NSF I- CorpsThe Lean LaunchPad

Lecture 4: Distribution Channels

How does your Product Get to Customers?

Version 6/13/12

Channels

How does your Product Get to Customers?

© 2012 Steve Blank

Physical versus Virtual Channels

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

6

Yourself

Through someone else

Retail

Wholesale

Bundled with other goods or services

üüüüü

Web Channels

7

Physical Channels

8

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

9

• Same day

• Delivered and installed

• Downloaded

• Bundled with other products

• As a service

• …

üüüüüü

Types of Channels

10

– OEM– VAR– Reseller– Distributor

Direct Indirect Licensing

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 Do the Economics Work in Different Sales Channel?

How Are Channels Compensated?

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– Commission

– Percentage of sales price

– Discounted pre-purchase

Channel Economics: “Direct” Sales

14

Profit + SG&A + R&D

En

d C

on

sum

er

EU

D

isco

un

ts

Your 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

Your 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

Your RevenueList

Price

Source: Mark Leslie, Stanford GSB

Cost of Goods(Supply Chain)

The Channel as a Customer

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– Some products are embedded in others (OEM)

– Some products are resold by others (VARs)

– Some products are distributed by others

– Who’s the customer?

Channel Economics: OEM or IP Licensing

18

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

How Are Channels Motivated or Incented?

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– Money! – what makes them the most?

– Training

– Marketing to the channel

– SPIF

Book Publishing Channel Example

Example: Book Publishing

21

PublisherNational

DistributorPrinter Wholesaler Retailer Customer

Book Publishing

22

•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

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PublisherNational

DistributorWholesaler Retailer Customer

Wholesale costs

Markup

Allowances

Payment guarantees

Payments

Bills

Credit guarantees

Payment guarantees

Return rights

Credits

Book Publishing Delivery

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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

Medical Device Channel Example

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

Farm Sensor IndustryChannel Example

Channel Model: Service Provider

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Licensing/sales

Channel Model: Service Provider

OEM

Us

Large farm

USDA/EPA

Small farm

Product

Money

Nutrient Data

Licensing/sales

Product

Service

Dental ProductChannel Example

COST / PROFIT ANALYSIS

R&D Maintaining IP

En

d u

ser

Our revenue 4-8% revenues List price

Per unit cost and profit estimation

Licensing Revenue Model

Raw materials

Manufacturing &

Packaging

License fee Distribution

32

Univ.License

fee

End User

Health-Care Providers:Hospitals

PractitionersClinics

InsuranceAgencies

Customer segment: Large

corporationsJ&J, GSK, 3M

DMXR&D

ProductsProcedures

IPs

$$$

~$40

$$

University

4-8% royalty

2-4% license fee

Licensing of Technology Ecosystem

33

Medical Device Channel Example 2

IndividualDoctors

Purchasing Administrato

rs

High value medical products

(e.g. cardiovascular stents)

Commodity medical products

(e.g. latex gloves)

• Doctor education• Direct feedback from doctors• Very expensive

• No doctor education• No customer feedback• Inexpensive

Direct Sales

Distributors

MammOpticsChannel Strategies and Costs

Individual Doctors

Purchasing Administrato

rs

Channel Strategies and CostsMammOptics

5 dedicated sales people$150,000 each/year

Hire nurses or technicianswith establishedrelationships

Early adopter feedback

Continue with core group of sales people

Use women’s healthcare equipment distributor

Already established network of customers

Sales strategy 1 Sales strategy 2

Dental Product 2Channel Example

Private PracticeDentist

PurchasingDepartment

Big Distributors

InstitutionalDentist

Direct Sales

Channels

Private PracticeDentist

PurchasingDepartment

Big Distributors

InstitutionalDentist

Direct Sales

Channels

80% Market Share30% Margin

Private PracticeDentist

PurchasingDepartment

Big Distributors

InstitutionalDentist

Direct Sales

Channels

80% Market Share30% Margin

ContinuingEducationCourses

Magazines& Email

TradeShows

Online RentalChannel Example

42

Listings Provider

Tenants

Landlords

PropertyManagers

Service Providers

Potential Landlords

Realtors

Web Info

Show, Advise, Valuate

Sell, Advise

MaintenanceFurnishing

Listings,ChecksRent Payment

Moving

CraigslistPadmapper.com

Rent.comApartment.com

Forrent.com

Credit ChecksSafetenantcheck.c

Erenter.com

Payment FacilitatorRentpayment.com

Clearnow.comOnline Cheque

Listings, ChecksRent Payment

Maintenance FindingZoospi.com

Redbeacon.comTaskrabbit.com

Schedule Tools

Yelp.com

Angie’s List

Setster.com

Find information

Servicemagic.com

Zoospi.com

Rentpost.comRentjuice.com

Buildium.comRentingsmart.co

Propertyware.com

Rentjuice.comPropertyware.co

Rentingsmart.co

Buildium.com

propertymanagemnt360

Maintenance Ratings

Trulia.com

PM Tools

Dental Product 3Channel Example

COST / PROFIT ANALYSIS

Raw active ingredient

Manufacturing &Packaging

Profit + R&D + License fee Distributor

$40 *$27%32 cut

$6 ? ($5) ~$11 ~$13

En

d u

ser

Our revenue List pricePer unit cost and profit estimation

Direct Sales Revenue Model

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* Competition• NuPro prophy paste (Novamin $50)• NuPro desensitizer (Novamin $93)• MI varnish (Recaldent $100)• Gluma desensitizer (Glutaraldehyde $130)• Health-Dent desensitizer (Fluoride $49)

End User

Customer Segments;

Health-Care Providers:- Hospitals

- Practitioners- Clinics

InsuranceAgencies

Product Sales &

Distribution

Formulations& Packaging

Raw MaterialsManufacturing

DMXR&D

ProductsProcedures

IPs

$$??$6/pk

$5/pk$$??

University

-32%($27)

$?

Direct Sales Ecosystem

R&D &Regulation

$40/pk

45

Travel IndustryChannel Example

Travel Services:Impact of Changing Technology

The Advent of GDS Systems (1980 -1995)

Turning the Screen AroundOnline Travel (1995-2010)