The Lean LaunchPad

Class 4: Distribution Channels

Steve Blank

Jon Feiber

Jon Burke

http://i245.stanford.edu/

CHANNELS

how does each customer segment want to be reached? through which interaction points?

Test Hypotheses: Channel

3

Two Critical Channel Questions

4

How do you want to sell your product?1

is subtle, but more important than the first: How does your customer want to buy your product?

2

How Do You Want Your Product to Get to Your Customer?

5

Yourself

Through someone else

Retail

Wholesale

Bundled with other goods or services

üüüüü

How Does Your Customer Want to Buy Your Product from your Channel?

6

• Same day

• Delivered and installed

• Downloaded

• Bundled with other products

• As a service

• …

üüüüüü

Web Channels

7

Physical Channels

8

Types of Channels

9

– OEM– VAR– Reseller– Distributor

Direct Indirect Licensing

The Channel as a Customer

10

– Some products are embedded in others (OEM)

– Some products are resold by others (VARs)

– Some products are distributed by others

– Who’s the customer?

Distribution Complexity

11

Evangelists

ServiceTechnicians

Higher Value Added

Higher Volume

Direct Sales

VARs

Retail

Web, Telesales

Systems Integrators

Mainframes

MinisLANs

PC ServersDesktop PCs

PrintersKeyboards

Toner

WANs

Global Systems

Solution Complexity

Ma

rke

tin

g C

om

ple

xity

How Are Channels Compensated?

12

– Commission

– Percentage of sales price

– Discounted pre-purchase

How Are Channels Motivated or Incented?

13

– Money! – what makes them the most?

– Training

– Marketing to the channel

– SPIF

Channel Economics: “Direct” Sales

14

Profit + SG&A + R&D

En

d C

on

sum

er

EU

D

isco

un

ts

RevenueList

Price

Source: Mark Leslie, Stanford GSB

Cost of Goods(Supply Chain)

Channel Economics: Resellers

15

Cost of Goods(Supply Chain)

Profit + SG&A + R&D

En

d C

on

sum

er

EU

D

isco

un

ts

Reseller

RevenueList

Price

Source: Mark Leslie, Stanford GSB

Profit + SG&A + R&D

Channel Economics: Distributors/Resellers

16

En

d C

on

sum

er

EU

D

isc

ou

nts

Reseller

Dis

trib

uto

r

RevenueList

Price

Source: Mark Leslie, Stanford GSB

Cost of Goods(Supply Chain)

Channel Economics: OEM or IP Licensing

17

Your Product Becomes Your Customer’s Cost of Goods Source: Mark Leslie, Stanford

GSB

En

d C

on

sum

er

ResellerProfit + SG&A

+ R&D

Cost of Goods

(Supply Chain)

EU

D

isc

ou

nts

Reseller

Dis

trib

uto

r

Mas

ter

Dis

trib

uto

r

Profit + SG&A + R&D

Cost of Goods(Supply Chain)

Your RevenueList

Price

Example: Book Publishing

18

PublisherNational

DistributorPrinter Wholesaler Retailer Customer

Book Publishing

19

•Percent of

Retail

• You get- 35% of retail- the distributor gets 10%- the wholesaler gets 15% - the retailer gets 40%

- less any discount they offer the customer

PublisherNational

WholesalerDistributor Retailer Customer

35% 15% 10% 40%

$7.00 $3.00 $2.00 $8.00 $20.00

Book Publishing Economics

20

PublisherNational

DistributorWholesaler Retailer Customer

Wholesale costs

Markup

Allowances

Payment guarantees

Payments

Bills

Credit guarantees

Payment guarantees

Return rights

Credits

Book Publishing Delivery

21

PublisherNational

DistributorPrinter Wholesaler Retailer

Merchandise titles

Sell magazines

Acknowledge returns

Determine allocations

Dispose of returns

Prepare film (content)

Establish identity

Create demand

Prepare galleys

Receive Schedules Print

orders Bundle

counts Film

Print and ship

magazines

Deliver orders

Nature of Product Impacts Channel: Physical or Virtual?

