MODULE: Channel Design
WHY GO (IN)DIRECT?
How to go to the market:
1) Indirect Channel: including a middlemen
Independent/third parties (retailer)
o Buy & own products
o Hold inventory
o Set consumer price
Physical or digital
2) Direct Channel: cutting out the middleman
Manufacturers straight to consumers and cutting out the middleman
Company-owned
o Manuf. holds inventory
o Manuf. sets consumer price
B&M or web store
Why go direct?
- Higher (gross) profit margin (even at lower consumer price)
COGS = Cost of goods sold
Why do not all manu’s go direct?
1) Middlemen add value > impact on sales
o Bulk breaking; allow buying in small lots
o Time convenience; reduce waiting time
o Assortment convenience; offer a wide variety of goods
2) Distribution costs: number of contact lines > impact on costs
o Non-routine transaction: manu to consumer
o Routine transaction: retailer to consumer
MARKET PLACES
Third party marketplace (3P Market)
- Indirect Channel
- Do not buy/own products
- Do not hold inventory
- Do not set price
= 3P Markets facilitate transactions and bring together manu’s and consumers
Profit generation: Retailer VS Market place
,How much is left for a manu that sells through a marketplace?
Consumer price – step in cost – commission = left for manu
Benefits of selling on a marketplace for manu’s:
1) Huge consumer traffic
o Long-tail products
o Cross-border selling
2) Quick launch
o Low set-up costs
o No Digital worries
Pitfalls for selling on a marketplace for manu’s:
- Marketplace learns from its selling’s
- Private labels will compete with the manu’s assortment
Pitfalls for retailers who expand in to becoming a marketplace:
1) No control over prices
2) No control over fulfilment
o Inconsistent delivery times, fee, and returning policies
3) No control over product presentation
o Inconsistent and misleading information about the product
= it can damage the retailer’s equity
MULTICHANNEL: THE MANUFACTURER’S PERSPECTIVE
Multiple channels compete with each other
Avoid under-distribution:
Les convenient for consumer to find your products
o Lower (volume) sales
Retailers may exploit their monopoly position. They will:
o Set higher prices
o Lower selling support
Effect of more channels:
- Price: manu’s have different prices that the middlemen > compete on the different
channels
Intra-brand competition on price
- Support: extra channels make it hard for the middlemen to earn money on it
Lower selling support
Avoid under-distribution:
, - More convenient for consumers to find your product
o Higher (volume) sales
- Fierce intra-brand price competition
o Resellers set lower prices
o Resellers lower selling support
Manufacturer’s objectives:
- Maximize market coverage
- Minimize channel conflict
o Minimize price competition
o Maximize selling support
How to minimize channel conflict while maximizing coverage?
- Exclusives (in some channels you offer exclusives only for them to sell)
- Different bundles (different bundles for different middlemen)
- Different product variants (different variants; package size)
GREY MARKETS
Products that are sold by unauthorized retailers (it is not illegal; real products are sold)
Grey markets: origin
- Dispose of overstock
o Unintentional (poor forecasting)
o Intentional (exploit quantity discounts through large scale buying)
Grey markets: consequences
1) Overdistribution
2) Brand image damaged
How to go against unauthorized retailers (grey markets)?
- Cut out retailers that sell to grey markets
- Prevent the problem:
o Share data and analytics to forecast demand
o Buy back unsold inventory
- Join them if you cannot beat them (Amazon and Burberry, but it’s hard to keep out
grey market sellers)
OMNICHANNEL: THE RETAILER’S PERSPECTIVE
Omnichannel = every possible combination is possible
1) Information delivery: online + offline
2) Product delivery: pick-up + home delivery
WHY GO (IN)DIRECT?
How to go to the market:
1) Indirect Channel: including a middlemen
Independent/third parties (retailer)
o Buy & own products
o Hold inventory
o Set consumer price
Physical or digital
2) Direct Channel: cutting out the middleman
Manufacturers straight to consumers and cutting out the middleman
Company-owned
o Manuf. holds inventory
o Manuf. sets consumer price
B&M or web store
Why go direct?
- Higher (gross) profit margin (even at lower consumer price)
COGS = Cost of goods sold
Why do not all manu’s go direct?
1) Middlemen add value > impact on sales
o Bulk breaking; allow buying in small lots
o Time convenience; reduce waiting time
o Assortment convenience; offer a wide variety of goods
2) Distribution costs: number of contact lines > impact on costs
o Non-routine transaction: manu to consumer
o Routine transaction: retailer to consumer
MARKET PLACES
Third party marketplace (3P Market)
- Indirect Channel
- Do not buy/own products
- Do not hold inventory
- Do not set price
= 3P Markets facilitate transactions and bring together manu’s and consumers
Profit generation: Retailer VS Market place
,How much is left for a manu that sells through a marketplace?
Consumer price – step in cost – commission = left for manu
Benefits of selling on a marketplace for manu’s:
1) Huge consumer traffic
o Long-tail products
o Cross-border selling
2) Quick launch
o Low set-up costs
o No Digital worries
Pitfalls for selling on a marketplace for manu’s:
- Marketplace learns from its selling’s
- Private labels will compete with the manu’s assortment
Pitfalls for retailers who expand in to becoming a marketplace:
1) No control over prices
2) No control over fulfilment
o Inconsistent delivery times, fee, and returning policies
3) No control over product presentation
o Inconsistent and misleading information about the product
= it can damage the retailer’s equity
MULTICHANNEL: THE MANUFACTURER’S PERSPECTIVE
Multiple channels compete with each other
Avoid under-distribution:
Les convenient for consumer to find your products
o Lower (volume) sales
Retailers may exploit their monopoly position. They will:
o Set higher prices
o Lower selling support
Effect of more channels:
- Price: manu’s have different prices that the middlemen > compete on the different
channels
Intra-brand competition on price
- Support: extra channels make it hard for the middlemen to earn money on it
Lower selling support
Avoid under-distribution:
, - More convenient for consumers to find your product
o Higher (volume) sales
- Fierce intra-brand price competition
o Resellers set lower prices
o Resellers lower selling support
Manufacturer’s objectives:
- Maximize market coverage
- Minimize channel conflict
o Minimize price competition
o Maximize selling support
How to minimize channel conflict while maximizing coverage?
- Exclusives (in some channels you offer exclusives only for them to sell)
- Different bundles (different bundles for different middlemen)
- Different product variants (different variants; package size)
GREY MARKETS
Products that are sold by unauthorized retailers (it is not illegal; real products are sold)
Grey markets: origin
- Dispose of overstock
o Unintentional (poor forecasting)
o Intentional (exploit quantity discounts through large scale buying)
Grey markets: consequences
1) Overdistribution
2) Brand image damaged
How to go against unauthorized retailers (grey markets)?
- Cut out retailers that sell to grey markets
- Prevent the problem:
o Share data and analytics to forecast demand
o Buy back unsold inventory
- Join them if you cannot beat them (Amazon and Burberry, but it’s hard to keep out
grey market sellers)
OMNICHANNEL: THE RETAILER’S PERSPECTIVE
Omnichannel = every possible combination is possible
1) Information delivery: online + offline
2) Product delivery: pick-up + home delivery
