Marketing Channel Strategy PDF

NINTH EDITION Marketing Channel Strategy An Omni-Chonnel Approoch RobertW. Palmatier, Eugene Sivodos, Louis W. Stern, ond Adel I. El-Ansary 」£Ո> § ； '' :喚 Ø L 、이 ; 'Г ∕j...

NINTH EDITION Marketing Channel Strategy An Omni-Chonnel Approoch RobertW. Palmatier, Eugene Sivodos, Louis W. Stern, ond Adel I. El-Ansary 」£Ո> § ； '' :喚 Ø L 、이 ; 'Г ∕j' ^如Í ホお『叶ヤ' Γ А CHAPTER 1 The Omni-Channel Ecosystem LEARNING OBJECTIVES After reading this chapter, you will be able to: Define a go-to-market strategy. Appreciate the importance of marketing channel management to a firm's success. Define an omni-channel strategy. Articulatethe differences between an omni-channel and a multi-channel strategy, Identify and describe drivers and trends shaping the move to omni-channel strategies. Outline the elements of მ framework for omni-marketing channel design and implementation. INTRODUCTION This book examines ways to design, modify, and maintain effective channel strategies and structures, in consumer goods markets and business-to-business markets, for both physical products and services, within nations and across coun- try borders. We take an omni-channel perspective. In this first chapter, we define and elaborate on the concept of omni-channels and discuss the factors driving and shaping their ecosystem. We also contiast an omni-channel approach with a multi-channel approach and provide examples of ways to go to market with an effective omni∙channel strategy. This approach represents an expansion beyond a traditional marketing strategy, which focuses on the four marketing mix elements: product, price, promotion, and channel (or "place," in the popular 4P designation).! Marketers devote attention and energy to decisions about the development, branding, promotion, and prices 2 ТНЕ OMNI-CHANNEL ECOSYSTEM of the products and services they offer; the ability to make pioducts and services available to customers, when and wheιe they want them, is also a critical and indis- pensable marketing function and the focus of this book. Each firm must make a series of decisions, both Stiategic and tactical, to determine how to distribute its offerings to ensure they are available to end-customers. These comprehensive, fiιm∙to-end-user links essentially function as the routes a fiim uses to get its products and services into the hands of the end-users. Actors within these links together make up a marketing channel or marketing channel system, composed of inter- and independent organizations that work to go to market with a product or service, so that it i3 available for use or consumption. Developing a go-to-market strategy that deploys the most optimal combina- tion of actors in an efficient manner, such that the product or service is available and easily accessible for purchase, is indispensable to firm success. Conversely, inadequate distribution is a primary cause of failure.2 A go-to∙market strategy is the blueprint used to deliver the firm's offerings to end-users in a manner that conforms to their preferred mode and method of buying and also is efficient and cost-effective, so that it confers a competitive advantage on the firm. When developing a go-to-market strategy, the firm must know its consumers' or end-users' buying preferences, including the information and education end∣users might need before they can make purchase decisions, the services and after-sales support they seek, their expectations, their willingness to pay for extτas, their deliv- ery preferences, their financing needs, and the mode of oτdeιing they like best. As a firm devises its go-to-market approach, it also must be cognizant of the costs and benefits associated with various routes to maiket and balance them against custom・ ers' preferences, as well as with the firm's own desire for market coverage, willingness and ability to invest to acquire this necessary market coverage, and desire for control. Thus, developing a go-to-market strategy requires three main steps.3 First, the firm must perform a thorough analysis of industτy channel practices to isolate critical successful factors. Second, channel managers should identify areas of improvement in their practices. Third, the firm can develop policies and procedures to incentiv- ize and alter channel partners' behaviors to motivate their efficient execution of channel tasks. That is, most distribution systems rely on independent third par- ties, whose incentive systems may not align with the seller's, so implementing a go-to-market strategy also entails managing the relationship with partners, to get them to do what the firm wants from them. Firms have many alternatives when it comes to designing a channel system‫ ر‬each with its own stiengths and weaknesses. Consider two massive restaurant chains, McDonald's and Starbucks. Franchising is the preferred route to market foι the fast food giant McDonald's, such that 82 percent of its 36,000 outlets are fran- chised.4 But Starbucks typically operates company-owned stores and has avoided franchising, at least in the United States, due to fears about diluting the brand and customers' in-store experience.5 Yet even Starbucks makes some concessions, such that it uses licensing to operate stores in airports and college campuses and has also  ТНЕ OMNI-CHANNEL ECOSYSTEM 3 adopted franchising as a go-to-market strategy in European markets, wheιe the high rents made company-owned stores infeasible.6 Some firms take over distribution functions, by building an in-house distribu- tion system over which they maintain complete control, but such a system also requires developing internal expertise and making considerable investments to build company-owned distribution channels—such that this option might not be feasible or desirable in all cases. Furthermore, most products and services need to go through multiple marketing channels before reaching end∙users. A direct distribution model, in which items move straight from the manufacturer to the end-user without any intermediaries, is rare, due to the conflicting demands asso- ciated with resource availability, cost, coverage, specialization requirements, and end=consumer pteferences. IntermedEies can perform many required tasks at lower costs or with greater efficiency and effectiveness, especially when they possess supe- ιior operational expertise, better infrastructure (e.g., warehousing facilitks), market knowledge, or connections to consumers. It likely would be cost and time prohibi- tive for manufacturers to acquire such expertise, resources, and connections, SO, for example, many firms use Amazon or Alibaba as a key channel to matket, granting the massive retail channel partner the responsibility for most channel tasks. EXAMPLE: FULFILLRAENT BY AMAZON (USA) Amazon is the 237th largest corporation in the world.7 Among its customer base of about 120 million people, 63 million are Prime members and pay an annual membership fee to receive enhanced services, such as free shipping》Amazon also Vfers its business clients a service. Fulfillment by Amazon (FBA)/9 that permits them to ship their products in bulk to Amazon. For a fee, it will store the product and then complete individual customer orders as they come in and provide the customer support service, Thus, businesses get access to AmazoNs huge customer base and delegate many channel functions to it, alt for a relatively small see. WHAT IS A MARKETING CHANNEL? A marketing channel goes by many aliasesj including "ρlace" in the 4P framework, distribution channel, route to market, and go to market, ot simply channels. We define a marketing channel specifically as the set ofinterdependent but in many cases independent organizations involved in the process of taking a product or service to market and making it available for use or consumption. Unique organ- izations, each with specific strengths and weaknesses, comprise any marketing channel system: distributors, Wholesakis, brokets, franchisees, and retailers. With the participation of these various actors‫ ر‬marketing channels represent a significant portion of the world's business, and an effective marketing channel strategy can be a source of competitive advantage, by deliveτing superior customer value. 4 ТНЕ OMNI-CHANNEL ECOSYSTEM Total sales through such channels represent approximately one-third of the world's annual gross domestic product, so understanding and managing these marketing channels is critical for most businesses.1° For example, raw material and 8mponent product manufacturers often rely on distributors and manufacturer representatives to sell their offerings to original equipment manufacturers (OEMs), so that they can outsource various necessary functions like sales, business develop- ment, education (or information), logistics, contracting, and ordei piocessing and financing. In addition, these intermediaries may share risk and help manage the customer relationship. Then the end-customer—that is, the OEM—assembles the components into finished products and services, which it sells to wholesalers and reraπers, and the retailers ultimately make the products available to consumers. Figure L1 outlines some varied channel functions. A marketing channel strategy specifically defines the design and management of a channel structure to ensure that the overall channel system operates efficiently and effectively. The end goal of any channel system is to make products and services available and easy for users to buy, in accordance with their preferences. Otherwise, the firm's reach and attractiveness to buyers will be limited, with negative effects on firm sales. For example, a movie's success strongly depends on the number of screens on which it is shown, so it is in the interest of movie producers to manage their distribution systems effectively. But any channel system also must be efficient and cost-effective. The Changing Channel Landscape Technological advances significantly affect channel landscapes, and as the role of physical stores changes, manufacturers and retailers face new conundrums. FIGURE 1.1 Commercial Channel Subsystem Typical Channel System Physical _ Possession ٠ Owaership — Promotion — Negotiation ∙ CusiQmersi Financing + 总励檢确蘭 Industrlal and Risking ‫ه‬ Household Ordering + Payment + InfurmatiQn. Sharing  ТНЕ OMNI-CHANNEL ECOSYSTEM The Intemet and e-commerce, smartphones and mobile technologies, and social media all have altered how consumers and end-useis buy, with far-reaching imρli- cations acioss the channel landscape. Social media and online review sites present