22

– Access to customers changes dramatically

– Logistics related to product complexity

– People as products

Bits vs. Atoms

23

Bits

Physical

Product

Web Physical

Channel

Product and Channel Are Bits

24

Bits

Physical

Product

Web Physical

Channel

Rapid Agile and Customer development

Fastest to acquire early customers and scale

Web 2.0 - Product/Channel Are Bits

25

Bits

Physical

Product

Web Physical

Channel

Google Twitter Facebook Zynga Cloud Services

Product Is Bits, but Channel Is People

26

Bits

Physical

Product

Web Physical

Channel

Rapid Agile and Customer development

Fastest to acquire early customers and scale

Rapid Agile and Customer development

Traditional sales channel

May require installation

Traditional Enterprise Software

27

Bits

Physical

Product

Web Physical

Channel

Google Twitter Facebook Zynga Cloud Services

Microsoft SAP Oracle

Physical Products Sold Over the Web

28

Bits

Physical

Product

Web Physical

Channel

Rapid Customer development

Logistics, shipping and manufacturing critical

Customer service

Rapid Agile and Customer development

Fastest to acquire early customers and scale

Rapid Agile and Customer development

Traditional sales channel

May require installation

Killing Traditional Storefronts

29

Bits

Physical

Product

Web Physical

Channel

Google Twitter Facebook Zynga Cloud Services

Microsoft SAP Oracle

Zappos Amazon Cafepress Netflix Consumer electronics

The Factories May Be in China

30

Bits

Physical

Product

Web Physical

Channel

Rapid Customer development

Logistics, shipping and manufacturing critical

Customer service

Rapid Agile and Customer development

Fastest to acquire early customers and scale

Longer customer feedback cycle

May require large capital requirements for scale

Rapid Agile and Customer development

Traditional sales channel

May require installation

We Still Make Things that Need Salespeople

31

Bits

Physical

Product

Web Physical

Channel

Google Twitter Facebook Zynga Cloud Services

Cars Solar panels Wind turbines Bookstores Consumer electronics

Microsoft SAP Oracle

Zappos Amazon Cafepress Netflix Consumer electronics

Team Deliverable by Tomorrow• Talk to 10-15 potential channel partners

• (Salesmen, OEM’s distributors, etc.) • What were your hypotheses about who/what your channel

would be? Did you learn anything different?• Did anything change about Value Proposition? • Update your Lean LaunchLab & Canvas• Draw your channel diagram

• Summarized in a 5 Minute PowerPoint Presentation

Examples

implantable drug infusion pumpswith remote physician control

for chronic pain patients at home

“the right dose at the right time and place”

Christian Gutierrez (EL), Ellis Meng (PI), Carol Christopher (IM), Tuan Hoang (FE)

PatientsTraining

Hospitals

Unit sales

Trade shows

Clinicians

Institutions

Support Services

Pain clinics

Clinical dataKOLs Formulary Acceptance

FDA

IP

Advocacy Groups

Foundations

OEMs

Wireless Developers

Manufacturing Costs

Product Dev Costs

FDA/Clinical Trials

Chronic Pain v4 FS Team

Payors/ICA

Marketing Costs

Faster relief

Efficient patient management and Dosing flexibility

Access to high-value therapies and pharmacoeconomics

pharmacoeconomics

Support

Proprietary knowledge

Human Resources

Electronic records

Electronic health record providers

Bundled kits

CMS (Medicare)

Getting out • Dr. Stan Louie, Drug Formulation Expert (USC Pharmacy)• Dr. Giovanni Cucchiaro, Anesthesiologist (CHLA)

• Dr. Diana Hull, Physician (Group Health in Washington state, formerly at Kaiser California)

• Thomas Hsu, Insurance Specialist (Network Medical Management; a California ICA)

• Two chronic pain patients – Pump user and creator of support forum– User of oral narcotics and patches

• Dr. Frances Richmond (Director Regulatory Science Program, USC)

• Richard Hull (formerly at company selling Lapband)

Clinicians

Institutions/patients

Regulatory

Entrepreneurs/Industry

Patients

Product flow/Channel

Fluid SynchronyElectronic

Health Records

.Partners/

OEMS

Hospitals(AnesthesiologistsNeurosurgeons)

Pain Clinic(AnesthesiologistsNeurosurgeons)

Pump + Controller

Support Services

Bundled Kits

Electronic Records

Channels (Direct)

• Direct to institutions• Some formularies involved in purchase decisions• Some doctors make purchase decision directly

• Device company/Doctor relationship is key • Heavily influenced by :

• Clinical study results • Regulatory approval• Reimbursement

Hospitals

Pain Clinics

Patient Care Flow (Now)

Fluid Synchrony

Hospitals(AnesthesiologistsNeurosurgeons)

Pain Clinic(AnesthesiologistsNeurosurgeons)

Scheduled follow-up

Patient Discharged

Surgery/Rx/reprogramming

Trial period/ Home setting

Weeks/monthsKey factors: Reimbursement , state regulations

Pump + Controller

Support Services

Bundled Kits

Partners/OEMS

Patient Care Flow (Proposed)

Fluid SynchronyElectronic

Health Records

.

