Channel Strategy: Going to Market
XMBA 206.1
Session 8
Ganesh Iyer
1
Dell Direct

Fostered a new age of price competition. Priced 20 to 30%
below IBM and consistently

22 yr old UT Austin marketing major, initial seed capital of 80K

IBM open architecture,
» investment in R&D, advertising and sales force support.
» Sold through regular distribution channels. Depended upon dealer
service and support

Dell targeted the “expert market”
» sold thru 1-800 number.
» Direct marketing cut out the channel fat
» piggybacked upon IBM open architecture
Ganesh Iyer
2
Key Learning
Integrated Channel and Pricing Strategy

Channel decisions must always go hand in hand with
Segmentation, Pricing and other elements of the marketing mix.

Dell’s direct was possible because it was an integrated strategy
»
»
»
»
Right target identification
Direct marketing, no distribution or salesforce cost.
no advertising
And so lower price can be delivered to the price sensitive target
consumer.
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3
Learning

Coordinating channels is critical for efficient behavior of
retailers.

Channel decisions go hand in hand with the other elements of
the marketing mix.

Channel decisions have greatest the most long-term impact and
are the hardest among all marketing strategy to change.
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4
Why Use Channel Intermediaries?
Without Intermediaries
Milk P1
Bread P2
C1
ShampooP3
C2
Soap P4
C3
Reducing
Transaction Costs
With Intermediaries
P1
P2
P3
P4
Wholesaler
or Retailer
C1
C2
C3
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Why Channel Intermediaries?

Customers buy baskets or “assortments” of goods. Economizes on the
time cost of shopping

Retail Service is most efficiently provided by an intermediary
» product demonstration, after-sales service

Inventory carrying
» Intermediaries provide inventory buffer. Hedge against demand
fluctuations for the manufacturers.

Financing
» Examples automobiles or appliances
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Types of Channel Intermediaries
Goodyear’s Distribution
Industry
Goodyear
Garages
6
0
W. House clubs
6
0
Mass Merchandisers
12
0
Manufacturer Owned
9
27
Independent
63
58 (50 indp. 8
franchises)
Other
4
15
What does this imply?
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Goodyear’s Distribution

Goodyear penetration 4400 outlets vs. Michelin 7000 outlets.
What are the pros and cons of Goodyear's selective distribution.

What does Goodyear gain from its focus on the independent
dealer channel?

What is the role of Goodyear’s company-owned outlets?
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Managing Retail Intermediaries
Channel Conflict

When each member of the channel is an independent business,
retailers might not behave according to the manufacturer
desires
» This is called Channel Conflict

Key problems with independent channels = Channel Conflict.
» Each member has her own private interests or profits in
mind.
» Retail perspective may be more short term short-term profits
than the manufacturer.
» National vs. Local perspective
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9
Solution to Channel Conflict:
Channel Coordination
General Principle
 Manufacturers must find ways to maximize total channel profits.
» Why?

The incremental profits can be used in two ways:
» Absorbed by the manufacturer leaving the retailer or other down
stream channel member no worse than before.
» Shared with the channel members to reward them for providing
better service.

The challenge is to get the retailers to “behave” in a conventional
channel with independent retailers
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Channel Conflict and Coordination
Double Marginalization
C = 10
Manufacturer
Goodyear
W
First stage
Retailer
(Independent Dealer)
P
Demand for Goodyear Tiempo at your dealership
P
D
30
10
40
6
50
2
Second stage
Market
D(P)
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11
Double Marginalization
P
D
Ret_Profit
Mfg_Profit
Total_Profit
30
10
20*10 = 200
0
200
40
6
30*6 = 180
0
180
50
2
40*2 = 80
0
80
30
10
10*10 = 100
10*10 = 100
200
40
6
20*6 = 120
10*6 = 60
180
50
2
30*2 = 60
10*2 = 20
80
30
10
0
200
200
40
6
10*6 = 60
20*6 = 120
180
50
2
20*2=40
20*2=40
80
30
10
X
X
X
40
6
0
180
180
50
2
10*2=20
30*2=60
80
W = 10
W = 20
W = 30
W = 40
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Double Marginalization Problem

What wholesale price will the manufacturer charge?
» Manufacturer wants high W,

But this forces retailer to charge high retail prices with too little
demand

Can the manufacturer do better?
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Solution to Double Marginalization

Two-Part Tariff:
» McDonalds charges Upfront Franchise Fees from its franchise and a
variable royalty…Why?