opportunities for brand advocacy but are also taking over information functions ^aditionally provided by channel partners, leaving them with less control over what information gets spreadJ1 Department stores such as Macy's, JCPenney, and Sears are struggling to find their bearings,ī213‫ ׳‬while various specialty stores such as Sports Authority have closed shop.14 Managers are vexed by such altered channel landscapes for several reasons. First‫ ׳‬building or modifying a channel system involves costly, hard∙to∙reverse investments. Taking the effort to do it right the first time has great value; making a mistake may put the company at a long-term disadvantage. Second, modifying channels means confronting entrenched inteτests and the way things have always been done. Channel confHcts intensify and require attention. Third, managers face challenging decisions when devising an optimal channel strategy, including where to devote the considerable financial investments required and how to adjust 56 roles and compensation of different channel members. The latest frontiers of m-commerce, including automatic replenishment, virtual and augmented reality, and shorter delivery time fιames, will continue to vex marketers. Integrating across channels also remains a challenge. Fot example, the prolifera- Hon of mobile devices makes price and product comparisons easier, so consumers demand greater pricing transparency but also leam about various features available ⅛om competitive bιands. Price diffeiences across channels can exacerbate chan- nel confHct, but online stores accrue much lower operating costs, because they do not need locations in high∙rent districts or expensive salespeople. Thus, whereas in 2015/ only 8 percent of consumers bought groceries online, that percentage doubled just one year later.15 Showiooming also has grown into a difficult challenge, such that consumers use one retail outlet to touch, feel, and try on products but then buy from a different, e-commerce outlet. In the practice of pseudoshowrooming, consumers inspect a product in the store but buy a related but different product online.16 EXAMPLE: BEST BUY'S RESPONSE TO ONLINE THREATS (USA) Even as the wider retail industry confronts store dosings on a vast scale； the consumer elec- tronics retailer Best Buy—faced with the threat of becoming a showroom for online retailers such as Amazon-is heading ٥ff most challenge$. Kcy elements of its strategy include charging prices comparable to those offered by online vendors, to minimize showrooming tendencies， In addition, with store-vvithin-a-stor0 formats, it partners with key vendors such as Samsung QontinueW 6 ТНЕ OMNI-CHANNEL ECOSYSTEM (continued) that can drive consumers to visit stores, because of their loyalty to the brands or because they want to experience and try items before purchasing them. For example, the recent addition of Dyson products means that consumers can try out innovative hair dryers and vacuum cleaners in Best Buy stores.17 Furthermore, Best Buy invests heavily in training a knowledgeable, customer- friendly sales force. To establish an omni-channel experience, the retailer lets ensumers shop for products across multiple platforms and buy according to their own preferred shopping com- bination, whether that involves researching in store and buying online, or vice versa, or some other combination of channels.|8 Marketing Channel Actors To be straightforward and avoid confusion, we identify and define three key entities involved in every marketing channel: manufacturers, Internediaries (wholesale, retail, and specialized), and end-users (business customers OI consum- ers). The presence or absence of a particular type of channel member is dictated by its ability to perform the necessary channel functions in such a way that it adds value. Sidebar 1.1 details an example from the tea industry in Taiwan that showcases the value that an inteιmediary can provide. SiDEBAHIJ Te^ S^His1g 1h Ea(uu^H: Yhe Key Rokas of Tea X『^cm、edH^『i0£i9 The Taiwanuse tea industry got its start when tea trees imported "om China got planted in the Taiwanese hills inthe mid-1800s. By the late 1920s, there were about20,000tea farmers in Taiwan, who sold their product (so-called crude tea) to one of about 60 tea intermediaries, who in turn sold it to 280 tea refineries located in Ta-tao-cheng, on the coast, ready for commercial sale and exportation. The tea intermediaries traversed the hills of Taiwan to search for and buy tea then bring it down to the dock to sell to refineries. But they also suffered a poor reputation among both farmers and refineries. Intermediaries were accused ofexploiting the market by buying low and selling high; critics suggested that a simple direct trading system could be instituted to bypass them 8mpletely. Thus in 1923, the Governor-General ofTaiwan set up a tea auction house in Ta~tao-cheng. Farmers could ship their tea directly to the auction house, where a first-price, sealed-bid auction would determine the price refineries would pay to obtain their products. The auction house's operating costs were covered by farmers' membership fees, trading charges, and subsidies by the Governor- General, so the tea intermediaries suddenly had to compete with the auction house. Despite this new and well-supported form of competition, the intermediaries not only survived, they ultimately forced the dosing of the auction house. But how could this outcome arise if they were just “exploiters" ofthe buy-sell situation?The answer isthatιhey weren't. They served key functions.  ТНЕ OMNI-CHANNEL ECOSYSTEM 7 First, the intermediaries facilitated search in the marketplace. An intermediary would visit many farms, finding tea to sell/ which constituted an upstream search for product supply. With the product supply in hand, the intermediary would take samples to a series of refineries and ask for purchase orders. Visiting multiple refineries was necessary because the same variety and quality of tea co3d fetch very different prices from different refineries, depending on the uses to which they would put the tea, This search process repeated every season, because each refin- ery's offer changed from season to season. The intermediaries thus found buyers for the farmers' harvest and tea supplies for the refineries. Second, tea intermediaries performed various sorting functions. Crude tea was highly het- eegeneous; even the same species oftea tree, cultivated on different farms, exhibited wide quality variations. Furthermore, 28 different species oftea trees grew in the Taiwanese hills! The appraisal process, at both intermediary and refinery levels, therefore demanded con- siderable skill. Refineries hired specialists to appraise the tea they received; intermediaries facilitated this p2cess by accumulating the tea harvests of multiple farmers into homogeneous lots for sale. Third, tea Intermediaries minimized the number of contacts in the channel system. With 20,000 tea farmers and 60 refineries, up to 1,200,000 contacts would be necessary for each farmer to market the product to get the best refinery price (even if each farmer cultivated only one variety of tea tree). Instead, each farmer tended to sell to just one intermediary, such that about 20,000 contacts existed at this first level of the channel. If the average intermediary collected " varieties of tea, and we assume that each of the 280 intermediaries negotiated, on behalf of the farmers, with all 60 refineries, we find [60 × 280 × 川 negotiations between intermediaries and refineries. The total number of negotiations, throughout the channel, in the presence of intermediaries thus was [20,000 + 16,800 χ 川，a value that exceeds 1,200,000 negotiations only if the number of tea varieties exceeded 70. But because there were only about 25 tea varieties in Taiwan at the time, intermediaries reduced the number of contacts from more than 1 million to about 440,000. Such value-added activities had been completely ignored in the attacks made on the tea inter- mediaries as "exploiters." The resulting failure of the government-sanctioned and -subsidized auction house suggests that, far from merely exploiting the market, tea intermediaries were efficiency-enhancing market-makers. In this situation, the intermediation of the channel added value and reduced costs atthe same time. In many cases, one channel member serves as the CliiUineI ca∣)taiι1∕ taking the keenest interest in the workings of the channel for the focal product Of service and acting as the prime mover in establishing and maintaining channel links. The chan∙ nel captain is often the manufacturer; it typically designs the overall go-to-market strategy, particularly for branded products. In the subsequent sections, we thus take the manufacturer's perspective frequently when describing a marketing channel strategy, but we explicitly acknowledge that manufacturers are not the only ones that can function as channel captains. 8 У OMNI-CHANNEL ECOSYSTEM Manufacturers: Upstream Channel Members Whenwe refer to manufacturers,wemeantheρroducer or originator ofthe prod- uct or service being sold. In the modern retail marketplace, ownership of a bτand can belong to the manufacturer (Mercedes-Benz) or a retailer (e.g., Arizona cloth∙ ing atjCPenney), or the retailer may be the brand (e.g., The Gaρ). Manufactureis can produce brands‫ ׳‬or they can sell private labels, and these two broad categoτies feature some key distinctions. First∕ manufacturers that brand their products are knownby those namestoend-useιs,evenifintermediaιies distribute their offerings. Famous examples include Coca-Cola, Budweiser beer (owned by Anheuser-Busch InBev), Meicedes-Benz, and Sony. Second, manufactureis that make products but do not invest in a branded name for them produce private-label products, and the downstιeam buyer (manufacturer or retailer) puts its own name on them. For example, Multibar Foods Inc. makes private-label products for the neutra- ceutical marketplace (health, diet, and snack bars); its branded clients include Dr. Atkins' Nutritionals and Quaker Oats Co. The company takes care of research and development, so the expertise and knowledge it can provide make it valuable to brand companies that hire it to produce their products.2° Branded manufactur- ers sometimes choose to allocate some part of their available production capacity to make private-label goods, though at the risk of helping a future competitor. In the U.K. market, private labels account for more than half the goods sold in leading supeιmaιkets.21 