Marketing channel management
Tutorial 1: introduction
What is a marketing channel?
Marketing channel: a set of organizations that work together to make goods available to end users (i.e., consumers,
business consumers). This can be all kinds of goods, so channels can be found everywhere:
• FMCG/ CPG (“Fast Moving Consumer Goods”; “Consumer Packaged Goods”): goods that have a short shelf life
(e.g., most products in supermarkets)
• Consumer durables (e.g., cars, furniture)
• Industrial products (e.g., electronic components, chemical substances)
• Services
In the retailing industry the word “customer” has a very specific meaning. The retailer is the customer of the brand
manufacturer. So, customer and consumer can’t be used as synonyms in this course.
Simplest distribution firm
Every firm that’s not a manufacturer or a consumer is a middle
man. Upstream describes the relationship between the
manufacturer and the middle man and the downstream
describes the relationship between the middle man and the
consumer.
Why marketing graduates should be knowledgeable about
channel management
> Channels are universal; so are channel decisions (behind
every product/service: one or more channels)
> Channels are important in economic terms (total sales
through channels: 1/3 of worldwide annual GDP)
> Channels can be a source of competitive advantage (creation
of entry barriers). Competitors can’t easily copy your
management channel, since you have built up a business relation with the middle man which can create loyalty.
There is a power shift going on from manufacturers to retailers
> Retailers are becoming bigger and more powerful.
> Which forces fuel rising retailer power?
1. Mergers: There have been many mergers in the retailing industry, which had led to giant companies (e.g., AH
and Delhaize)
2. Multi-channel operations: retailers do not longer try to reach consumers through one channel, but trough
multi-channel operations. Retailers do not only reach their consumers through brick-and-mortar stores
anymore, but also online with home delivery for example.
3. Retailers are becoming brands: private labels (e.g., AH has their own brand which competes with brand
manufacturer’s products on the shelves).
4. Access to consumer data: retailers have the most information on consumers.
However, the outlook is not all rosy. Some shifts are giving retailers a hard time.
The retail apocalypse
A lot of retail stores have to close their doors and are going bankrupt. The shift to online is the biggest disrupter that is
causing the retail apocalypse, in particular amazon and Alibaba. 18% of retail sales were online in 2020, which is not even
that high, especially since 2020 was the year of COVID. So, how can only 18% of online sales be such a disruption?
à The disruption isn’t caused because brick-and-mortar stores are replaced by online retailers, but it’s Amazon’s
business model that is causing the big problem.
,Amazon
It starts with the product selection (consumers can find whatever they need). If
consumers have a good experience at Amazon they talk about the brand to other
consumers, and this generates traffic. The more traffic Amazon has, the more
sellers want to offer their products at Amazon. Consequently, this broadens the
product selection even more and allows Amazon to benefit from a lower cost
structure, which leads to lower prices. This in turn will lead to a better customer
experience and that’s how the circle continues.
This business model has led to greedy consumers. Consumers want everything,
right here, right now, at the lowest cost and zero willingness to pay. COVID has
only accelerated this process.
Tutorial 2: channel design
Case 1: the iPhone in its early through ET&T stores (independent Brick and mortar stores) and through Best Buy (Brick
and mortar store). The iPhone at Best buy will be sold at the same price as Apple.
1. Who sets the price? à Best buy, it is always the retailer that sets the price. Because they buy the iPhones from
iPhone and they then own them. The owner of the products sets the price. In fact, it’s illegal for the
manufacturer to set the price, they can only advice.
2. Selling through additional channels comes with advantages and pitfalls. To what extend do these advantages and
pitfalls apply to this case?
a. What is the key advantage of selling through an additional channel? à you can reach more consumers
b. Does this advantage apply to this case?
c. What are the pitfalls of selling through additional channels? You lose control over the price, there will be
price-competition, which might lead to lower prices à there is less margin on the product. This leads to
less selling support for the product. Because retailers will be less motivational to support the brand if they
can only earn a small margin on the products.
• Intra-brand competition on price (= prices are driven down) à this is not the case in the iPhone
case. So, this first pitfall does not apply.
• Reduced selling support by incumbent channels à Reduced selling support by AT&T is therefore
also unlikely.
d. Good buy or bad buy? So, the positive effect of extra coverage clearly outweighs the negative effect of
channel conflict (intra-brand competition)
Case 2: Nike starts & stops selling at Amazon
Selling though an additional channel comes with advantages and pitfalls. To what extend do these pitfalls apply to this
case? Do you believe Nike made the right decision to quit selling through Amazon?
1. Advantages? Applicable? Extra market coverage (=reach more consumers). However, this isn’t applicable to this
case, because they already have huge numbers of channels (incl. their own online channel) and everybody knows
the brand already à likelihood to reach more consumers is low.
