIRECT
> Distribution options vary from direct to many layers of middlemen
> The reality is that distribution strategy and options lie on a continuum that reflects elements of each
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Indirect Direct
Variable Costs Fixed costs
Efficiency per contact Effective per contact
Lower control Higher control
Coverage Targeting
Low customization High customization
DISTRIBUTION & CHANNEL DECISIONS
EXCLUSIVITY ALTERNATIVES IN INDIRECT DISTRIBUTION OPTIONS
> Exclusive distribution gives a retailer or other intermediary the exclusive right to sell your product in a defined “area” for a defined time period.
> Selective distribution gives the right to distribute your product to some entities in a defined area but limits the number to a select group.
> Intensive distribution lets anyone who wants to distribute your product do so.
> A number of trade-offs you must evaluate when you consider your choice of distribution channel
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DISTRIBUTION & CHANNEL DECISIONS
EXCLUSIVITY ALTERNATIVES IN INDIRECT DISTRIBUTION OPTIONS
> Exclusive Distribution − Easier to sell in (+)
− Higher control (+)
− Higher margins for both parties (+)
− Less competition at point of sale (+)
− More push from the distributors (+)
− Less coverage (-)
− More association with the distributor (?)
− Possible guaranteed min. sales (?)
> Item Exclusivity − Customers cannot compare prices across distributors
− Solve conflicts between offline and online
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DISTRIBUTION & CHANNEL DECISIONS
EXCLUSIVITY ALTERNATIVES IN INDIRECT DISTRIBUTION OPTIONS
> Intensive Distribution − High coverage
− Convenience
− Lower control
− Less push in store
− More mass pull needed from you
− Faster sales cycle possible
> If you notice a short product life cycle and high risk of knockoffs – good option
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DISTRIBUTION & CHANNEL DECISIONS
EXCLUSIVITY ALTERNATIVES IN INDIRECT DISTRIBUTION OPTIONS
> Selective Distribution − The conceptual middle between exclusive and intensive distribution.
− Distributors compete (?)
− Less distributor loyalty (-)
− More space for entrepreneurs to be creative
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DISTRIBUTION & CHANNEL DECISIONS
USING SELECTIVE DISTRIBUTION TO REPOSITION A BRAND
Brooks Sports
> Had been successful in the late 1970s; in the 1980s they tried to chase Nike.
> Expanded into other categories like basketball, aerobics, and baseball.
> Stretched too thin. − When business began to slow, it began using cheaper materials and selling its
sneakers at rock-bottom prices to discount retailers like K-Mart
> Brooks lost credibility with joggers, and between 1983 and 1993 it lost some $60 million
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DISTRIBUTION & CHANNEL DECISIONS
USING SELECTIVE DISTRIBUTION TO REPOSITION A BRAND
> Helen Rockey came to Brooks in 1994 after 11 years at Nike
> A completely different marketing strategy − went back to Brooks’ running heritage
− repositioned as the shoe for serious running enthusiasts
> Repositioning dictated all the elements of her new marketing mix, including distribution.
> Make the product attractive − not only to the end purchaser, the running enthusiast
− but also to the specialty running store retailers
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DISTRIBUTION & CHANNEL DECISIONS
USING SELECTIVE DISTRIBUTION TO REPOSITION A BRAND
> The repositioning − limited to the 3 best suppliers who produced high-quality shoes
− redesigned the line to be attractive to serious runners
− boosted the suggested retail prices to as high as $120
− only supply specialty running shops
− sales force helped their retailers to offer running clinics and trained the retail sales force
− extensive and professional presence at the major running trade shows
− give over 200 competing runners with free shoes
− appearance in niche publications like Runners World and Running Times
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DISTRIBUTION & CHANNEL DECISIONS
USING SELECTIVE DISTRIBUTION TO REPOSITION A BRAND
The result
> Brooks’ sales have been growing at a 30% clip for the past 4 years until 1999, and hit $100 million by 2000.
> Operating income (net before depreciation, interest, and taxes) last year (1998) topped $4 million, from $3 million in 1997.
> Brooks does not have the potential to outcompete or outmuscle Nike.
> However, it does have the potential to make a lot of money for its entrepreneurial owners if they continue to understand its limitations and have a marketing mix (including selective distribution) consistent with its revised positioning
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DISTRIBUTION & CHANNEL DECISIONS
HOW TO DEAL WITH INTERMEDIARIES
> Intermediaries do not exist to reinforce your positioning, serve your customers, and build your business. Rather, they seek to accomplish all of these objectives for themselves.