A manufacturer can produce a service too, such as the tax preparation services offered by H&R Block (franchisor) or insurance policies provided by State Farm or AUstate. These brands sell no physical products; rather, the companies cieate families of services to sell, which constitutes their "manufacturing" function. In turn, marketing channel functions typically focus on promotional or risk-oriented activities, such as when H&R Block promotes its services on behalf of both itself and its franchisees with a guarantee to find the maximum tax refund allowed by law. Insurance companies similarly tend to ignore physical products and focus on promotions (on behalf of independent agents in the marketplace) and risk (here, risk management is the very heart of the industry). Therefore, the lack of a physi- cal product that needs to move through the channel does not mean that channel design or management issues disappear. As these examples also suggest, the manufacturer is not always the channel captain. For branded, produced goods, such as Mercedes-Benz automobiles, the manufactuτer clearly serves this role; its ability and desire to manage channel efforts proactively relates intimately to its investment in the brand equity of its offerings. But a private-label apparel or neutraceutical manufacturer is not evidently the owner of the brand name, at least from end-users' perspectives, who instead see another channel member (e.g., the retailer) as the apparent owner. Nor does a manufacturer's ability to manage production mean that it excels in other marketing channel activities. An apparel manufactuτer is not necessarily a  ТНЕ OMNI-CHANNEL ECOSYSTEM 9 retailing or lo^stics expert. But there are some activities that neatly every manufac­ turer must undertake. Physical product manufactuiers must hold on to the product and maintain ownership of it, until the product leaves their manufacturing sites and travels to the next channel member. Manufacturers must engage in negotia­ tions with buyers, to set the terms foι selling and merchandising theif products. The manufacturer of a branded good also participates significantly in promoting its products. Yet various intermediaries in the channel stIU add value through theiτ superior performance of functions that manufacturers cannot, so manufacturers voluntarily seek them out to increase their reach and appeal. Intermediaries: Middle-Channel Members The term intermediary encompasses any channel member other than the manu­ facturer or end-user. We differentiate three general types: wholesaler, retailer, and specialized. Wholesalers Wholesalers include merchant wholesalers or distributors, manufacturers' repre- sentativesj agents, and brokers. A wholesaler sells to other channel intermediaries, such as retailers, or to business end-users, but not to individual consumer end-users. Chapter 7 discusses wholesaling in depth. Briefly, though, we note that merchant wholesalers take title to and physical possession of inventory, store inventory (frequently from multiple manufacturers), promote products in their line, and arrange for financing, ordering, and payment by customers. They earn profits by buying at a wholesale price and selling at a marked-up price to downstream customers, then pocketing the difference (net of any distribution costs they bear). Manufacturers' representatives, agents, and brokers rarely take title to or physical possession of the goods they sell (e.g., real estate agents do not buy the houses theyhave been enlisted to sell); rather, they engage in promotion and negotiation to sell the products of the manufacturers they represent and negotiate terms of trade for them. Some intermediaries (eg, trading companies, export management companies) specialize in international selling, regardless of whether they take title or physical possession; we elaborate on these intermediaries in Chapter 9. Retail Intermediaries Retailers come in many forms: department stores, mass merchandisers, hyper­ markets, specialty stores’ category killers, convenience stores, franchises, buying clubs, warehouse clubs, direct letailers—to name just a few. Unlike purely whole­ sale intermediaries, they sell directly to individual consumer end-users. Their role historically entailed amassing an assortment of goods that would appeal to consum­ ers, but today that role has greatly expanded. Retailers might contract to produce private-label goods, such that they achieve effective vertical integration upstream in 10 ТНЕ OMNI-CHANNEL ECOSYSTEM the supply chain. They also may sell to buyers otheτ than consumers; Office Depot earns significant sales by selling to businesses rather than consumers (i.e., about onethird of its total sales), even though its storefronts nominally identify the chain as a retailer. In particular. Office Depot's Business Solutions Group sells services to businesses through various routes, including direct sales, catalogs, call centers, and Internet sites, and it makes these business-to-business sales services available in the United Kingdom, the Netherlands, France, Ireland, Germany, Italy, and Belgium.22 Chapter 6 discusses retailing in depth Specialized Intermediaries Specialized inteιmediaries enter the channel to perform a specific function; Wpi- cally, they are not heavily involved in the 8re business represented by the products being sold. For example, insurance, financing, and credit card companies are all involved in financing; advertising agencies participate in the channel's promotion function; logistics and shipping firms engage in physical possession; information technology firms may participate in ordering or payment functions; and marketing research firms generate marketing intelligence that can support the perhrmance of manyfunctions. EXAMPLE: MTIME-BRINGING HOLLYWOOD TO ASIA (CHINA) Established in 2005, Mtime (1w.mt1me.com) is China's answer to Fandango, Rotten Tomatoes, and IMDb. China is predicted to overtake the United States as the wo"d's largest movie market> me3sured by box office revenues, relatively soon.23 The Mtime online portal provides Chinese consumers with movie reviews, critics ratings, and a database of film synop­ ses going back to 19Q5. It also sells movie tickets online and provides partner theaters with data about movie ticket sales, segmented by market. Mtime carries celebrity news and covers movie premieres. Most Chinese 8nsumers do not have access to Facebook and other Western social media sites (which are blocked by the Chinese government), so portals like Mtime are a primary source of news about Hollywood and celebrities, In 2015, Mtime partnered with Dalian Wanda Group, China's largest theater chaιn, to sell movie-themed merchandise ín theaters. Mtime also licenses products from Hasbro and Mattel, to sell through pop-up stores and its own online portal, As a result of these varied appeals, Mtime boasts an estimated 160 million unique visitors a month and has been acquired by its erstwhile partner the Dalian group for $350 million.24 End-Users: Downstream Channel Members End-users Susiness or consumer) are channel members as well‫ ر‬because they сап and frequently do perform channel functionS/ just as other channel members do. Businesses often stock up on raw materials for their operations; they are performing  ТНЕ OMNI-CHANNEL ECOSYSTEM 11 physical possession, ownership, and financing functions, because they buy a much larger volume of product than they will use in the near future. They also pay for the raw materials before they use them, thus injecting cash into the channel. While storing the raw materials in their factories, they reduce the need foι warehouse space maintained by the supplier, thus taking on part of the physical possession function. They bear all the costs of ownership too, including pilferage, spoilage, and so forth. Naturally, these buyers expect a piice cut for their bulk purchases, because they are bearing so many more channel function costs. Combinations of Channel Members The various channel participants can come together in varPus ways to create an effective marketing channel strategy. The optimal range and number of channel members depend on the needs of the end-users and manufacturers. In addition, the identity of the channel captain can vary from situation to situation. Appendix 1.1 outlines several different possible channel formats for manufacturers, retailers, service providers, and other channel structures. Online Channels Online channels go by many aliases: e-commerce, e-tailing, online retailing, and Internet channels, to name a few. Online channels offer a form of direct retail- ing, such that the consumer uses an Internet-enabled device to order products or services through the Internet and have them delivered, digitally or physically, to a ^eferred location. They provide a 24/7 shopping environment and a much wider 3cay of goods and services available for purchase, unhindered by shelf-space Bnstraints. In addition, they offer consumers a means to shop from anywhere ‫ت‬nd anytime, accessing vendors located in all corners of the world. Other nota- He strengths of online channels include their easy search functions; provision of ‫؛‬etailed product information, both from the manufacturer or retailer and in the ‫؛‬٥rm of online reviews posted by other users; and helpful product and price com- jarison tools. Thus, by 2016, online sales accounted for 8.1 percent of all retail ∖mles; that number is expected to grow at double-digit rates in the next several vears.25 The top 25 retailers earned combined online sales of $159 billion in 2016, N^d notably, 18 of these 25 companies started as traditional brick-and-mortar :EtaDeiS (e.g., Walmart).26 Yet online channels also feature limitations, in that end-users cannot touch, feel, 二1 try on products. Therefore, their return rates tend to be high, and the cost of those ιeturns must be absorbedby the system. The need to wait for physical product Delivery represents another drawback of online channels from end-users' perspec- K e, In a related sense, online channels are constrained when it comes to selling ,ems with a poor weight4o-value ratio; it even may be economically unfeasible foι ‫ ق‬channel actor to ship low-priced but heavy products like concrete or rice. 12 ТНЕ OMNI-CHANNEL ECOSYSTEM EXAMPLE: HOLLAR-TAKING THE DOLLAR STORE ONLINE (USA) Hollar is an online dollar store； conceived of in 2015 when the founders saw that e-commerce had not really penetrated this retail 3pace. Existing companies such as Dollar General and Dollar Tree had limited online