NSF I- Corps
The Lean LaunchPad
Lecture 4:
Distribution
Channels
How does your Product
Get to Customers?
Version 6/13/12
Channels
How does your Product
Get to Customers?
© 2012 Steve Blank
Physical versus Virtual Channels
How Do You Want Your Product to
Get to Your Customer?
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Yourself
Through someone else
Retail
Wholesale
Bundled with other goods or services
5
Web Channels
6
Physical Channels
7
How Does Your Customer Want to
Buy Your Product from your Channel?
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
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• Same day
• Delivered and installed
• Downloaded
• Bundled with other
products
• As a service
• …
8
Types of Channels
Direct
Indirect
–
–
–
–
Licensing
OEM
VAR
Reseller
Distributor
9
Distribution Complexity
Global Systems
Systems Integrators
Evangelists
Marketing Complexity
WANs
Mainframes
Direct Sales
Minis
LANs
VARs
PC Servers
Desktop PCs
Retail
Printers
Keyboards
Service
Technicians
Web, Telesales
Toner
Solution Complexity
10
How Do the Economics Work in
Different Sales Channel?
How Are Channels Compensated?
– Commission
– Percentage of sales price
– Discounted pre-purchase
12
Channel Economics: “Direct” Sales
Source: Mark Leslie, Stanford GSB
13
End Consumer
Profit + SG&A + R&D
Discounts
Cost of Goods
(Supply Chain)
EU
List
Your Revenue Price
Channel Economics: Resellers
Profit + SG&A + R&D
Reseller
Source: Mark Leslie, Stanford GSB
14
End Consumer
Cost of Goods
(Supply Chain)
EU
Your Revenue
Discounts
List
Price
Channel Economics: Distributors/Resellers
Profit + SG&A +
R&D
Reseller
Source: Mark Leslie, Stanford GSB
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End Consumer
Cost of Goods
(Supply Chain)
Distributor
Your Revenue
EU
Discounts
List
Price
The Channel as a Customer
– Some products are embedded in others (OEM)
– Some products are resold by others (VARs)
– Some products are distributed by others
– Who’s the customer?
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Channel Economics: OEM or IP Licensing
Cost of
Goods
(Supply
Chain)
Profit + SG&A
+ R&D
Reseller
End Consumer
Profit + SG&A +
R&D
Distributor
Cost of
Goods
(Supply
Chain)
Master
Distributor
Your Revenue
EU
Discounts
List
Price
Reseller
Your Product Becomes Your
Customer’s Cost of Goods
Source: Mark Leslie, Stanford GSB
17
How Are Channels Motivated or Incented?
– Money! – what makes them the most?
– Training
– Marketing to the channel
– SPIF
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Book Publishing
Channel Example
Example: Book Publishing
Publisher
National
Distributor
Printer
Wholesaler
Retailer
Customer
20
Book Publishing
•Percent of
Retail
Publisher
National
Wholesaler
Distributor
Retailer
35%
15%
10%
40%
$7.00
$3.00
$2.00
$8.00
Customer
$20.00
• You get
- 35% of retail
- the distributor gets 10%
- the wholesaler gets 15%
- the retailer gets 40%
- less any discount they offer the customer
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Book Publishing Economics
Publisher
National
Distributor
Wholesaler
Retailer
Customer
Allowances
Wholesale costs
Bills
Credit
guarantees
Markup
Payment
guarantees
Payment
guarantees
Return rights
Credits
Payments
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Book Publishing Delivery
Publisher
National
Distributor
Prepare film
(content)
 Establish
identity
 Create
demand
Prepare
galleys
Printer
Wholesaler
Retailer
Receive
 Schedules
 Print orders
 Bundle
counts
 Film
Determine
allocations
Merchandise
titles
Deliver orders
Sell
magazines
Dispose of
returns
Acknowledge
returns
Print and ship
magazines
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Medical Device
Channel Example
Product flow/Channel
Electronic
Health
Records
Electronic
Records
Patients
Partners/
OEMS
Fluid Synchrony
Support Pump +
Services Controller
Hospitals
(Anesthesiologists
Neurosurgeons)
Pain Clinic
(Anesthesiologists
Neurosurgeons)
Bundled
Kits
Hospitals
Pain Clinics
Channels (Direct)
• Direct to institutions
• Some formularies involved in purchase decisions
• Some doctors make purchase decision directly
• Device company/Doctor relationship is key
• Heavily influenced by :
• Clinical study results
• Regulatory approval
• Reimbursement
Farm Sensor Industry
Channel Example
Channel Model: Service Provider
Product
Money
Nutrient
Data
OEM
Large farm
Us
Small farm
USDA/EPA
Licensing/sales
Channel Model: Service Provider
Product
Money
Nutrient
Data
OEM
Large farm
Product
Us
Small farm
USDA/EPA
Service
Licensing/sales
Dental Product
Channel Example
COST / PROFIT ANALYSIS
Licensing Revenue Model
Per unit cost and profit estimation
R&D
Maintaining
IP
Univ.
