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Ganesh Iyer
Channel Strategy: Going to Market
XMBA 206.1
Session 8
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Ganesh Iyer
Dell Direct
Fostered a new age of price competition. Priced 20 to 30%
below IBM and consistently

22 yr old UT Austin marketing major, initial seed capital of 80K

IBM open architecture,
investment in R&D, advertising and sales force support.
Sold through regular distribution channels. Depended upon dealer
service and support

Dell targeted the expert market
sold thru 1-800 number.
Direct marketing cut out the channel fat
piggybacked upon IBM open architecture
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Ganesh Iyer
Key Learning
Integrated Channel and Pricing Strategy
Channel decisions must always go hand in hand with
Segmentation, Pricing and other elements of the marketing mix.

Dells direct was possible because it was an integrated strategy
Right target identification
Direct marketing, no distribution or salesforce cost.
no advertising
And so lower price can be delivered to the price sensitive target
consumer.
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Ganesh Iyer
Learning
Coordinating channels is critical for efficient behavior of
retailers.

Channel decisions go hand in hand with the other elements of
the marketing mix.

Channel decisions have greatest the most long-term impact and
are the hardest among all marketing strategy to change.


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Ganesh Iyer
Why Use Channel Intermediaries?
Wholesaler
or Retailer

With Intermediaries
Milk P1 Bread P2 ShampooP3 Soap P4
C1 C2 C3
P1 P2 P3 P4
C1 C2 C3
Without Intermediaries
Reducing
Transaction Costs
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Ganesh Iyer
Why Channel Intermediaries?
Customers buy baskets or assortments of goods. Economizes on the
time cost of shopping

Retail Service is most efficiently provided by an intermediary
product demonstration, after-sales service

Inventory carrying
Intermediaries provide inventory buffer. Hedge against demand
fluctuations for the manufacturers.

Financing
Examples automobiles or appliances
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Ganesh Iyer
Types of Channel Intermediaries
Goodyears Distribution
Industry Goodyear
Garages 6 0
W. House clubs 6 0
Mass Merchandisers 12 0
Manufacturer Owned 9 27
Independent 63 58 (50 indp. 8
franchises)
Other 4 15
What does this imply?
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Ganesh Iyer
Goodyears Distribution
Goodyear penetration 4400 outlets vs. Michelin 7000 outlets.
What are the pros and cons of Goodyear's selective distribution.

What does Goodyear gain from its focus on the independent
dealer channel?

What is the role of Goodyears company-owned outlets?
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Ganesh Iyer
Managing Retail Intermediaries
Channel Conflict
When each member of the channel is an independent business,
retailers might not behave according to the manufacturer
desires
This is called Channel Conflict

Key problems with independent channels = Channel Conflict.
Each member has her own private interests or profits in
mind.
Retail perspective may be more short term short-term profits
than the manufacturer.
National vs. Local perspective

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Ganesh Iyer
Solution to Channel Conflict:
Channel Coordination
General Principle
Manufacturers must find ways to maximize total channel profits.
Why?

The incremental profits can be used in two ways:
Absorbed by the manufacturer leaving the retailer or other down
stream channel member no worse than before.
Shared with the channel members to reward them for providing
better service.

The challenge is to get the retailers to behave in a conventional
channel with independent retailers
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Ganesh Iyer
Channel Conflict and Coordination
Double Marginalization
Manufacturer
Goodyear
Retailer
(Independent Dealer)
Market
C = 10
W
P
P D
30 10
40 6
50 2
D(P)
Demand for Goodyear Tiempo at your dealership
First stage
Second stage
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Ganesh Iyer
Double Marginalization
P D Ret_Profit Mfg_Profit Total_Profit
30 10 20*10 = 200 0 200
40 6 30*6 = 180 0 180
50 2 40*2 = 80 0 80
W = 10
30 10 10*10 = 100 10*10 = 100 200
40 6 20*6 = 120 10*6 = 60 180
50 2 30*2 = 60 10*2 = 20 80
30 10 X X X
40 6 0 180 180
50 2 10*2=20 30*2=60 80
W = 20
W = 40
30 10 0 200 200
40 6 10*6 = 60 20*6 = 120 180
50 2 20*2=40 20*2=40 80
W = 30
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Ganesh Iyer
Double Marginalization Problem
What wholesale price will the manufacturer charge?
Manufacturer wants high W,

But this forces retailer to charge high retail prices with too little
demand

Can the manufacturer do better?
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Ganesh Iyer
Solution to Double Marginalization
Two-Part Tariff:
McDonalds charges Upfront Franchise Fees from its franchise and a
variable royaltyWhy?