presence, and e-commerce startups were focusing all their efforts on more affluent customer groups. For Hollar, 80 percent of its traffic comes from customers using their mobile devices to find items commonly found in drug stores, at much lower prices.27 Many items cost $1, though the median price ٠n Hollar is $5; nothing costs more than $10. Tha company boasts more than 2 million active users.28 To deal with shipping costs, it avoids carrying heavy items (an average shipment weighs 5 pounds) and requires a minimum order of $10-though average order sizes reach about $30. FROM A MULTI CHANNEL TO AN OMNI-CHANNEL WORLD Some writers use the terms ‫׳‬،multi-channel,‫" ״‬omni∙channel," and "cross∙channel" loosely and nearly interchangeably.29 Yet omni-channel and its variants are becom- ing increasingly prevalent; in Figuie 1.2, we graph the frequency of searches for the term "omni-channe]" in recent years. This growth reflects market trends, The ever-growing share of online sales has prompted most manufactuiers to add online channels to theiι existing channels mix. In certain industries (e.g., travel, books), online sales have decimated tradi- tional intermediaries; in otheιs, though (e.g., food retailing), the impact of online FIGURE 1.2 800000 Frequencyof 700000 Occurrence of Omni-Channel 600000 Retail in a 500000 Seatch Engine: 2008-2017 400000 300000 200000 100000 2004 2006 2008 2010 2012 2014 2016 2017(1an-Sept) Year  ТНЕ OMNI-CHANNEL ECOSYSTEM 13 sales has been less dramatic. Initially, the emergence and growth of online sales led brick-and-mortar retailers to initiate multi-channel strategies, by adding online sales channels to their channel mix. More recently, some pure play online retailers, including Amazon and Warby Parker, have decided they might want to be pres- ent ofHine too, leading them to open a few physical stores. These choices are not limited to retailers; upstieam channel membeιs also must decide whether to add online channels. The insurance sector offers a classic example. Most insuiance companies distrib- ute their products through independent agentSj so they confronted a challenging decision about whether to offer direct online sales. The pressure to add this online channel largely came from competitive forces; online only and direct distribution insurance companies weτe cutting into theiι markets. The traditional insurers also realized that 8nsumers' preferences weιe evolving when it came to ways to buy, learning valuable lessons from the fate of companies in other sectors that had been totally upended by the Internet. Yet adding an online presence cieated the risk that the insurance companies would alienate their primary channel partners, insurance agents. Across various sectors—insurance and otherwise-many comρa- nies sought to add online or direct channels to their traditional physical channels, while minimizing channel conflict, but for the most part, the integration across channels was minimal.3° The emergence of smaιt mobile devices, social networks, and in-store technol- ogy has blurred the line between online and physical channels, though, and this blurring is what omni-channel strategies are all about. Consumers can search foι information online with their smart devices while they are still in the store, giving rise to both showrooming (using the store to try and touch products but buying online) and Wcbrooming (searching on the web but buying in the stoιe). The diminished boundaries between physical and online channels also precipitated the necessary shift away from a multi-channel and toward an omni-channel perspec- tive, because firms have no choice but to find ways to integrate their operations seamlessly across channels. The lines will continue to blur with the greater ρen- etration of smartphones, incieasing investments in virtual reality, and advancing ietail technologies that promise to help consumers Viitually experience products and even touchj see, or smell them remotely. DISTINCTION BETWEEN MULTI-CHANNEL AND OIVINI-CHANNEL MARKETING STRATEGIES: TRENDS DRIVING THE SHIFT A multi-channel environment sets clear demarcations and silos between channels, with the goal of optimizing th6 performance of each individual channel and coordi- natiπg across them. That is」a multi-channel strategy entails leveraging multiple 14 ТНЕ OMNI-CHANNEL ECOSYSTEM channels that operate relatively independently. Theie may be some coordination and evaluation of the different channels, but they opeτate as clearly separate enti- ties. Consumeιs engage in cross-channel shopping by switching among online, mobile, and physical platfoτms during a single puichase transaction. But in many organizations, the online and in-store experiences may be managed by separate divisions, with differing priorities, so the experience is not really seamless for the customer. Even in the face of well-entrenched cross-channel integration practices, such as when consumers can buy online and pick up products in-store, or else buy online and receive delivery, but then make τeturns in Store, channel integration remains a challenge and a work in progress. An omni-channel system instead harmoniously integtates functions that allow customers to shop—research, purchase, communicate, engage with, and consume the brand—across online, mobile, social, and offHne physical channels. In an omni-channel world, channel arrangements help customers move seamlessly and however they choose, across multiple channels during a purchase transaction.31 As another key distinction, the concept of "consumer engagement‫ ״‬is central to omni-channel approaches; they explicitly seek customer experience and engage- ment through efforts that rely on social media, email, web links, mobile platfoτms, store visits, promotional effoτts, and so on. in this sense, an omni-channel Strat- egy incorporates vaτious channels of communication, in addition to channe!s for the physical transfer of goods.32 Noting these differences, we also highlight several trends that are driving the shift. Trend 1: Channel Participants Operate in a Connected World Nearly 90 percent of Ameiicans are online, more than three-quarters own a smart♦ ρhone, nearly three-quarters have access to broadband services at home, and 70 peτcent of consumers use social nιedia.33 The ubiquity and universality of Internet access have vastly influenced people's shopping behavior. According to a Google Consumer Barometer report, 52 percent of U.S. consumers research home furnish- ings online prior to purchase; the incidence is even greater in Thailand, where 78 percent of shoppers do likewise.34 This survey further revealed that across a τange of 20 product categories, 35 percent of U.S. consumers sought advice through their smartphones prioi to purchase, and 36 percent engagud in online comparison shop- ping. A high level of interconnectivity means that consumers fιeely move across different channels, depending on their preferences at the time. Trend 2: Cross-Channel Shopping Consumers use their mobile phones in stores to check and compare prices, bιands, or products; they also might check out product reviews online and ask ftiends on social media sot advice.35 The resulting showrooming phenomenon means that many consumers visit physical stores to inspect and try pιoducts but choose to  ТНЕ OMNI-CHANNEL ECOSYSTEM 15 make purchases oπline. Such activities can lead to conflict among upstream chan- nel members, though, because one actor is paying all the costs of informing the customer, while another one enjoys the benefits of the sale. Thus they have to devise equitable compensation systems when one channel functions as a showroom for another channel. Perhaps the most smmon type of cross-channel shopping behavior is webrooming, such that consumers research products online before ρur- chasing them offline.36 Warby Parker and Bonobos are pioneers in the online arena that now operate physical showιooms too. Trend 3: Altered Shopping Norms The physical storefront continues to evolve; some retail futurists predict that stores may become simply pared-down showrooms, with the mobile phone functioning as the stoιe of the future.37 The prediction has some reasonable support. Consider how product review sites have altered basic pricing rules. In a world devoid of prod- uct reviews, consumers tended to use price as a heuristic, often buying mid-priced items but bypassing the most and least expensive items. But today, consumers are more willing to buy the lowest∙ρriced item in a product line, if the ιeviews are good.38 The proliferation of social media sites also means that the power, reach, and frequency of word-of-mouth and shared reviews have increased manyfold. Not only do consumers share information and offer recommendations, as well as seek out infoιmation and advice from others to inform their own purchase decisions, but they also can engage with brands and become brand advocates. Marketers can- not control what consumers say, yet they can harness the power of social media as a platform for co-cιeating experiences and engaging with consumers. Channel managers should be mindful of privacy issues while they develop strategies to per- sonalize their communications. A true omni∙channel strategy integrates channels of communication as a key part of the channel system. Trend 4: Move to Services The intangible nature of services creates challenges for matketing channels, in terms of both governance and management.39 In service channels, the focus is not on taking title and inventorying but iather on creating customer engagement and CUS- tomer value. This focus provides opportunities for customization and co∙creation. As we have noted, online channels also totally disrupted seτvice industries such a3 travel and financial services, leading to the disappearance of many intermediar- ies. The ability to remove or circumvent well-entrenched intermediaries from the marketing channel and its value chain is disintermediation. Upstream channel members often prefer to control the customer experience, which may lead them to seek the disintermediation of downstream channel membeιs. Tesla Motors' direct distribution model excludes traditional dealerships, because the company seeks to create a specific customer experience that goes beyond just its product offeι. 