2. Pitfalls? Applicable? Intra-brand completion on price and reduced selling support are both appliable in this case.
Prices and selling support both decreased for Nike.
Does this mean that consumers can no longer buy Nike at Amazon?
No, if Nike stops selling through Amazon, other parties can still sell Nike through Amazon. Because Amazon is a
marketplace.
Case 3: Maroccanoil
Selling to à independent retailer
Selling through could mean anything
Before Maroccanoil sold through Amazon all the Maroccanoil products that were sold on Amazon were grey market and
counterfeit products. Why did Maroccanoil’s average consumer rating change so much after it started selling directly to
Amazon?
• Before: many grey market sellers on Amazon’s marketplace.
, • After: Amazon weeded out unauthorized sellers on its marketplace, if Maroccanoil would sell to them directly.
Now there are only three sellers left after Amazon cleaned up its marketplace.
Module 2.1 channel design – why go (in)direct
How to go to market?
INDIRECT CHANNELS DIRECT CHANNELS
> Independent/third parties (i.e. they are not The manufacturer sells its products directly to the
owned by the manufacturer). The independent customers.
parties: > Company-owned
• Buy & own products • Manuf. holds inventory
• Hold inventory • Manuf. sets consumer price
• Set consumer price > Bricks&Mortor or web store
> Physical or digital
Why go direct?
Higher (gross) profit margin for manufacturer. Even at a lower consumer price, a higher (gross) profit margin is possible.
For example, the COGS is €50, and the company uses an indirect channel with a wholesale price of €80. The retailer sells
the product for a consumer price of €100. If the company would cut out the middleman and sell directly to the
customers at a price of €85, they would still make a higher profit margin à €35 instead of €30.
Note: COGS = cost of goods sold
- Wholesale price: the price the retailers pay the manufacturer
- Consumer price: the price the customer pays.
à So why do not all manufacturers go direct?
Higher profit margins do not always lead to higher total net profits.
There are two other aspects that you should also come into play:
1. Even though the total gross margin is bigger when going
indirect, if the total sales volume is a lot higher when selling
indirect the total gross profits might still be higher when going
indirect (when the middleman adds value for the consumers
this might lead to a higher sales volume)
2. The distribution cost should also be considered. Going direct
also comes with extra costs and it might even be more
expensive than using middlemen.
Tutorial 1: introduction
What is a marketing channel?
Marketing channel: a set of organizations that work together to make goods available to end users (i.e., consumers,
business consumers). This can be all kinds of goods, so channels can be found everywhere:
• FMCG/ CPG (“Fast Moving Consumer Goods”; “Consumer Packaged Goods”): goods that have a short shelf life
(e.g., most products in supermarkets)
• Consumer durables (e.g., cars, furniture)
• Industrial products (e.g., electronic components, chemical substances)
• Services
In the retailing industry the word “customer” has a very specific meaning. The retailer is the customer of the brand
manufacturer. So, customer and consumer can’t be used as synonyms in this course.
Simplest distribution firm
Every firm that’s not a manufacturer or a consumer is a middle
man. Upstream describes the relationship between the
manufacturer and the middle man and the downstream
describes the relationship between the middle man and the
consumer.
Why marketing graduates should be knowledgeable about
channel management
> Channels are universal; so are channel decisions (behind
every product/service: one or more channels)
> Channels are important in economic terms (total sales
through channels: 1/3 of worldwide annual GDP)
> Channels can be a source of competitive advantage (creation
of entry barriers). Competitors can’t easily copy your
management channel, since you have built up a business relation with the middle man which can create loyalty.
There is a power shift going on from manufacturers to retailers
> Retailers are becoming bigger and more powerful.
> Which forces fuel rising retailer power?
1. Mergers: There have been many mergers in the retailing industry, which had led to giant companies (e.g., AH
and Delhaize)
2. Multi-channel operations: retailers do not longer try to reach consumers through one channel, but trough
multi-channel operations. Retailers do not only reach their consumers through brick-and-mortar stores
anymore, but also online with home delivery for example.
3. Retailers are becoming brands: private labels (e.g., AH has their own brand which competes with brand
manufacturer’s products on the shelves).
4. Access to consumer data: retailers have the most information on consumers.
However, the outlook is not all rosy. Some shifts are giving retailers a hard time.
The retail apocalypse
A lot of retail stores have to close their doors and are going bankrupt. The shift to online is the biggest disrupter that is
causing the retail apocalypse, in particular amazon and Alibaba. 18% of retail sales were online in 2020, which is not even
that high, especially since 2020 was the year of COVID. So, how can only 18% of online sales be such a disruption?
