Distribution Channels
and Pricing
MK-814
Gerald Smith
PULL DISTRIBUTION
STRATEGIES
MANUFACTURER
DISTRIBUTOR
RETAILER
CONSUMER
PUSH DISTRIBUTION
STRATEGIES
MANUFACTURER
DISTRIBUTOR
RETAILER
CONSUMER
Channel Margins
•
•
•
•
•
•
•
•
•
•
2-Step Channel
Average Margins
Warehouse Clubs
6.0%
Medical Supplies Wholesalers
8.8%
Computer Resellers
8.9%
Vending Product Wholesalers
11.0%
Lumber Wholesalers
11.5%
Grocery Wholesalers
11.5%
Candy and Tobacco Wholesalers
13.1%
Floor Covering Distributors
22.0%
Lawn Mower Parts Distributors
28.0%
Channel Pricing
•Prices
–
–
–
–
–
–
Market
Contract
Meet comp
List price
Net pricing
Brand
•Resale Pricing
– Min/max/exact
– MAP programs
•Discounts
–
–
–
–
–
–
–
Volume
Functional
Activity-based
Time-based
Markdowns
Close-outs
Promotions
•Allowances
–
–
–
–
–
New stores
Opening order
Display allowances
Swell allowances
Policy funds
•Rebates
–
–
–
–
–
–
Growth
Volume
Product mix
Exclusivity
Loyalty
End User
•Terms and Conditions
–
–
–
–
Extended dating
Prepaid freight
Prompt payment
Warranty reimbursement
•Fees
–
–
–
–
–
–
Finders fees
Drop shipment fees
Broken carton fees
Restocking fees
Slotting fees
Fees for service
•Commissions
– Margin-based
– Volume-based
•Accrual Programs
–
–
–
Co-op advertising
Market development
Account-specific
•Other
– Invoice deductions
– Spiffs
5
ADVERTISING &
PROMOTIONS TOOLS
Informational
Pull
(End-User)
Push
(Trade)
National Advertising
Spot Advertising
Coop Advertising
Event Sponsorship
Trade Advertising
Trade Shows
Point of Purchase
Economic
Rebates
Bonus Packs
Price Packs
Coupons
Sweepstakes
Premiums
Sampling
Trade-in Allowances
Financing Incentives
Off-invoice
Allowances
Quantity Discounts
Dating, Floor Plans
Sales Force Incentives
TRENDS AMONG THREE MAIN
CATEGORIES OF PROMOTIONAL SPENDING
70%
Trade Promo
60%
Media Advert
Consumer Promo
50%
40%
30%
20%
10%
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
0%
Direct Corporate
Sales
Economic Value and
Channel Pricing
Strategy
Corporate
Direct
Website Sales
Direct Mail,
Tele-Marketing
Manufacturer,
Vendor
Economic Value
To the Reseller
Specialty
Economic Value
To the Vendor
Value-Added
Resellers
Direct Marketing,
Catalog Partners
Wholesale
Retail
Wholesalers,
Distributors
Agents, Mfr Reps,
Brokers
Direct
Retail
Direct-Buy
Retailers
Logistics
Partners
Distressed
Merchandisers
Retailers
Retailers
Retailers
Retailers
End-Buyer Segments
Control and Influence
Online
Marketplaces
Economic Value
of a Distributor
Extra Installers
$36,000
Experienced Installers
$38,000
Positive
Differentiation
Value
$234,000
Product FailureReinstall $42,000
Brand Tie-In Purchase
$36,000
Brand Likelihood of
Purchase $41,000
Info Accuracy-Lost Sales
$20,000
Delivery Errors-Lost Cust
$16,000
Delivery Errors-Opp Cost
$16,000
Delivery Errors-Rep Bus
$10,000
Out of Stock-Lost Bus
$23,000
Out of Stock-Rep Bus
$12,000
Management Time Lost
$10,000
Carpet Products Probs
$7,000
Brand Awareness
$41,000
A Standard Package of
Distributor Services from
a Competitor would cost
$400,000
Net
Economic
Value
$520,000
Negative
Differentiation
Value
$114,000
•
VENDOR DRIVERS OF VALUE TO THE RESELLER
Drive traffic for this reseller
–
–
–
–
–
•
Increase likelihood of purchase at this reseller
–
–
–
•
Obsolete inventory drivers (closeout, mark-down programs)
Supply chain knowledge drivers (accuracy, predictability of product delivery, transparent
logistics)
Increase margins for this reseller
–
–
•
Tie-in purchases of complementary goods (e.g., loss leader products)
Cross category promotions (cross-ruff coupons, promotion bundles of vendor products)
Reduce operational costs (inventory, etc.) for this reseller (United Stationers -multiple catalogs, drop ships to custs for non-inventoried products)
–
–
•
Brand trust drivers (brand predictability, warranty, reputation for problem resolution, etc.)
Supply chain knowledge drivers (accuracy and predictability of product availability -- timing,
models)
Product knowledge drivers (product training, knowledge of the brand, its differentiation value
versus competitive brands)
Increase average basket value for this reseller
–
–
•
Brand image drivers (awareness, favorability, loyalty)
Brand market volume drivers (e.g., advertising -- gross impressions, GRPs, reach, frequency)
Brand availability drivers (coop advertising, market development funds)
Special promotion drivers (sweepstakes, special packages, special displays, etc.)
Repeat purchase drivers (vendor loyalty programs, etc.)