16 ТНЕ OMNI-CHANNEL ECOSYSTEM The approach has prompted intense lobbying and legal action from advocacy groups and automobile associations, though,4° which aιe seeking to avoid the fate of inteιmediaries like travel agents. The Internet al30 has spawned several consumer∙to-consumer service businesses with novel channel captains. For example, Airbnb enables consumers to rent out extra rooms or vacation properties to other 8nsumers who choose to stay in these facilities rather than traditional hotel rooms. The American Hotel and Lodging Association is lobbying regulators to put curbs on Airbnb operations, arguing that the service being provided really is an unregulated hotel.41 Trend 5: Targeted Promotions and Customer Insights Targeted promotions delivered via email, online couponing, price matching, and social media advertising are all tools that leverage new mass communication pro­ motional channels. They effectively hamess customer Ielationship marketing and social media benefits to facilitate an omni-channel strategy. For example, Walgreens and Foursquare have partnered on a location-based social networking site that provides electronic coupons to customers as soon as they enter a Walgreens store; Catalina Marketing uses in-store purchasing histories to deliver personalized mobile ads to consumers too.42 Such technologies create a data∙rich environment, as we elaborate in Chapters 10 and 11. But many retailers have not fully developed their webpages or e-stores to ensure optimal presentations on various online and mobile platforms. In some cases, their mobile and online channels even compete directly with each other. An omni-channel strategy instead requires that upstream and downstream channel members integrate their promotion, pricing, and brand positioning across chan∙ nels. For example, in their online channels, retailers are not constrained by store size or shelf spac0 so they can carry a wider assortment and potentially target more customers. Thus Walmart can target higher∙income customers through its online and mobile platforms, competing with Costco and Amazon by selling higher-end, branded items, even while maintaining its low-price positioning for in-store shoρ- pers. Such end-user segmentation across channels is challenging; different end∙us6rs seek varying bundles of services and thus prefer different channel arrangements. It is up to upstream and downstream channel partners to synchronize the bundle of services, and the costs involved in serving these customer segments, to find a fair, appealing, efficient pricing strategy. CHANNEL STRATEGY FRAMEWORK An ecosystem—zza complex network or interconnected system43‫ ״‬or''everythingthat exists in a particular environment"44-is an apt term to describe a fiιm's go∙to∙market  ТНЕ OMNJCHANNEL ECOSYSTEM 17 strategies and associated sales channels. It involves an a∏-encompassing‫ ر‬intercon­ nected, complex network. In a multi-channel world, firms rely on multiple routes to marketj butin an omni-channel world, they mustgo further to develop a 8mprehen∙ sive framework that captures a systemic view of the flows of material, information, ownership, financing, promotion, and supporting services across channels, An omni-cha∏nel view "rises above siloed behavior, unlocks values across devices and platforms, and delivers a more curated and interactive brand experience."45 The mov­ ing parts that form the ecosystem come together and complement one another in their capabilities. Accordingly, an Omni-Channel ecosystem integrates domains that are often analyzed separately, namely business∙to∙business (B2B) and channel intermedia^ domains. Analyzing, designing, and developing the most effective go∙to∙market omnLchannel structure and stiategies requires a thorough understanding of both domains. This book combines them, but we also address the unique elements in separate chapters. Specifically, in Chapters 2-5, the focus is on the B2B domain, starting with the assumption that developing an insightful omni∙channel strategy requires being fluent in channel fundamentals. We drill down to specify various aspects of managing channel functions. In Chapter 2, we cover how channels ere ate value and provide solutions in an omni∙channel world, according to the functions and activities that exist in the channel and its participants. We also introduce the channel audits and tools that marketers can use to identify gaps in existing channels, along with a framework that can reveal if channel functions should be performed in-house or outsourced, according to a make∣or-buy channel analγsis. This chapter covers three key design questions: the degree of channel intensity, mix of channel types, and use of omni-channel distribution. Overall, the end objective must be that the channel design creates value by ensuring that the needs of both upstream and downstream members of the channel are meshed, in such a way that they can meet target end-users' demands, with mini­ mum possible cost. Rather than the channel design, Chapter 3 deals with channel poh Channel Hanagers need to understand the source of each channel member's power and Jependence and potential for channel conflict to develop before they can derive a plan for building and maintaining relationships with channel partneis. For exam- 마巳 given the interdependence of channel partners who may not always have the ^icentlve to cooperate fully what should a channel captain do to ensure an optimal channel design? One approach is to leverage channel power. A channel member's power lies in their ability to control the strategic and tactical decisions of a channel partner. These sources could serve to further the member's ina1v1dual ends, though if it uses its channel power to get channel members to perform the jobs that an optimal channel design specifies as their responsibility, the result will be a channel that delivers the demanded service outputs at a lower cost. 18 ТНЕ OMNI-CHANNEL ECOSYSTEM In Chapter 4, we go further into ways to manage channel relationships. Relationships are important foτ both upstream and downstream channel mem- bers, who participate in channel relationship lifecycles. We exploιe ways channel members might build commitment and trust‫ ر‬but we also coveι how dysfunctional relationships, lacking in tiust and commitment, can disrupt the channel. Finally, in Chapter 5 we discuss the nature and types of channel confHct and how to measure it in channel relationships, across both multi-channel and omni-channel contexts. We also identify various conHict resolution strategies. Turning to the channel intermediary domain, our goal is to identify the best practices to integrate into an omni∙channel system, accoιding to the per- spectives of the most common channel participants, structures, and strategies: retailing (Chapter 6), wholesaling(Chåpte17), franchising (Chapter 8), and international channels (Chapter 9). Retailing connects the channel to the end-user, and the mul- tiplicity of retailing models available today offers testimony to the vast range of end-user segments seeking different concatenations of service outputs. We addιess various e-commerce topics too, such as digitization, showrooming, disinterme- diation, virtual and augmented reality, social commerce, and mobile commerce. Dramatic changes in the business environment-shifts from products to seιvices, incteases in e-commerce, globalizationτre leading to the emergence of new chan- nel systems, with the potential to disrupt many traditional approaches. Fot example, the shift to online purchases of books and music has dramatically tτansformed the channel system for these products. Wholesaling is distribution's "back room, mov- ing and holding product both efficiently (i.e., to minimize cost) and effectively (i.e., to create spatial convenience and quick delivery). Franchising is an important method of selling that allows small-businesspeople to operate retail product and service outlets, with the benefits of a laige-scale parent company's (franchisor's) knowledge, strategy, and tactical guidance. The channels differ somewhat in inter♦ national marketing, so we also address some of these challenges, especially for firms that seek to reach the base or bottom of the pyramid] that is, the poorest 8nsumers, often living in remote regions of the world. With Chapteis 10 and 11, we pull all this information together to propose omni-channel strategies. In Chapter 10, the focus is on the end-user. A fundamen- tal principle of maikuting is segmentation, which means dividing a market into groups of end-users who are (1) maximally similar to one another and (2) maximally different from other groups. For channel manageis, segments can be best defined acconiing to the service outputs the end-user needs to obtain from that maiketing channel. A marketing channel is more than just a conduit for products; it is a means to add value to the products and services marketed through it. In this sense, the marketing channel represents another "production line," engaged in producing not the product (or service) that is being sold but ratheτ the ancillary services that define how the product will be sold. Value-added services created by channel members and consumed by end-useis, together with the product purchased, represent service  ТНЕ OMNI-CHANNEL ECOSYSTEM 19 outputs. Service outputs include φut are not limited to) bulk-breaking, spatial con- Venience, waiting and delivery time, assortment and variety, customer service, and product/market/usage information sharing. In Chapter 11‫ ر‬we detail four pillars of an Omni-Channel strategy: harnessing customer knowledge, leveraging technology, mana^ng channel relationships, and assessing channel perfoimance. We believe that to design an optimal channel strat- egy for a targeted end-user market, the designer must audit the existing marketing channels serving this segment. This audit should evaluate the capabilities of each potential channel, in terms of the nine key channel functions (Figure 1.1), to deter- mine how well it is suited to meet the segment's service output demands. Channel functions pertain to all channel activities that add value to the end-user, such that we move beyond merely moving the product along the channel to include promotion, negotiation, financing, ordering, payment, and so foτth. An omni-channel strategy is applicable both in consumer and business markets. In Figure 1.3, on the left, we present upstream sellers of raw materials or compo- nent ρarts. Most finished goods sellers ate not fully vertically integrated, SO they obtain raw materials and component parts from upstream suppliers. These suρ- pliers may be grouped into tiers, depending on their degree of importance or the amount of business they transact with the finished goods sellers. Upstteam sellers of raw