Management_Week 4_Distribution Channels (2).pdf

VO Management I - Marketing (MA) Week 4 – Distribution Channels Univ.-Prof. Dr. Christoph Fuchs Chair of Marketing, [email protected] http://marketi...

VO Management I - Marketing (MA) Week 4 – Distribution Channels Univ.-Prof. Dr. Christoph Fuchs Chair of Marketing, [email protected] http://marketing.univie.ac.at Office hours: upon request Course Framework PRODUCT SEGMENTATION Marketing PRICE Research TARGETING PROMOTION Consumer Behavior POSITIONING PLACE PREREQUISITES MARKETING STRATEGY MARKETING PLAN Chair of Marketing Prof. Christoph Fuchs, Ph.D. 2 Introduction to Channels Chair of Marketing Prof. Christoph Fuchs, Ph.D. 3 Definition of distribution Distribution entails all stakeholders (persons and/or organizations) that are involved in creating a revenue stream between a manufacturer and a consumer. Production Distribution Consumption Chair of Marketing Prof. Christoph Fuchs, Ph.D. 4 What is distribution (place)? Making goods/services available at: the right TIME at the correct LOCATION in the correct QUANTITY to the right CUSTOMER in a way that is BETTER than your competitors Chair of Marketing Prof. Christoph Fuchs, Ph.D. 5 Why is Channel Management important? In the US, channel members collectively earn margins of 30-50% of the selling price. Channel decisions are often structural, long-term, and sticky. Superior channel strategy can lead to sustainable competitive advantages Changing role of retailers (online) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 6 Why is Channel Management important? Immense share of Wall Mart in the US market. Dependency? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 7 Objectives of Channel Management Reduction of distribution costs Image of the channel Cooperation and Steering of channels Flexibility and time to market Chair of Marketing Prof. Christoph Fuchs, Ph.D. 8 How important is distribution? Read the article by Ataman et al. (2008) Please read the paper after the session https://faculty.fuqua.duke.edu/~mela/ bio/papers/Ataman_Mela_Van_Heerde _2007_b.pdf Chair of Marketing Prof. Christoph Fuchs, Ph.D. 9 Answer: Very important! VERY important! Access to distribution breadth plays the largest role in the success of new brands Increases sales more than discounting, advertising, and features/displays Interacts with other strategies, increasing their effectiveness ! → Take home message: must reinforce overarching strategy Chair of Marketing Prof. Christoph Fuchs, Ph.D. 10 Answer: Very important! Chair of Marketing Prof. Christoph Fuchs, Ph.D. 11 What is a Channel? A distribution channel is a set of firms or individuals who participate in the flow of products from manufacturers to customers. These firms/individuals are known as channel intermediaries Chair of Marketing Prof. Christoph Fuchs, Ph.D. 14 The Logic behind Distribution Channels Chair of Marketing Prof. Christoph Fuchs, Ph.D. 16 Decision process when setting up distribution channels Decision 1 Structure of Distribution system Vertical Structure Direct Indirect Channel Channel Chair of Marketing Prof. Christoph Fuchs, Ph.D. 17 What is a Channel? Please think about respective ! examples of A. B. & C. Write them down. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 18 What is a Channel? Please think about respective ! examples of A. B. & C. DIRECT INDIRECT Write them down. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 19 What is a Channel? Your Examples: DIRECT Chair of Marketing Prof. Christoph Fuchs, Ph.D. 20 What is a Channel? Your Examples: INDIRECT Chair of Marketing Prof. Christoph Fuchs, Ph.D. 21 Channel members and function? Direct Sales Force Keep title, work for you, direct control, only company’s products Distributors Captive or sole distributors Take title, work for you, only your products Wholesalers Take title, not tied to any company Agents Manufacturer’s representative Don’t take title, work for you and others Brokers Free agents, don’t take title, no ties to manufacturers Retailers/Dealers Often don’t work for you, usually take title Chair of Marketing Prof. Christoph Fuchs, Ph.D. 22 Decision process when setting up distribution channels Decision 2 Structure of Distribution system Vertical Structure Horizontal Structure Intensity: Direct Indirect Type of intermediate: Channel Channel intensive distribution selective distribution exclusive distribution Length: Number of intermediates Chair of Marketing Prof. Christoph Fuchs, Ph.D. 24 