> You must position yourself with your chosen intermediaries just as you would with customers
> Your product offering must enhance the perceived value of the intermediaries’ customers and create value for their businesses
> A typical principal-agent issue …
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DISTRIBUTION & CHANNEL DECISIONS
HOW TO DEAL WITH INTERMEDIARIES
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DISTRIBUTION & CHANNEL DECISIONS
TYPES OF INTERMEDIARIES
> Agents, brokers, and manufacturer representatives (reps) − earn a commission and do not take possession of inventory
> Wholesalers and retailers − take possession of inventory; may facilitate search as well as provide goods and
services to specific market segments
> Resellers and value-added resellers (VARs) − bundle an offering with additional products and services, enhancing the overall
perceived value
> Original Equipment Manufacturers (OEMs) − provide a component, subsystem, or complete product that is then sold as part
of a separately branded product
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DISTRIBUTION & CHANNEL DECISIONS
HOW TO DEAL WITH INTERMEDIARIES – AN EXAMPLE
> Neat, Co. designed and manufactured scanners for the small office and home office markets. Helped organizing receipts, business cards, and documents that clutter offices
> Staples and other office products retailers − hesitant to give up valuable shelf space to an unknown brand
> Neat rolled out kiosks in airports that allowed customers to demo the Neat solutions
− excellent visibility and awareness
− proof that Neat products were perceived as highly valuable
> Armed with the data and results, Neat returned to Staples and secured both the shelf space and broad distribution it sought
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DISTRIBUTION & CHANNEL DECISIONS
Dynamic Distribution Management
> Distribution channels can sometimes be more valuable if they are changed over time
− product lines that continually have innovation
− new products or models that are introduced
> The distribution channels need to change − the prestige you want to associate with your newest and most innovative
product may be very different from the prestige you are able to associate with an existing product
> Matching − Associate the high-prestige items with high-prestige distribution channels and
lower-prestige items with lower-prestige distribution channels
− We need to understand the high- and low- end distributors first
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DISTRIBUTION & CHANNEL DECISIONS
Dynamic Distribution Management
> The high-end channel members − want to sell exclusive, high-perceived value items
− do not want to compete on price with the same item in a lower-end store
− their better service justify higher margin than the mass-market competitors
− do not sell in mass volumes
> The lower-end channel members − Dream: to sell the same items that the high-end stores do
> Managing the delicate balancing act of the different channel hierarchies is a real challenge for many entrepreneurs
> How? Move up or move down?
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DISTRIBUTION & CHANNEL DECISIONS
Another Distribution Option - Franchising
Types of Franchising
> Manufacturing franchise − a franchisee manufactures a product using the
franchisor’s name and trademark
> Manufacturer-retailer franchise − Franchisee has the right to sell products through a
retail outlet.
> Wholesaler-retailer franchise − the retailer has the right to carry products distributed
by the wholesaler
> Business format franchise − franchisee gets a way of operating a business
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DISTRIBUTION & CHANNEL DECISIONS
ANOTHER DISTRIBUTION OPTION - BEING A FRANCHISEE
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Advantages Disadvantages
• Lower risk of failure • Established product/service • Experience of franchisor • Group purchasing power • Instant name recognition • Operational standards ensure uniformity
and efficiency • Assistance in setting accounting
procedures, facility management, personnel policies, and so on
• Start-up assistance • Location assistance • Help with financing arrangements • Power of national and regional
marketing
• Payment of an initial franchise fee • Ongoing royalty payments • “Off the top” payments for cooperative
marketing fund • Cannot add or drop products unilaterally • Little say on national marketing policies
and tactics • Must conform to operating procedures • You depend on the franchisor for much
of your success • Some large franchisors have failed • May be restrictions on selling the
franchise • May be difficult to pass the business to
your heirs
DISTRIBUTION & CHANNEL DECISIONS
ANOTHER DISTRIBUTION OPTION - BEING A FRANCHISOR
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Advantages Disadvantages
• Rapid expansion without large investments
• scale economies increase access to real estate
• Franchisees are more motivated • Predictable cash flow • Easier to sell
• No full control • Image and positioning rely on the
franchisees • Need suitable systems and controls to
ensure that the franchisees pay the correct franchise fees
• Different incentives for pricing from franchisees
• Distribution channel hard to change • Creating new competitors
DISTRIBUTION & CHANNEL DECISIONS
Concept Testing on Channel Members
> REMEMBER: Channel Members do not exist to reinforce your positioning, serve your customers, and build your business. Rather, they seek to accomplish all of these objectives for themselves.
> To get channel members’ reactions to your new entrepreneurial product(s) or services – a concept test
> The channel member should be exposed to your concept as realistically as possible.
− Let the channel member know explicitly what functions you expect him to perform as well
− All tentative prices and terms should also be shown
− Consumer concept testing results can be powerful arguments for convincing a retailer to carry your product
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DISTRIBUTION & CHANNEL DECISIONS
SUMMARY
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