Session 15: Distribution Strategy
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Barco – distributors were the key to market intelligence
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Calyx & Corolla – replace long distribution system with Fedex
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Southwest Airlines – ticketing through website
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Intuit – used the pull strategy rather than push, service excellence
reduces cost to retailer
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Swatch (and Levi's) – department store vs. jewelers (specialty shops)
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Tweeter – segment the market, price perceptions, branded variants
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Coming: Aravind
15.810 Marketing Management
Distribution – today’s topics
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Discrepancy of assortment.
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What channels do?
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Rule of efficiency.
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Analysis framework.
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Power and conflict.
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Coordinating mechanisms.
15.810 Marketing Management
Markets develop for efficiency
HATS
HATS
POTS
BASKETS
HOES
KNIVES
POTS
HOES
BASKETS
KNIVES
M1
M2
M3
M4
M5
Manuf.
5 x 40 = 200
contacts
C1
C2
C3
customers
C39
Discrepancy of
assortment
C40
...
M1
Channels
develop for
efficiency
M2
M3
M4
INTERMEDIARY
C1
C2
C3 customers
...
Manuf.
M5
5 + 40 = 45
contacts
C39
C40
Discussion example
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Nielson (division of Cadbury) – best
selling chocolate bars in Canada
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Sabritas (division of Pepsico) –
distributor of salted snacks in Mexico
„
Most of sales through “Tiendas”
Neilson
Hershey
Salted
snacks
Nestle
Other food
products
Sabritas
…
Tienda
Tienda
Tienda
Tienda
Tienda
450,000 Tiendas
Plus other outlets
What do channels do?
MANUFACTURER
Selling
Activities
Physical
Distribution
Pricing/
Financing
Service
Information/
Market
Feedback
CUSTOMER
15.810 Marketing Management
Manufacturer
Local Availability
Assortment
Rapidity
Financials
Local Knowledge
Salesforce Efficiency
Search Cost
Candy Consumer
Market
Information
Manufacturer
Assortment
Local Availability
many candy bars
food products
convenience products
trucks
storage
details
Local Knowledge
Tiendas
government
consumers
Rapidity
re-supply
heat, melt
Salesforce Efficiency
e.o.s.
delivery, storage
assortment
Financials
credit, currency
promotion
returns
Search Cost
candies where
consumers are
Candy Consumer
Market
Information
Changing
tastes,
competition
adv., etc.
A structure to analyze channel tactics
Exclusive
Selective
Auto parts
Candy
Examples
Automobiles
Sailboats
Customers
Frequent purchase
Service is key
POS critical
Mf. assure quality
Quality assurance Some service
Brand-Channel
Moderate density Little service
Competition
Combination
Company Skills Provide service
Assure quality
Furniture
Cons. Electronics
Intensive
Brand competition
within store
Assort efficiency
Display
Rule of efficiency
“The rule is very simple – the most efficient organization
for the task should perform the function.”
Example
Most efficient?
Levi’s
Department store
Specialty store
Calyx & Corolla
Florists
Fedex
Barco vs. Sony
Own distributors
Box distributors
Swatch
Department store (US)
Jewelers (Europe)
Tweeter
High-end, box sales
For what?
15.810 Marketing Management
Which functions are done best by:
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Sabritas or Neilson?
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„
„
„
„
„
Assortment
Local knowledge
Local availability
Salesforce efficiency
Rapidity
Search cost
Financials
Market information
Product quality
National advertising
Neilson
Sabritas
Consumers
15.810 Marketing Management
Channel advantages come from:
Local knowledge
personal relationships
understand customers
Local availability
assortment economics
provide value to the customer
Salesforce efficiency
represent many suppliers
efficient “tours”
Rapidity
reduce supply chain delay (JIT)
Search cost
capture some of consumer surplus
Systems integration
computer systems, florists, etc.
15.810 Marketing Management
Will Nielsen and Sabritas always see eye
to eye?
Neilson
Sabritas
1st rule of (core) economics:
Marginal Revenue = Marginal Cost
Consumers
15.810 Marketing Management
Shared demand is the root of conflict on
service and quality.
Pepsico
Sabritas
Consumers
Neilson
Sabritas
Consumers
MR in sync with MC
MC (product) not shared
MC (service) not shared
both costs and benefits are
shared
gain in sales shared
15.810 Marketing Management
Shared demand is the root of conflict on
margins.