materials and parts also use a variety of distribution methods to serve fin∙ ished goods sellers. Three primary drivers determine the suitability of a given channel: the size of the customer (fEished goods seller) and its buying preferences, as well as the sell- er's willingness and ability to inteiact through a certain channel. To eam business from and manage relationships with larger customers, a supplier might deploy Upstream Intermediate Downstream FIGURE 1.3 RnHttdV Entities Entities В2В Omni- Channel Ecosystem В2В Intarmadiariav BCIntermediaries Sellers of ,&而踪画빠 ,向鹏 ：；；：：；«^^‫ل‬］| ‫ليؤ^^»； ع‬ Raw *⅜Vhql⅞≤⅛lel⅛. Finished ·,；；апеміе^： ၊ End-Userof pJ5⅛⅛utoI'i∙ Materials/ , И^con‫ا‬meғ¢e‫ذ‬ Goods , Products and Component 朝週*值武南ま Sellers Services Parts 20 ТНЕ OMNI-CHANNEL ECOSYSTEM an in-house direct sales force, reHecting the potential size of their order and theiτ demand for guaranteed pioduct availability or custom delivery options. Suppliers alternatively might hire manufacturei representatives to transact with potential customers. Some sellers (especially newer firms) may lack the resouices needed to develop an in-house sales force, and agents and brokers that already have connec- tions with customers could offei an appealing option. These agents often carry a portfolio of products from different manufacturers, which many customers pre- fer, rather than being limited to transacting individually with different 3upphers, Finally, in globalized marketplaces, many international firms tum to agents and brokers as a key mode of entry into new overseas markets. A firm also might go through a wholesaler or distributor. Grainger is a lead- ing industrial distributor that stocks nearly 1.5 million items (www.grainger. com). Many finished product manufacturers source items from distributois such as Giainger, wnich offer one-stop shopping convenience. Furthermore, Graingeι helps both suppliers and finished goods manufactuiers with their supply chain functions, such as inventory management. In other industries, such as pharma- ceuticals, wholesalers play a more critical role; Amerisource Bergen, Catdinal Health, and McKesson account for an estimated 90 percent of drug distribution in the United States.46 These wholesalers often provide service for the complete inventory line produced by manufacturers and have access to a wide array of retail outlets (e.g., traditional pharmacies, supermaikets, mail order pharmacies, hospitals). In technology sectors, value-added resellers also can be critical; these distributors offer complete solutions packages that bundle components, software, or hardware from a variety of providers or add features to existing packages. If end-users need complete solutions that a single vendor is unable to provide, these resellers become critical intermediaries, because customers prefer to buy through them to obtain those value-added services. Some firms instead turn to direct, B2B e-commeice, supported by proprietary electronic data interchange (EDI) systems or cloud computing services provided by companies like Amazon (https://aws.amazon.com/ecommerce~applications). In the automotive industry, for example, finished goods sellers can find and transact with component part suppliers using shared online platforms, some ofwhich even feature reverse auction mechanisms, such as Covisint (www.covisint.com). These platforms allow firms to find suppliers that meet certain criteria, while also expand- ing the suppliers' options. Direct selling in B2B settings also can create challenges, though, because buyers readily tum to these platforms to find alternative suρρli- ers, which might strain relationships that salespeople have spent years cultivating. Salespeople also may need to leverage more communication tools, including social media, even in a B2B context, but still deliver a consistent message acιoss com- munication channels. Thus, the role of the salesperson is poised to change in the shifting omni-channel context.  ТНЕ OMNI-CHANNEL ECOSYSTEM 21 Most omni-channel research tends to focus on business-to-consumer contexts, though,47 as represented on the right side of Figure 1.3. In reality too, such consid- erations are prominent. Automakers are closely watching Tesla's direct distribution model to determine if it threatens to upend traditional distribution channels through franchised dealers. At the same time, dealerships themselves increasingly use the Internet to acquire customers‫ ر‬but they need to realize that those custom- ers are better informed, having done plenty of research before they ever visit the dealership. Consumers also can shop among various dealerships for the same vehi- cle modeL thus creating more intra∙brand competition. For these customers, the marketer needs to find an appropriate way to synergize the offHne and online expe- τiences,48 but also guaιd against the risk of revenue loss if 8nsumers move fiom one channel to another. A key question is whether customers that transact with the company through a particular channel are more valuable than those that transact through othe1 channels.49 Most evidence indicates that customers that use multiple channels tend to be more piofitable and transact more with the firm.50f51 Figure 1.4 summarizes the various challenges that managers face in developing an omni-channel stιategy. We highlight the need to integrate across marketing and communication channels, to create unified brand experiences for customers. By necessity, an omni-channel strategy is data rich and ιelies heavily on data analytics. Furtheimore, an omni∙channel strategy demands pricing transparency and consistent pricing across channels or even globally. Certain industries are affected by the shift to an omni∙channel environment more than others, though. We develop all these themes thioughout this book; moιe brie□y, in Sidebar 1.2 we highlight challenges associated with deιiving a distribution strategy. We close with a bιief example that highlights the opportunities and promises of an omni-channel environment. Managing Omni-Channels FIGURE 1.4 The Omni- Pricing: Trapsparcncy Kd^onsistency ChanrH Challenge Ünder ：mli٦٦g and A^^cs Consun|: Behavior Omni-Channel Deploying Usumer Strategy Cnmpetitorand JndustryPractices 22 ТНЕ OMNI-CHANNEL ECOSYSTEM SIDEBAR1.2 E-Commerce in India: Channels Operate in an Ecosystem52 53 China is the world's largest e-commers market; its 2016 sales of $681 billion made it nearly twice the size of the U,S. market. In comparison, India's e-commerce market is miniscule, CUΓ∣ rently earning sales of around $21 billion that might increase to $63.5 billion by 2021. Yet despite this relatively small size, India's e-commerce market is drawing vast attention from global e-commerce giants; Amazon has made investments of dose to $5 billion, and Softbank is investing $2.5 billion. The reason for this interest actually parallels the reason that the market has remained SQ small thus far. That is, e~smmerce in India has not spread because the Internet has not penetrated the nation. The se8nd most populous 8untry in the world (more than 1.3 billion people), India also is home to an estimated 730 million mobile-phone users—but only about 450 million people use the Internet. Even as Internet penetration increases, reaching 31 percent of the country in 2017, it laqs areatly behind the rates of mobile users, who were 88 percent of the population in 2016. The spread is even slower in rural areas, which are hometo ð population of916million people- all potential e-commerce customers, if only they could access the online channels. Another challenge also represents a potential opportunity. The poor penetration of credit and debit services, along with consumer uncertainty about using them, imposes constraints on any transactions that rely on anything other than cash on delivery¥ in such a system, channel members tasked with delivering products and services often risk theft, whether of goods or cash. These channel members cannot rely on air cargo options, though, because the avaHable logis- tics in India do not reach smaller towns and cities.55 When we include the challenges of online channels that are inherent to the medium, such as the high rate of returns, the low numbers of e-commerce customers start to make more sense. Yet as penetration of both the Internet and credit services continues to spread, that vast untapped market offers great promise for marketers. Even the dogged and congested Indian roads may be an opportunity; people may learn to prefer to avoid the hassles of going out to shop, and rural shoppers likely will appreciate a chance to get the coolest urban styles, without having to venture into the big cities. EXAMPLE: BEEPVVROOM-SELLING USED CARS ONLINE (USA) Would you buy a used car online, sight unseen? The process of buying used cars vexes many consumers, and the phrase ‫״‬used car salesperson" is a widely used pejorative teg to denote someone untrustworthy. But in Beepi's novel consignment model, sellers consigned the car to Beepir which used its online portal to find buyers for the car and deliver it to them at the location of their choice. The car remained with the seller while up for sale. For sellers, Beepi promised the opportunityto get a higher return, while also eliminating the potential risk and hassle of dealing  ТНЕ OMNI-CHANNEL ECOSYSTEM 23 with strangers in a private∙party sale. For buyers, it guaranteed a full refund if they did not like the car and returned it within seven days, certified the car with მ thorough inspection, and posted several pîctures ofthe car's interior, exterior, and engine, Thetarget market consumers looking for late-model used vehicles, CQuld shop 24" and be freed of the challenges of haggling with a used car dealer，The company also promised that its direct model would save consumers money. Yet even after Beepi attracted funding to the tune of nearly $150 million, it could not sustain the business; it was sold and now operates under the |i/,vroom.com umbrella.56 Take-Aways Marketing channels are a set of interdependent organizations involved in the process of making a product or seivice available for use or consumption. Firms have to come up with a blueprint to deliver the firm's offerings to the end-user in a manner that conforms to their preferred mode and method of buying and is efficient, cost-effective, and confers competitive advantage to the firm. This is in essence the firm's go-to-market strategy. There are nine key channel functions that have to be performed: physical possession, ownership, promotion, negotiation, financing, risking, ordering, payment, and information sharing. Technological advances are changing the channel landscape and altering how end-users buy. The growth of online channels led firms to utilize multi-channel strategies where channels typically operate in silos as separate entities with less than optimal integration and insufficient coordination. It also led to disinter- mediation with well-entrenched intermediaries being removed from the channel value chain. Also some well-established formats like department stores are struggling to manage the onslaught from online channels and adapt to changes in consumer buying preferences. ♦ Today, the focus is moving from a multi-channel to an omni∙channel strategy where firms seek integration of the customers' ability to research, purchase, communicate, engage with, and consume a brand such that the customer experience across online, physical, mobile, social, and communi- cation channels is seamless and optimized. ♦ The key players in a channel system include the manufacturers who are upstream channel members, intermediaries like wholesalers, retailers who are intermediate channel members, and end-useis who are the downstream channel members. 