License
fee
Raw
materials
Manufacturing
&
Packaging
License
fee
Distribution
End user
List price
Our revenue 4-8% revenues
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Licensing of Technology Ecosystem
University
Insurance
Agencies
2-4% license fee
$$$
DMX
R&D
Products
Procedures
IPs
4-8% royalty
Customer
segment: Large
corporations
J&J, GSK, 3M
~$40
Health-Care
Providers:
Hospitals
Practitioners
Clinics
$$
End
User
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Medical Device
Channel Example 2
MammOptics
Channel Strategies and Costs
High value
medical products
(e.g. cardiovascular
stents)
Commodity
medical products
(e.g. latex gloves)
Direct Sales
Individual
Individual
Doctors
Doctors
• Doctor education
• Direct feedback from doctors
• Very expensive
Distributors
• No doctor education
• No customer feedback
• Inexpensive
Purchasing
Purchasing
Administrators
Administrators
MammOptics
Channel Strategies and Costs
Sales strategy 1
5 dedicated sales people
$150,000 each/year
Sales strategy 2
Continue with core
group of sales people
Hire nurses or technicians Use women’s
with established
healthcare equipment
relationships
distributor
Early adopter feedback
Already established
network of customers
Dental Product 2
Channel Example
Channels
Direct Sales
Private Practice
Dentist
Big Distributors
Institutional
Dentist
Purchasing
Department
Channels
Direct Sales
Big Distributors
80% Market Share
30% Margin
Private Practice
Dentist
Institutional
Dentist
Purchasing
Department
Channels
Continuing
Education
Courses
Direct Sales
Magazines
& Email
Big Distributors
80% Market Share
30% Margin
Private Practice
Dentist
Institutional
Dentist
Purchasing
Department
Trade
Shows
Online Rental
Channel Example
PM Tools
Rentpost.com
Rentjuice.com
Buildium.com
Rentingsmart.co
Listings
Provider
Craigslist
Padmapper.com
Rent.com
Apartment.com
Forrent.com
Rentjuice.com
Propertyware.co
Trulia.com
Potential
Landlords
Show, Advise, Valuate
Realtors
Sell, Advise
Listings,
Checks
Rent Payment
Safetenantcheck.c
Listings,
Checks
Rent Payment
Tenants
Maintenance
Furnishing
Moving
Service
Providers
Erenter.com
Buildium.com
Payment Facilitator
Rentpayment.com
Clearnow.com
Online Cheque
Rentingsmart.co
Find information
Maintenance
Ratings
Yelp.com
Angie’s List
Maintenance Finding
Zoospi.com
Redbeacon.com
Taskrabbit.com
Servicemagic.com
Web Info
propertymanagemnt360
Credit Checks
Landlords
Property
Managers
Propertyware.com
Schedule Tools
Setster.com
Zoospi.com
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Dental Product 3
Channel Example
COST / PROFIT ANALYSIS
Direct Sales Revenue Model
Our revenue
$27
Per unit cost and profit estimation
$6
Manufacturing &
Packaging
? ($5)
$40 *
%32 cut
Profit + R&D + License
fee
~$11
Distributor
End user
Raw active
ingredient
List price
~$13
* Competition
• NuPro prophy paste (Novamin $50)
• NuPro desensitizer (Novamin $93)
• MI varnish (Recaldent $100)
• Gluma desensitizer (Glutaraldehyde $130)
• Health-Dent desensitizer (Fluoride $49)
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Direct Sales Ecosystem
R&D &
Regulation
University
$?
Raw Materials
Manufacturing
$6/pk
$5/pk
Formulations
& Packaging
DMX
Insurance
Agencies
$$??
R&D
Products
Procedures
IPs
Customer
Segments;
Health-Care $$?? End
Providers:
-32%($27)
User
- Hospitals
Product
- Practitioners
Sales &
$40/pk
- Clinics
Distribution
44
Travel Industry
Channel Example
Travel Services:
Impact of Changing Technology
The Advent of GDS Systems (1980 -1995)
Turning the Screen Around
Online Travel (1995-2010)