Two part tariff = F + Wq
» Suppose the manufacturer asks the retailer for an upfront Franchise Fee (F
= $195) and in return charges W = c = 10…
» What happens?

Manufacturer Profits = 195, Retailer Profits = 5
» Retail price = low at 30
» Demand = high at 10.

Upfront Franchise fees helps in solving channel conflict because it
helps the manufacturer to lower wholesale price without sacrificing
profits.
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14
Channel Conflict and Coordination
Horizontal Conflict
Horizontal Retailer “Free-Riding”:
 Services provided by one retailer helps other competing retailers
» McDonald’s franchisees in a region.
» Free riding of pre-sale informational services.
» Goodyear selling to discounters and mass merchandisers.
Solutions
 Random Monitoring of Franchises

Exclusive territories: Retailer is guaranteed all consumers in a
territory? What are the benefits?
» Saturn dealerships
» Prevents free-riding of retail services.
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Should Goodyear Expand distribution to Mass
Merchandisers?
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Should Goodyear Expand distribution to Mass
Merchandisers?
Pros

Over ½ of all tire buyers (emergency purchases) make same day purchases-“be within an arm’s length of desire” unplanned purchases.

Michelin and others already everywhere

Mass merchandisers account for a declining percentage of replacement

(12% in 91 – 28% in 1976). Their prices are 97% of independent dealers. Less
of a threat for independent dealers. Warehouse clubs are more of a threat.

Mass merchandisers sell only 34% of private label…less interested in bait and
switch.

Independent dealers are becoming less Goodyear loyal. Using Goodyear name
to bait-and-switch to private labels. Going to mass merchandisers might counterbalance this
Cons

Increased Price Competition

Independent dealers might respond by supporting private labels

Intensive distribution  Erosion of brand loyalty
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Vertical Retailer Free-Riding

Retailer may use the manufacturer’s brand to draw customers
into the store and then sell other higher margin brands (Baitand-Switch)
» Possible problem with Goodyear dealers as the market matures
and becomes more competitive.
Solution
 Exclusive Dealing Contract: Requirement not to carry other
brands.
» Provides incentives to retailers to invest in service to build up the
product and therefore the manufacturer to invest in advertising and
brand building.
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18
Channel Conflict and Coordination
Manufacturer Free-Riding

Manufacturer may not provide the promised advertising support
for the retailers local market.

Manufacturers may open supply to competing retailers after a
retailer has invested in developing the manufacturer’s product.
Solution
 Exclusive territories.

Why are automobiles often sold through exclusive dealerships in
exclusive territories….
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19
Consumer Segmentation and Channel Design

Design channels to serve the needs of target consumer
segments.

Which channel to use depends upon which consumer segment
» comparison shopper vs. product information vs. after-sales service.
» emergency vs. planned

Evolution of consumer behavior to one-shop shopping has
affected tire channels.
Ganesh Iyer
20
Information Needs and Channel Design

Customers could identify Aquatread as being different…”grooves”
» Can the role of this feature be easily communicated by TV
advertising  determines how important is the role of retail
information

Primary information (education, demonstration, service)
» Early phase of product life cycle PLC.
» Need a dedicated authorized dealer channel which does not deal
with competitive products.

Comparative information
» Later phase of PLC need to accentuate benefits versus
competition.
» If you have a superior product you can move into channels which
display products side by side.
Ganesh Iyer
21
Learning

Coordinating channels is critical for efficient behavior of
retailers.

Channel decisions go hand in hand with the other elements of
the marketing mix.

Channel decisions have greatest the most long-term impact
and are the hardest among all marketing strategy to
change.
Ganesh Iyer
22