Levels of Distribution Intensity Intensive Distribution: All intermediaries who are willing to stock and sell Coke: “Within an arm’s reach of desire” (but more competition and conflict) Selective Distribution: Rely on only some intermediaries who are willing to stock and sell Exclusive Distribution: Severely limiting the number of intermediaries (dealer has exclusive right) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 25 Channel breadth – why to go exclusive? https://www.retaildetail.eu/en/news/fashion/s uitcase-brand-rimowa-cancels-all-dealer- contracts Chair of Marketing Prof. Christoph Fuchs, Ph.D. 26 Channel length and vertical control – Why does Tesla have no dealers? Tesla does not have Franchise dealerships Chair of Marketing Prof. Christoph Fuchs, Ph.D. 27 Function & Distribution Channel Chair of Marketing Prof. Christoph Fuchs, Ph.D. 28 Tea Party (Tea distribution in Taiwan) 20,000 tea farmers in the hills of Taiwan -> 280 middlemen -> 60 tea refineries on the oceanfront (Ta-tao-cheng). Tea middlemen had a bad reputation among both farmers and refineries “Exploit the market by buying low and selling high” The governor-general of Taiwan set up a tea auction house in 1923 near the refineries. Farmers could ship directly to the auction house. Tea would be bought by the highest bidding refinery Despite this, the middlemen survived and continue to operate to this day. The auction house has been closed. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 29 Role of the middleman? Facilitating search – They’d visit many farms -> finding high quality teas -> take samples to refineries -> ask for purchase orders – Searched for buyers for the farmer’s harvest and suppliers for the refineries Sorting – The process of appraising different species of tea and assessing their quality is highly skilled Contact efficiency – No. of possible contacts w/o middlemen: 20k farmers X 60 refineries = 1.2M contacts to get the best price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 30 Intermediaries can streamline number of transactions Chair of Marketing Prof. Christoph Fuchs, Ph.D. 31 Functions of Distribution Channel Overcoming discrepancies Manufacturers make narrow assortments in large quantities, but… …customers want wide assortments in small quantities Contact efficiency (specialized in distribution) Physical distribution (and transportation) Inventory: risk reduction (and warehousing) Sales and returns Service: before and after sales Information/market feedback (up and down the channel) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 32 Functions of Distribution Channel: Contact Efficiency Chair of Marketing Prof. Christoph Fuchs, Ph.D. 33 When to go direct -- Trend towards DISINTERMEDIATION? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 34 Trend towards DISINTERMEDIATION? Example: Amazon Chair of Marketing Prof. Christoph Fuchs, Ph.D. 35 Trend towards DISINTERMEDIATION? (direct selling) Not suitable for every product! When is direct working: if Manufacturer * Customer direct contacts are relatively small < Small number of customers Large orders Low order frequency (can’t visit every week for small order, prefer fewer, larger orders) but not so clear if frequent orders are straight rebuys. In that case, high might be fine for direct. High importance to customer. If core product is important to customer, will make time for dedicated sales meeting (cf. detailing in pharma). High product customization. Information: When lots of information needed, sometimes better to go direct. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 36 Verticalization of Distribution Channels – Vertical Control! Manufacturer (starts Distributor starts taking over taking over tasks of tasks of manufacturer (own distributor (own stores, production, brands, etc.) online channel, etc..) M D The strategy of controlling more of your product's supply chain is called vertical integration. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 37 Channel Conflicts Chair of Marketing Prof. Christoph Fuchs, Ph.D. 38 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 39 Channel Conflicts Vertical Horizontal Multichannel Chair of Marketing Prof. Christoph Fuchs, Ph.D. 40 Channel Conflicts Vertical Dealer A Dealer B Dealer C Horizontal Chair of Marketing Prof. Christoph Fuchs, Ph.D. 41 Divergent interests Manufacturer Distributor You must carry a full line of all the products We can try, but we can’t sell ‘dogs.’ We we make. No cherry-picking. should concentrate on our strong points. We need you to concentrate on our We need exclusive territories. products. We need your active involvement in selling It is very costly to do so. How will you new products and developing new markets. compensate us for the effort? We need to know about y(our) customers We don’t keep such records. (“... not a in greater detail. chance – they’ll start selling direct.”) You need to improve sales effort. You need to improve your sales promotion. Your channel margins are too high. Your prices are too high. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 42 Multichannel conflicts Customer Chair of Marketing Prof. Christoph Fuchs, Ph.D. 43 Multichannel Example Chair of Marketing Prof. Christoph Fuchs, Ph.D. 44 Incentives for Intermediaries: Push vs. Pull Strategies Chair of Marketing Prof. Christoph Fuchs, Ph.D. 45 Push vs. Pull Strategies Chair of Marketing Prof. Christoph Fuchs, Ph.D. Any tactic that results in a third party to stocking your products 46 Push vs. Pull Strategies PUSH STRATEGY PULL STRATEGY Directing marketing efforts to channel Directing marketing efforts to end members to gain their cooperation consumers to gain their cooperation When appropriate: When appropriate: Low brand loyalty High brand loyalty Brand choice is made in the store High category involvement Product purchase is on impulse Brand choices are made before trip to retail store Consumers perceive brand differences Emphasis on trade promotions Emphasis on advertising, consumer promotions Chair of Marketing Prof. Christoph Fuchs, Ph.D. 48 Online Channels Chair of Marketing Prof. Christoph Fuchs, Ph.D. 49 How online is different from offline? Transparency about availability and pricing can increase competition (esp. if identical merchandise). Buying process? (Can use different channels for different stages in decision process) Information about customers (big data) Easy customization of e.g., prices. Reduction in impulse buying Chair of Marketing Prof. Christoph Fuchs, Ph.D. 50 What does a physical store do for consumers that on-line doesn’t? Touch and feel, see. Try before you buy. Information and help by a person Immediate availability Fun, entertainment (end of dreary malls, comeback of inner-city pedestrian malls) Low price for bulky items Physical pick-up location (important in many places outside US) Service Chair of Marketing Prof. Christoph Fuchs, Ph.D. 51 Effect of Distribution Channel on Customers Chair of Marketing Prof. Christoph Fuchs, Ph.D. 53 Example Imagine you are lying on the beach on a hot day, and all you have to drink is water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite brand of beer. A friend gets up to go make a phone call and offers to bring back a beer from the only nearby place where beer is sold: [Fancy resort hotel] or [Small, run-down grocery store] He says that the beer might be expensive and asks how much you are willing to pay for the beer. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 54  People are willing to pay 73% more at the fancy resort relative to the run down grocery store. (seller’s costs are higher) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 55 Example When run in the early 1980s (replication with MBAs): Store scenario = $1.50 Hotel Scenario = $2.65 Why is this interesting? 1) Identical consumption experience: same beer, same beach 2) No atmosphere is being consumed to justify price differential 3) No strategic reason to justify a price below perceived value (cannot haggle with store owner) Perceived value should be identical across groups Chair of Marketing Prof. Christoph Fuchs, Ph.D. 56  EXPECTATIONS MATTER! Place can shape expectations. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 57 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 58 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 59 Key Takeaways Chair of Marketing Prof. Christoph Fuchs, Ph.D. 60 Key Take Aways Hardest marketing mix element to change. Can be a source of competitive advantage A distribution channel serves several important functions; it is not just an additional cost. Manufacturers need to balance between push and pull strategies More exclusive distribution can lead to greater focus by channel members on providing customer service, better merchandising, etc. Direct sales aligns incentives but adds cost Should be based on STP! Chair of Marketing Prof. Christoph Fuchs, Ph.D. 61  Thank You. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 62