lecture9 distribution

8/14/2019 Lecture9 Distribution

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What is a Distribution Channel?

. . . the set of inter-dependent organizations

nvo ve n e process o ma ng a pro uc or

service available for use or consumption.

A channel is characterized by its:

Structure

e.g., direct vs. indirect, or how many levels

Organization or governance mechanism

e.g., vertical integration (ownership) or market Intensity of coverage, effectiveness of resellers

e.g., number of resellers, activities of resellers

No Intermediary

b = cost per contact, n = 5 customers, m = 2 manufacturers

C C

CC

M

C C

CC

M

C C

Note that the contact cost is multiplicative: b*n*m


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With Intermediary

b = cost per contact, n = 5 customers, m = 2 manufacturers

C C

CC

M M

I

C

Note that the contact cost is linear: b*(n+m)

What are Buyers Needs?

Information Logistics

What kind ofinformation is needed?

What kind of logisticsneeds exist?

What is the mosteffective and efficientway to provide it?

What is the mosteffective and efficientway to provide it?


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Information Needs

Primary information

uca on a ou as c pro uc ene s

Demonstrations and training

Advice and consultation on early use

Comparative information

Product comparisons (e.g., versus competition)

,

Quality assurance

Customization of transaction or product

Build to order, complex contract terms, etc.

Logistics Needs

Product variety

Breadth and depth of offerings

Convenience/accessibility

Ease of locating point of sale

Travel time

Time between order and receipt of goods

Lot size flexibility

Minimum order size or product size


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Informational and Logistic Needs

Economics

Information

Suppliers are typically lower cost providers of complex

information than channel intermediaries

Where information is critical, channels tend to becomeshorter

Logistics

Tends to improve as intermediaries hold inventory

Suppliers are typically higher cost providers of high logisticalservices than channel intermediaries

Where critical to the end-user, channels tend to becomelonger

Distribution and the Product Life

Cycle

Home Video Specialist

Circuit City Walmart

Ebay

Introduction Growth Maturity Decline

Information NeedLogistic Need


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A Channel Strategy Framework

-

Channel Selection

ManagingDirect Sales

Activities

ManagingDistributorActivities

Managing Direct Sales

Productivityof the = Efficiency X Effectiveness

Salesforce (At Bats) (Batting Avg)


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Productivity Factors

Efficiency

ze ccoun coverage, ca ra e

Allocation (Territories, Products, Customers, etc.)

Organization (Specialty vs General Line)

Effectiveness

Compensation (Level, Salary vs Commission)

, ,

Tradeoffs can occur (e.g., a specialized sales force

will be less efficient but more effective)

Approaches to Sales Force Sizing

The same as last year method

,

Sales expense set as a percent of revenue

Budget process, match competition, etc.

Workload activity breakdown/buildup

Customers to be contacted

Call capacity per sales representative

Sales response analysis

Marginal returns versus marginal costs


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Response Analysis Approach

How does selling cost varywith sales force size?

0

2

4

6

8

10

12

14

Costs and

Contribution Linear assumption illustrated atright

(Note: may also need toaccount for variablecompensation in an analysis)

How does dollar contributionum er o aes eps

Contribut ion Selling Costs

vary w t sa es orce s ze

Diminishing marginal returns

expected

How to determine this?

Sales Force Compensation

Overall level of sales rep compensation What should be the target compensation (total rep

income) for good selling performance?

Labor market factors will govern this

Assess via industry surveys, turnover rates

Salary vs Incentive What proportion of total target compensation

should be fixed salary versus commission? Role in sorting potential recruits

Insights from the principal-agent research


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Salary vs Commission

100% commission (A)

Dollar Sales

Compensation When would you

use Plan A vs Plan B?

Who is attracted toPlan A vs Plan B?

Dollar Sales

Compensatio

nUS average is:

60% salary40% variable

Managing an Indirect Channel

Setting the Level of Distribution Intensity

Managing Conflict

Vertical

Pepsi bottlers wanting to bottle Dr. Pepper

Horizontal

Car dealers complaining that other local dealers

are too aggressive in pricing


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Distribution Intensity

Having many outlets increases customers

It may also reduce the exclusivity of yourproduct

Both jeopardize margins

The Three Classic Alternatives

Exclusive Selective Intensive

Only One

Strong

LimitedNumber

Moderate

MaximumPossible

LowResellerSupport

Resellers pertrading area

None Moderate HighIntra-BrandCompetition


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Sources of Vertical Conflict

Some producer-reseller tension is inherent

oa vergence supp er vs rese er econom cs

Conflicting perceptions of roles (e.g., who ownsthe customer, who built the business)

Note: no noise at all could be a warning sign

Vertical conflict becomes a problem when the

end users the channel services (e.g.,

information and logistics) its marketingstrategy requires

Managing Reseller Efforts:

Building Supplier Power

Value of Brand

Reseller Efforts

ranc se x enof Consumer Pull Intensity

- - yRelations &Support

Programs

ResellerSwitching

Costs


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Balancing Power and Control

Control Over Reseller Actions

Demanding RelaxedSupplierPower

High Tight Relationship Free Riding Potential

LowVertical Conflict Loose Relationship

Sources of Horizontal Conflict

Distributors versus Direct Sales

e.g., HPs distributors vs. on-line direct sales

Dealers vs. dealers

Independents vs. captives,

e.g., Macys vs. Ralph Lauren Stores

Full service vs. discounters

e.g., Nordstrom vs. Mervyns vs. Costco

Intra-brand distribution too intense

e.g., Frys vs. CompUSA vs. Circuit City vs. Good Guys


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Some Strategies for Managing

Horizontal Conflict

Establish clear boundaries between channels

Delineation by product classification

Segmentation by size-of-order

Set appropriate level of distribution intensity

As distribution becomes more selective, reseller supportand merchandising efforts increase

Introduce multiple brands Different brands for different channels Private brands

Summary

Channel selection should be guided by the

needs for channel services (information,logistics)

When going direct, getting sales force sizingand compensation right are key success

When going indirect, setting intensity andmanaging conflict are key success factors


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Next class:

HP Printers

Second individual assignment due

Recommend & justify one of 3 options

Refer to syllabus for format and directionsOne page of text (11-point font size, single

spacing, and one-inch margins)

Optional one page of exhibits (spreadsheets,calculations, etc.; 11 point font size or larger and

one-inch margins)

lecture9 distribution

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