24 ТНЕ OMN^CHANNEL ECOSYSTEM The key distinction between omni-channel and multi-channel is one of seamless integration versus disjointed silos and that omni∙channel captures the notion of customer engagement in its DNA. The trends driving the migration to omni-channels are that consumers live in a connected woιld where they engage in cross-channel shopping. Thus shop- ping norms have been altered and this, coupled with the move to services and the ability to generate deep consumer insights and create a custom, taιgeted experience for end-useis, necessitates a move to an omni-channel woιld. ٥ We view channel strategy as operating in an ecosystem. The key to an omni-channel strategy is to integrate across channels and consumer touchpoints to create a transparent, seamless, and unified biand experience for the end-user. APPENDIX 1i1: ALTERNATIVE CHANNEL FORMATS-DEFINEONS; AND EXAMPLES Altemative channel formats may stem from any of the three sections of the traditional distribution channel; that is, manufacturer‫ ر‬distributor, or customer. But they also could have other bases. This appendix summarizes the variety of channel formats and the characteristics on which they rely to gain strategic advantages, as well as some examples of specific companies, types of companies, or product categories that use the specific channel format. By comparing each market against this information, channel managers can identify opportunities and vulnerabilities. ZSnufninAJRauab Channel Formats L Manufacturer Direct. Product shipped and serviced from manufacturer's warehouse. Sold by company sales force or agents. The wide variety of products appeals to customeιs with few service needs and large oιders. Many manufacturer- direct companies also sell through wholesaler-distributors. Examples: Hewlett-Packard, IBM‫ ر‬and Geneial Electric sell to their largest customers using a direct sales force. 2. Manuracturer-Owned FulLService WholesaIef Distrib=HtOL An acquired wholesale distribution company serving the parent's and other manufactur- ers' markets. Typically, diverse pioduct lines in an industry support synergies between a company's manufacturing and distribution operations. Because of customer demand, some companies also distribute other manufacturers' products.  ТНЕ OMNI-CHANNEL ECOSYSTEM 25 Examples: Revlon, LwiStrauss, Kraft Foodservice, GESCO, clothing and apparel products. 3 Company Store/Manufacturer Outlets. Retail product outlets in high-density markets; often used to liquidate sesnds or excess inventory of bτanded consumer products. Examples: Outlet malls, hostess bakery outlets. 4. License，Contracting distribution and marketing functions through licensing agreements」which usually grant exclusivity for some period of time. Often used for products in the development stage of their lifecycle. Examples: Mattel, Walt Disney, importers. 5. Consignment∕Locker Stock. Manufacturer ships the product to the point of consumption, but title does not pass until consumed. Risk of obsolescence and ownership remains with manufacturer. Focus on high-price/high-margin and emergency items. Examples: Diamonds, fine art galleries, machine repair parts. 6. Broker. Specialized sales force contracted by manufacturer that also carries comparable product lines and focuses on a narrow customer segment; product is shipped through another format, such as the pieceding options. Typically used by small manufacturers attempting to attain bτoad coverage. Examples: Schwan's frozen foods, paper goods, lumber, newer product lines. Retailer-Based Channel Fonnats L franchise. Product and merchandising concept is packaged and formatted. Territory rights are sold to franchisees. Various distribution and other services are provided by 8ntract to franchisees for a fee. Examples: КҒС, McDonald's. 2. Dealer Direct. Franchised retailets catry a limited number of pioduct lines supplied by a limited number of vendors. Often these big-ticket items need substantial after-sales service support. Examples: Hea|y equipment deakrs, auto dealers. 3. Buying Club. Buying services requiring membership. Good opportunity for vendors to penetrate certain niche markets or experiment with product vaιia∙ tions. They also provide buyers with a variety of 8nsumer services; today, they are largely consumer-oriented. Examples: Compact disc/tape clubs, book clubs. 4. Warehouse Clubs/Wholesale Clubs. Appeal is to pιice∙conscious shopper. Size is 60,000 square feet or more. Product selection is limited, and products are usually sold in bulk in a "no-frills" environment. Examples: Sam's Clubj Costco. 26 ТНЕ OMNI-CHANNEL ECOSYSTEM 5. Mail Order/Catalog. Nonstore selling through literature sent to potential customers. Usually has a central distribution center for receiving and shipping direct to the customer Examples: Land's End, Spiegel, Fingerhut. 6. Food Retailers. Will buy canned and boxed goods in truckloads to take advantage of pricing and manufacturing rebates. Distribution centers act as consolidators to reduce the number of trucks received at the store. Pricing is not required‫ ر‬because manufacturer bar codes are available. Includes full lines of groceries, health and beauty aids, and general merchandise items. Some food retailers have expanded into other areas, such as presciiption and over- the-counter drugs, delicatessens, and bakeries. Examples: Publix, Safeway. 7. Department Stores. These stoτes offei a wide variety of meichandise with moderate depth. The product mix usually includes soft goods (clothing, lin- ens) and hatd goods (appliances, haidware, sporting equipment). Distribution centets act as consolidators of both soft goods and hard goods. Quick response for apparel goods demands a direct link with manufacturer. A national basis motivates tetailers to handle their own distribution. Examples: JCPenney, Federated Stoτes. 8. Mass Merchandisers. Similar to depaitment stores, except product selection is broader and prices are usually lower. Examples: Walmait, Kmart, Target. 9. Specialty Stores. Offer merchandise in one line (e.g., women's apparel, electronics) with great depth of selection at prices comparable to those of department stores. Because of the seasonal nature of fashion goods, partner- ship with the manufacturer is essential. Manufacturer ships predetermined store assoτtments and usually prices the goods. Retaileιs might have joint ownership with the manufacturer. Examples: The Limited, The Gap, Zales. 10. Specialty Discounters/Category Killers. Offer meichandise in one line (e.g., sporting goods, office supplies, children's merchandise) with great depth of selection at discounted prices. Stores usually range in size from 50,000 to 75Q00 square feet. Buys direct in truckloads. Manufacturer will ship direct to the store. Most products do not need to be priced. National chains have created their own distribution centers to act as consolidators. Examples: Office Depot, Drug Emporium, Best Buy. 11. Convenience Store. A small, higher-margin grocery store that offers a limited selection of staple groceries, non-foods, and other convenience items; for exam∙ ple, ready-to∙heat and ready-to-eat foods. The traditional format includes stores that started out as strictly convenience stores, but they may also sell gasoline. Examples: 7-Eleven, Wawa.  THE OMNI-CHANNEL ECOSYSTEM 27 12. Hypermarket. A very large food and general merchandise store with at least 100,000 square feet of space. Although these stores typically devote as much as 75 percent of theil selling area to geneial merchandise, the food-to-general merchandise sales ratio typically is 60/40. Examples: Auchan, Carefour, Fred Meyet. Service Provider-Based Channel Formats 1. Contract Warehousing. Public warehousing services provided for a fee, typ- ically with guaranteed seiviced levels. Examples: Caterpillar Logistics Services, Dry Storage. 2. Subprocessor. Outsourcing of assembly Ot subprocessing. Usually performed with labor-intensive process or high fixed-asset investment when customers need small orders. These channel players are also beginning to take on tradi- tional wholesale distribution roles. Examples: Steel processing, kitting of parts in electronics industry. 3. Cross-DQCking. Trucking 8mpanies service high-volume inventory needs by warehousing and backhauling product on a routine basis for customers' nar‫־‬ rower inventory needs. Driver picks inventory and deliveιs to customer after picking up the customer's shipment. Examples: Industrial repair parts and toolS/ vatious supply industries. 4. Integration of Truck and Rail (Intctmodal). Joint ventures between trucking and rail companies to ship large orders door to door from supplier to customer, with one way-bill. Examples: Veiy esnomical for laige orders, or from manufacturer to CUS- tomer for a manufacturei with a broad product line. 5. Roller Freight. Full truckload is sent from manufacturer to highVensity CUS- tomer markets via a transportation company. Product is sold en toute, and drivers are directed to customer delivery by satellite communication. Examples: Lumber products, large, moderately priced items with commodity- like characteristics that allow for routine orders. 