Pepsico
Sabritas
Consumers
MR in sync with MC
both revenue and loss of
demand are shared
Neilson
Sabritas
Consumers
MR (Neilson margin) not shared
MR (Sabritas margin) not shared
MR (loss in sales) is shared
15.810 Marketing Management
The effect of mismatch in MC ≠ MR.
Neilson
Sabritas
Neilson margin
tempted higher
wants lower
Sabritas margin
wants lower
tempted higher
Neilson quality
tempted lower
wants higher
Sabritas service
wants higher
tempted lower
15.810 Marketing Management
Net result without coordination.
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Both have higher margins → higher prices
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Sabritas provides less service
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Nielsen provides lower quality
15.810 Marketing Management
Conflict
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Different goals
„ Coke wants vending machines stocked
„ Distributors lose money on marginal machines. Prefer to “free ride”.
„ Training, set-up, etc. for sound system (Tweeter vs. Circuit City)
„ Who carries the inventory?
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Multiple Channels
„ High-end & new electronics needs selling (Tweeter vs. Circuit City)
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„
„
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avoid perceived overlap & enable Tweeter to capture value from service
New franchises
Gray market (diversion, Swatch)
Value-added resellers (VARS) conflict with distributors
Brand vs. Market
„ Brita gives a supermarket a trade discount on filters.
„ Does the supermarket have the incentives to pass it on if it means only that
consumers switch from other PUR filters to Brita?
15.810 Marketing Management
Coordinating mechanisms
PROs
CONs
Joint ownership
When possible
Assortment
Local knowledge
Contracts
Can work, many details
Agree on margins,
cheat on service
Implicit understandings Some progress
Long-term relationships
Profit sharing
Can align incentives.
Complex accounting
and monitoring
Quantity discounts
Share the revenue to
align MC = MR
Must offer to everyone.
Hard to get right.
All dealers will receive a 20% discount from
published suggested retail price. Value added
incremental discounts will be awarded as follows:
1. Dealers with salespeople who routinely and personally visit, call on, and
promote our products to at least 15% of the end-users in the dealer’s trading
area. 10%
2. If not above, provide a catalog that is distributed to at least 80% of customer
base in which all our major products are featured. 2%
3. Maintain and inventory of our products that represents no less than 60 days of
estimated or historical sales and at least one item for demonstration or
display. 5%
4. Offer open account privileges to all responsible customers and provide
financing or leasing alternatives for large purchases. 2%
5. Schedule at least 1 week of detailing with us and organize not less than 2
clinics per years with at least 12 end-users , the cost to be paid by the dealer.
2%
6. Provide reasonable parts inventory and employee capability to handle routine
returns, exchanges, and warranty replacement or repair. 1%
15.810 Marketing Management
Sabritas v. Neilson?
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Quality of the candy?
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Exclusivity?
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Quality of the advertising?
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Quality of the service?
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Candy v. salted snacks?
Neilson
Sabritas
Consumers
15.810 Marketing Management
Can Neilson monitor Sabritas?
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Local presence?
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Local knowledge?
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Understand culture?
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Visit all the tiendas?
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Beyond Mexico?
Neilson
Sabritas
Consumers
15.810 Marketing Management
Brand name sharing?
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What are Sabritas’ incentives?
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What are Sabritas’ investments?
What does Sabritas risk?
What are Neilson’s incentives?
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„
What are Neilson’s investments?
What does Neilson risk?
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Milch vs. Mr. Big and Crispy Crunch?
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Is brand name sharing an effective coordinating
mechanism?
15.810 Marketing Management
Some puzzles
To illustrate how to work through channel issues.
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Is it always cheaper to buy at
a double-coupon store?
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Do price matching guarantees
help consumers?
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Why can’t you ever find the
item number that is reviewed
in Consumer Reports?
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Can it ever be cheaper (per
oz.) to buy two small cans of
tuna than one large can?
15.810 Marketing Management
Final case – Aravind
What is the best channel to
distribute “cured eyes?”
15.810 Marketing Management
MANUFACTURER
Selling
Activities
Physical
Distribution
Pricing/
Financing
Service
CUSTOMER
The channel is a means to serve
downstream customers.
The channel is a customer too!
Analyze with 5 C’s.
15.810 Marketing Management
Information/
Market
Feedback