Hospitals(AnesthesiologistsNeurosurgeons)

Pain Clinic(AnesthesiologistsNeurosurgeons)

Pump + Controller

Support Services

Bundled Kits

Electronic Records

Scheduled follow-up

Patient Discharged

Surgery/Rx/reprogramming

Trial period/ Home setting

Partners/OEMS

Weeks/months

Actionable feedbackto doctors/institutions

E-prescription / closing loop

Key factors: Reimbursement , state regulationsDays

Regulatory considerations

PMA 510K

Trial size 100’s of patients 20-100

Costs Up to $100,000 per patient

$10-50 MM $1-10 MM

Time ~ 3-4 yrs + post approval follow-on

~ 2-3 yrs

• PMA approval with grouping of FDA approved drugs.• Clinical trials results used to obtain CMS (Medicare) approval• 510K restricts technology to predicate devices

• Can be more difficult to market against incumbents• European CE mark is easier to attain (safety and performance only)

Take-aways• Channel is direct in this existing market

• Channel for e-health is more complex and evolving• State-to-state regulations can impact incentives

• Can pose problems as electronic records systems vary across the country

Next Steps• Understand costs associated with reaching

doctors/institutions directly• Understand structure of e-health channel• Develop regulatory pathway (timelines and cost profile)

Ground Fluor Pharmaceuticals

Advanced Chemistry for Pharmaceutical Progress

Team: Kiel Neumann (EL)

Stephen DiMagno (PI)

Allan Green (Mentor)

45

PET is a non-invasive medical diagnostic technique for cardiac, brain, and tumor imaging

GFP technology makes new (unknown) and known (but clinically inaccessible) [18F]-labeled radiotracers readily available

Fast, multiplatform, high efficiency synthesis of these fleeting, precious agents.

Initial target indications: pediatric neuroblastoma, Parkinson’s disease.

Ground Fluor Pharmaceuticals

General methodology for adding fluorine

to lead compounds of

interest

The Business Model Canvas

Accessibility (RCY)PuritySpeedPET/SPECTMultiplatformSensitivity (nca)Specific compounds

IPPoP dataRegulatory planUnderstanding of the regulatory process

Contract cGMP precursor manufactureSalary, RentsClinical trials

SOPs for precursors and drugsRecruit clinical sitesIn vivo animal studiesDevelop regulatory plan for pre IND meetingID cGMP CROFund-raising

cGMP manufacturerRadiopharmaciesNuclear Medicine and Radiology departments

Technical Assistance (Image Atlas)FDA regulatory support

Radiopharmacies

Equipment producers

Prescribing physicians

Radiologist who perform studies

Sales of intermediates

Technology license

Product license (royalty)

Drug developers

Pharmaceutical development companies

IPPoP data

Radiologists

Technical assistance

Direct sales of precursor

R&D and clinical studies presented in journals and meetings

Sales of precursor through global finished pharmaceutical distributor

Face to Face meeting with president of small radiopharmaceutical company

Face to face with a clinician at Memorial Sloan-Kettering

Face to face with Global Production Manager of Molecular imaging for one of world’s largest radiopharmaceutical companies

OncoKinib collaboration between Geurbet, OncoDesign, and Ariana pharmaceuticals

Face to face meeting with head of R & D and International Production Manager from Linz, Austria

Eckert and Zeigler – German PET modular synthesis provider

Face to face meeting with Executive Director and CEO of Scott Tech Center in Omaha, NE

Introductory teleconference to CEO of Innovation Accelerator

Out of the Building

50

Significant Interest in our technology Radiopharmacies want GMP product

No interest in GMP reagent preparation

Third-party manufacturers would use our developed synthetic pathways

Internal competition with one world radiopharmaceutical leader Best to approach one of other two world leaders

Scott Tech Center Willing to offer free advice on startup strategy

Provided introduction to Innovation Accelerator

Offered introduction to Director of Venture Technology of one of world’s leading radiopharmaceutical companies

Key Learnings

51

General methodology for adding fluorine

to lead compounds of

interest

The Business Model Canvas

Accessibility (RCY)PuritySpeedPET/SPECTMultiplatformSensitivity (nca)Specific compounds

IPPoP dataRegulatory planUnderstanding of the regulatory process

Contract cGMP precursor manufactureSalary, RentsClinical trials

SOPs for precursors and drugsRecruit clinical sitesIn vivo animal studiesDevelop regulatory plan for pre IND meetingID cGMP CROFund-raising

cGMP manufacturerRadiopharmaciesNuclear Medicine and Radiology departments

Technical Assistance (Image Atlas)FDA regulatory support

Radiopharmacies

Equipment producers

Prescribing physicians

Radiologist who perform studies

Sales of intermediates

Technology license

Product license (royalty)

Drug developers

Pharmaceutical development companies

IPPoP data

Radiologists

Technical assistance

Direct sales of precursor

R&D and clinical studies presented in journals and meetings

Sales of precursor through global finished pharmaceutical distributor

Channels

53

We provide accessibility

Only want GMP precursor in modules without development

Could license precursor synthesis for incorporation in modules

Require GMP precursor (or cassette) to develop our product with their synthesizer