Vendor pricing drivers (discount programs -- trade, volume, functional, activity-based, timebased discounts)
Vendor Competitive Pricing Assistance (e.g., special “Meeting Comp” prices)
Reduce intra-brand competitive rivalry for reseller
–
Exclusive drivers (e.g., exclusive, selective, longer term reseller contracts)
10
•
RESELLER DRIVERS OF VALUE TO THE VENDOR
Access to a base of customers and market segments (volume and/or margin)
–
–
–
–
•
Basic Services to End-Users
–
–
–
–
•
Warranty service drivers
Customer maintenance and repair drivers
Service location drivers, hubs for customer interaction
Supply chain efficiencies for vendors
–
–
–
–
•
E.g., (TCO, auto inventory replenishment, EDI)
New product launch services for vendors
Customer service and support drivers
–
–
–
•
Inventory risk
Inventory management
Technical service
Delivery
Ordering
Value-Added Services
–
–
•
Education, clinics, demonstrations
Repair, maintenance
Rentals
Financing
Basic Services to Resellers (e.g., rack jobbers)
–
–
–
–
–
•
Inventory and stock availability
Merchandising skills
Customer relationships and loyalty
Scale economies
Reduced order cycle drivers
Warehouse efficiency drivers
Transportation efficiency drivers
Inventory prediction and reduction drivers
Dedicated sales forces and selling professionals
–
Problem resolution drivers for the vendor
11
Exhibit 12-2
Ingram Micro Partner Service Model
MAY I TAKE YOUR ORDER, PLEASE?
INDEPENDENT
CHOICE
ACTIVE
CHOICE
PROFESSIONAL
CHOICE
PRICING
Receive most
aggressive pricing
Receive aggressive
pricing
Receive less aggressive
pricing
ORDERING METHOD
Must order online
Can use any method
of ordering
Can use any method of
ordering
ORDER FULFILLMENT
Within two business
days
Within one business
day
Same day
$5 HANDLING FEE
CHARGED
For orders less than
$1,000
For orders less than
$500
For orders less than $100
FREIGHT
All freight expenses
charged
Free freight for orders Free freight for orders
more than $2,000
more than $1,500 placed
placed with sales rep;
with sales rep; free
free freight for orders freight for orders more
more than $800
than $500 placed
placed electronically
electronically
PRESALES TECH SUPPORT
Not Included
Requires minimum
purchase of $50,000
per quarter
Requires minimum
purchase of $30,000 per
quarter
POST-SALES TECH
SUPPORT
Not included
Not included
Requires minimum
purchase of $30,000 per
quarter
10-day net terms
30-day net terms
30-day net terms
FINANCING
SALES SUPPORT
Available for complex
Available for
Available for placement,
orders only
placement, pricing and pricing and availability,
availability, and order
and order verification
verification
Leveraged Profit Growth
for a Wholesale Distributor
Increase
Average Purchase
New
Product
Lines or
Services
Existing
Product
Lines
 Acquire new Product Lines
 Create New Client Services
 Build Revenue-Generating
Strategic Initiatives
 Partnering with Complementary
Channel Members
 Acquisition of Complementary
Product Firm
 Acquire Service Firm that
diversifies the Service Mix
 Increase Share of Account with
Specialty Retailers
 Enhance Price Recovery and
Margin Management
 Selectively Increase Some Product
Prices
 New Fees on Existing Services
 Increase Penetration in Strategic
Market Channels
 Target Small New Accounts with
High Margin Potential
 Target Disaffected Large Specialty
Accounts
 Horizontal Acquisition
Existing Customers
New Customers/Markets
New Customer
Acquisition
By 2008, Distributors Plan to Offer
Some Fee-For Service
Retail Consulting Svces
43%
42%
Setup/Install
On-site Inv Mgmt
44%
Retail Trng
43%
After-Sale Svce
57%
58%
57%
69%
31%
0%
20%
40%
No Fee
Fee
56%
60%
80%
Fee-Based Services and Pricing
• Product price pressure
– Wholesale product prices up 1%/yr since 1990s
– Compensation up 4.1%/yr since 1998
• Low inflation causes gross margin squeeze
• But customers will resist fees for existing
“free” services
Logistics and Fulfillment
• Logistics companies are on a collision course with
distributors for control of the supply chain, especially for
warehouse management, order processing, and delivery.
• Wholesaler-Distributors will retain an advantage in postsales service and support.
• Smaller wholesaler-distributors will face less of a threat
because they rely more on personal relationships and
selling skills for success.
Key Trends Among Suppliers
• As retailer self-service grows, manufacturers will question
the effectiveness of the distributor sales force.
• Some manufacturers will leverage their design skills to
deliver fee-based services to retailers -- maybe team up
with distributors.
• Online communication between distributors and
manufacturers will grow dramatically.
Manufacturer Attitudes
• “We are getting less service while our costs continue to
increase.”
• “Lack of sales talent has forced us to reach around our
distributors.”
• “Wholesaler-distributors that do not execute a value-added
strategy will lose their customers to challengers -- some
they know and some they don’t.”
Trends to Watch
• Radio Frequency Identification
– Mfrs and Retailers soon will know exactly where a shipment is
• Offshore Customer Service
– Real cost savings due to low cost telecom, low salaries, etc.
• Sarbanes-Oxley Act of 2002
– Stresses financial transparency and accountability, may see
demands from large public supplier