6. Stack Trains and Road Railers. Techniques to speed movement and elimi- nate handling for product tobe shippedby multiple formats. The importer might load containers directed to specific customers on a truck body in Hong Kong, ship direct, and unload onto railcars, which can eliminate two to three days' transit time. Large customer orders using multiple transportation techniques. Examples: Importers. 7. Scheduled Trains. High-speed trains leave daily at prescribed times from high-density areas to high∙density destinations. Manufacturer "buys a ticker՛ and hooks up its railcar」then product is picked up at the other end by the customer. Examples: High-density recurring orders to large customers with limited after-sales service needs. 28 ТНЕ OMNI-CHANNEL ECOSYSTEM 8. Outsouicing. Service providers sign a contract to provide total manage- ment of a company's activities in an area in which the provider has particular expertise (computet operations, janitorial services, print shop, cafeteria, repair parts, tool crib). The outsourcer then takes over the channel product func- tion for products associated with the outsourced activi。(janitorial supplies). Outsourcinghas spread to virtually every area ofthe business (repair part stock- room, legal, accounting) and may not use merchant wholesaler-distributors. Wide variety of applications and growing. Examples: Infosys, R.R. Donnelly. 9. Direct Mailer. Direct mail advertising companies expanding services in con- juncdon with market research database services to directly market narrower line pioducts. Product Io^stics and support performed by either the manufacturer or outsourced to a third paιty. Examples: Big-ticket consumer products, high-margin, I3wservic&requirement industrial and commercial equipment. 10. Bartering. Service provider, usually an advertising or media company, signs a barter arrangement with a manufacturer to exchange product for media advertising time or space. Bartered product is then rebartered or redistributed through other channels. Examples: Consumer and 8mmercial products that have been discontinued or for which demand has slowed considerably, 11. Value-Added Resellers (VARs). Designers, engineers, or consultants for a variety of service industries that joint venture or have arrangements with manufacturers ofproducts used in their designs. The VARs often get a commis- sion or discount to seivice the product and carry inventory of high-turnover items. Examples: Computer software companies that market hardware for turnkey products; securi^ system designers that foτm joint ventures with electronics manufacturers to sell turnkey p2ducts. 12. Influencers/Specifiers. Similar to a VAR, but these firms generally design highly smplex, large ρmjects (commercial buildings), do not take title to product, and have a group of suppliers whose products can be specified to the design. Selling effort is focused on both the ultimate customer and the speci∙ fieτ. Distribution of product is handled through other channel formats. Examples: Architects, designers, consultants. 13. Financial Service Providers. These formats have historically been initiated by joint ventures with financial service companies to finance margin purchases for customers or dealers (e.g., Hoor planning). They have been expanded to allow manufacturers to initiate distribution in new markets and assess these markets. High-capital, highly controlled distribution channel for one or two suppliers. Examples: Branded chemicals, construction equipment.  ТНЕ OMNI-CHANNEL ECOSYSTEM 29 Other Channel Formats L Door to-Door Formats. To some extent, these are variations on the channel formats pieviously listed. These formats have existed in the United States since pioneer days for products with high peisonal sales 8sts and high margins, sold in relatively small ordeis (encyclopedias, vacuum cleaners). A wide range of variations (e.g٠‫ و‬home-party foιmat) attempt to get many small buyers in one location to minimize the sales cost and provide a unique shopping exρeτience. Vatiations of the format have also spiead to industrial and commercial markets to capitalize on similar market needs (e.g., Snap-On Tools uses a vaιiation of the home∙par^ system by driving the product and salespeople to mechanics' garages and selling to them on their lunch hours). Each format is different and needs to be analyzed to understand its unique characteristics. A brief summaty of the more identifiable formats follows: a. Individual On-Site Very effective for generating new business for high∙mar^n products requiring a high level of interaction with customers. Examples: Fuller Brush, Electrolux, bottled water, newspapers. b. Route. Used to service routine repetitious purchases that do not need to be resold on each call. Sometimes price is negotiated once and only changed on an exception basis. This concept was historically mote prevalent in consumer lines (eg, milk deliveries) but has recently spread to a variety of commercial and industrial segments. Examples: OfAce deliveries of copier paper and toner. C. Home Party. Similar to individual on-site sales’ this format takes the ρrod- uct to a group of individuals. Examples: Tupperware, Snap-On Ιbols. d. Multi-Level Marketing. Salesperson not only sells products but recruits other salespeople who become a leveraged sales force that gives the original salesperson a commission on sales. Channel can be used for "highτizzle," high-mar^n, fast-growth opportunities in branded differentiated products. Examples: Amway, Shaklee, NuSkin, plumbing products, cosmetics, other general merchandise. e. Service Merchandising/‫״‬RackJobbing.‫ ״‬Similar to a routebut expanded to provide a variety of services with the pioduct. Originally, the rack jobber sold small consumei items to grocery stores, merchandised the p2duct, and owned the inventory, merely paying the retailer a commission for the space. This concept is expanding to commercial, industrial, and home markets in a variety of niches: maintaining a stockroom of office supplies, maintaining repair parts stock, servicing replenishable items in the home such as chemi- cals, ρuriπeci water, salt, and so on. Examples: Specialw items and gadgets or noveltieS/ paperback books magazines- 30 ТНЕ OMNI-CHANNEL ECOSYSTEM 2. Buyer-Initiated Formats. These formats have been built on the concept of all buyers joining together to buy large quantities at better prices. It has expanded to give these buyers othei securities and leverage that they might not be able to obtain on their own (e.g., private labeling, advertising design). As with the door-to-door concepts, variations of this concept are proliferating to meet individual buyers' needs’ a. Co-oρ. Companies, usually in the same industry, create an organization in which each member becomes a shareholder. The organization uses the Smbined strength of the shareholders to get economies of scale in several business areas, such as purchasing, advertising, or private-label manufactur- ing. This format is generally designed to allow small companies to compete more effectively with laige competitors. Although wholesaler-distributors can form or join co-ops, their use as an alternative channel format may direct buyers from nonwholesaler-distributoτs. Example: Topco. b. Dealer-Owned Co-op, Similar to the co-op format, except the co-op may perform many of the functions rather than contracting for them with third- party suppliers (eg, own wareh3ises). Shareholders/members are generally charged a fee for usage, and all profits in the co-op at year-end are refundable to the shareholders on some prorated basis. In many instances, this format has elements of a franchise. Example: Distribution America, c Buying Group. Similar to the co-op, except the relationship is usually less structured. Companies can be membeιs of several buying groups. The loose affiliation usually does not commit the members to performance. This format has taken on a host of roles. A gr31p can buy through the wholesale distribu~ tion channel or direct from manufacturers. Often, wholesaler-distributors are members of buying groups for low-volume items. Example: DPA Buying Group. 3. Point-Of-Consumption Merchandising Formats. This concept has grown, from the practice of strategically placing vending machines wheιe demand is predictable and often discretionary and the cost of selling through a full-time salespeison would be too high, to nevet-before-imagined commer∙ cial∕ industrial, and home markets for products and services. The incieased use of technology and telecommunications has opened this channel to even more products and services. a. Vending/Khsks. Kiosks have historically been very small retail locations that carry a very narrow product line. Through interactive video, online ordering technology, and artificial intelligence, this format has been sig- nificantly enhanced and can operate unattended. It is also being used for  ТНЕ OMNI-CHANNEL ECOSYSTEM 31 point-of∙use dispensing of maintenance supplies and tools. "Purchases" are recorded in a log by the computer to control inventory shrinkage and bal- ance inventory levels, Examples： Film processing, candy, tobacco, compact discs, and taρes. b٠ Pay-Per-Serving Point of Dispensing. Product is prepared or dispensed by vending machine at the time ofpurchase. Vending machines for soup and coffee, soft drinks, and candy or food ate usual uses of this format, but it is expanding to include such foods as pizza and pasta. Examples: Beverages, food. C. Coinputer Access Infcimation. Many of the computer access informa- tion formats have not necessarily altered the product function (products ate not available online), but they have significantly altered the service and information function by uncoupling them from the product, such that the ptoduct can pass through cheaper channels. Examples: Online information services, cable movies, news wire services, shopping services for groceries. 4. Third-Party Influencer Formats. These formats are designed around the concept that an organization that has a relationship with a large number of people or companies can provide a channel for products and services not tra- ditionally associated with the organization (e.g., school selling candy to the community, using school children as a sales force). Again, the concept has broadened across both the commercial and industrial sectors and deepened in terms of the products and services offered. a. Charity. This Srmat typically involves sales of goods and services in which the sponsoring charitable organization receives a commission on the sale. All types of products can be included, shipped direct OI outsouFced. Sales forces may be non-paid volunteers. Examples: Market D