Two part tariff = F + Wq
Suppose the manufacturer asks the retailer for an upfront Franchise Fee (F
= $195) and in return charges W = c = 10
What happens?

Manufacturer Profits = 195, Retailer Profits = 5
Retail price = low at 30
Demand = high at 10.

Upfront Franchise fees helps in solving channel conflict because it
helps the manufacturer to lower wholesale price without sacrificing
profits.
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Ganesh Iyer
Channel Conflict and Coordination
Horizontal Conflict
Horizontal Retailer Free-Riding:
Services provided by one retailer helps other competing retailers
McDonalds franchisees in a region.
Free riding of pre-sale informational services.
Goodyear selling to discounters and mass merchandisers.

Solutions
Random Monitoring of Franchises

Exclusive territories: Retailer is guaranteed all consumers in a
territory? What are the benefits?
Saturn dealerships
Prevents free-riding of retail services.
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Ganesh Iyer

Should Goodyear Expand distribution to Mass
Merchandisers?
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Ganesh Iyer

Should Goodyear Expand distribution to Mass
Merchandisers?
Pros
Over of all tire buyers (emergency purchases) make same day purchases--
be within an arms length of desire unplanned purchases.
Michelin and others already everywhere
Mass merchandisers account for a declining percentage of replacement
(12% in 91 28% in 1976). Their prices are 97% of independent dealers. Less
of a threat for independent dealers. Warehouse clubs are more of a threat.
Mass merchandisers sell only 34% of private labelless interested in bait and
switch.
Independent dealers are becoming less Goodyear loyal. Using Goodyear name
to bait-and-switch to private labels. Going to mass merchandisers might counter-
balance this

Cons
Increased Price Competition
Independent dealers might respond by supporting private labels
Intensive distribution Erosion of brand loyalty

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Ganesh Iyer
Vertical Retailer Free-Riding
Retailer may use the manufacturers brand to draw customers
into the store and then sell other higher margin brands (Bait-
and-Switch)
Possible problem with Goodyear dealers as the market matures
and becomes more competitive.

Solution
Exclusive Dealing Contract: Requirement not to carry other
brands.
Provides incentives to retailers to invest in service to build up the
product and therefore the manufacturer to invest in advertising and
brand building.

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Ganesh Iyer
Channel Conflict and Coordination
Manufacturer Free-Riding
Manufacturer may not provide the promised advertising support
for the retailers local market.

Manufacturers may open supply to competing retailers after a
retailer has invested in developing the manufacturers product.

Solution
Exclusive territories.

Why are automobiles often sold through exclusive dealerships in
exclusive territories.


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Ganesh Iyer
Consumer Segmentation and Channel Design
Design channels to serve the needs of target consumer
segments.

Which channel to use depends upon which consumer segment
comparison shopper vs. product information vs. after-sales service.
emergency vs. planned

Evolution of consumer behavior to one-shop shopping has
affected tire channels.

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Ganesh Iyer
Information Needs and Channel Design
Customers could identify Aquatread as being differentgrooves
Can the role of this feature be easily communicated by TV
advertising determines how important is the role of retail
information

Primary information (education, demonstration, service)
Early phase of product life cycle PLC.
Need a dedicated authorized dealer channel which does not deal
with competitive products.

Comparative information
Later phase of PLC need to accentuate benefits versus
competition.
If you have a superior product you can move into channels which
display products side by side.
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Ganesh Iyer
Learning
Coordinating channels is critical for efficient behavior of
retailers.

Channel decisions go hand in hand with the other elements of
the marketing mix.

Channel decisions have greatest the most long-term impact
and are the hardest among all marketing strategy to
change.