à The disruption isn’t caused because brick-and-mortar stores are replaced by online retailers, but it’s Amazon’s
business model that is causing the big problem.
,Amazon
It starts with the product selection (consumers can find whatever they need). If
consumers have a good experience at Amazon they talk about the brand to other
consumers, and this generates traffic. The more traffic Amazon has, the more
sellers want to offer their products at Amazon. Consequently, this broadens the
product selection even more and allows Amazon to benefit from a lower cost
structure, which leads to lower prices. This in turn will lead to a better customer
experience and that’s how the circle continues.
This business model has led to greedy consumers. Consumers want everything,
right here, right now, at the lowest cost and zero willingness to pay. COVID has
only accelerated this process.
Tutorial 2: channel design
Case 1: the iPhone in its early through ET&T stores (independent Brick and mortar stores) and through Best Buy (Brick
and mortar store). The iPhone at Best buy will be sold at the same price as Apple.
1. Who sets the price? à Best buy, it is always the retailer that sets the price. Because they buy the iPhones from
iPhone and they then own them. The owner of the products sets the price. In fact, it’s illegal for the
manufacturer to set the price, they can only advice.
2. Selling through additional channels comes with advantages and pitfalls. To what extend do these advantages and
pitfalls apply to this case?
a. What is the key advantage of selling through an additional channel? à you can reach more consumers
b. Does this advantage apply to this case?
c. What are the pitfalls of selling through additional channels? You lose control over the price, there will be
price-competition, which might lead to lower prices à there is less margin on the product. This leads to
less selling support for the product. Because retailers will be less motivational to support the brand if they
can only earn a small margin on the products.
• Intra-brand competition on price (= prices are driven down) à this is not the case in the iPhone
case. So, this first pitfall does not apply.
• Reduced selling support by incumbent channels à Reduced selling support by AT&T is therefore
also unlikely.
d. Good buy or bad buy? So, the positive effect of extra coverage clearly outweighs the negative effect of
channel conflict (intra-brand competition)
Case 2: Nike starts & stops selling at Amazon
Selling though an additional channel comes with advantages and pitfalls. To what extend do these pitfalls apply to this
case? Do you believe Nike made the right decision to quit selling through Amazon?
1. Advantages? Applicable? Extra market coverage (=reach more consumers). However, this isn’t applicable to this
case, because they already have huge numbers of channels (incl. their own online channel) and everybody knows
the brand already à likelihood to reach more consumers is low.
2. Pitfalls? Applicable? Intra-brand completion on price and reduced selling support are both appliable in this case.
Prices and selling support both decreased for Nike.
Does this mean that consumers can no longer buy Nike at Amazon?
No, if Nike stops selling through Amazon, other parties can still sell Nike through Amazon. Because Amazon is a
marketplace.
Case 3: Maroccanoil
Selling to à independent retailer
Selling through could mean anything
Before Maroccanoil sold through Amazon all the Maroccanoil products that were sold on Amazon were grey market and
counterfeit products. Why did Maroccanoil’s average consumer rating change so much after it started selling directly to
Amazon?
• Before: many grey market sellers on Amazon’s marketplace.
, • After: Amazon weeded out unauthorized sellers on its marketplace, if Maroccanoil would sell to them directly.
Now there are only three sellers left after Amazon cleaned up its marketplace.
Module 2.1 channel design – why go (in)direct
How to go to market?
INDIRECT CHANNELS DIRECT CHANNELS
> Independent/third parties (i.e. they are not The manufacturer sells its products directly to the
owned by the manufacturer). The independent customers.
parties: > Company-owned
• Buy & own products • Manuf. holds inventory
• Hold inventory • Manuf. sets consumer price
• Set consumer price > Bricks&Mortor or web store
> Physical or digital
Why go direct?
Higher (gross) profit margin for manufacturer. Even at a lower consumer price, a higher (gross) profit margin is possible.
For example, the COGS is €50, and the company uses an indirect channel with a wholesale price of €80. The retailer sells
the product for a consumer price of €100. If the company would cut out the middleman and sell directly to the
customers at a price of €85, they would still make a higher profit margin à €35 instead of €30.
Note: COGS = cost of goods sold
- Wholesale price: the price the retailers pay the manufacturer
- Consumer price: the price the customer pays.
à So why do not all manufacturers go direct?
Higher profit margins do not always lead to higher total net profits.
There are two other aspects that you should also come into play:
1. Even though the total gross margin is bigger when going
indirect, if the total sales volume is a lot higher when selling
indirect the total gross profits might still be higher when going
indirect (when the middleman adds value for the consumers
this might lead to a higher sales volume)
2. The distribution cost should also be considered. Going direct
also comes with extra costs and it might even be more
expensive than using middlemen.
