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15.810 Marketing Management
Session 15: Distribution StrategyBarco – distributors were the key to market intelligence
Calyx & Corolla – replace long distribution system with Fedex
Southwest Airlines – ticketing through website
Intuit – used the pull strategy rather than push, service excellence reduces cost to retailer
Swatch (and Levi's) – department store vs. jewelers (specialty shops)
Tweeter – segment the market, price perceptions, branded variants
Coming: Aravind
15.810 Marketing Management
Distribution – today’s topicsDiscrepancy of assortment.
What channels do?
Rule of efficiency.
Analysis framework.
Power and conflict.
Coordinating mechanisms.
Markets develop for efficiency
POTS
HATS
BASKETS
KNIVESHOES
HATS
BASKETS
KNIVESHOES
POTS
5 x 40 = 200 contacts
Manuf.M1 M2 M3 M4 M5
C1 C39C3C2 C40customers
. . .
Discrepancy of assortment
Manuf.
5 + 40 = 45 contacts
customers
. . .
M1 M2 M3 M4 M5
C1 C39C3C2 C40
INTERMEDIARY
Channels develop for efficiency
Discussion exampleNielson (division of Cadbury) – best selling chocolate bars in Canada
Sabritas (division of Pepsico) –distributor of salted snacks in Mexico
Most of sales through “Tiendas”
Tienda
Neilson Hershey NestleSalted snacks
Other food products
…
Sabritas
Tienda Tienda Tienda Tienda
450,000 TiendasPlus other outlets
15.810 Marketing Management
What do channels do?
MANUFACTURER
Information/Market
Feedback
Selling Activities
Physical Distribution
Pricing/ Financing Service
CUSTOMER
Manufacturer
Candy Consumer
Assortment
Local Knowledge
Local Availability
Salesforce Efficiency
Rapidity
Search Cost
Financials
MarketInformation
Manufacturer
Candy Consumer
Assortmentmany candy bars
food productsconvenience products
Local KnowledgeTiendas
governmentconsumers
Local Availabilitytrucksstoragedetails
Salesforce Efficiencye.o.s.
delivery, storageassortment
Rapidityre-supplyheat, melt
Search Costcandies whereconsumers are
Financialscredit, currency
promotionreturns
MarketInformation
Changingtastes,
competitionadv., etc.
A structure to analyze channel tactics
Auto partsCandy
Frequent purchaseMf. assure qualityLittle service
Brand competitionwithin store
Assort efficiencyDisplay
FurnitureCons. Electronics
POS criticalSome serviceModerate density
AutomobilesSailboats
Service is keyQuality assuranceBrand-Channel
Combination
Provide serviceAssure quality
Examples
Customers
Competition
Company Skills
IntensiveSelectiveExclusive
15.810 Marketing Management
Rule of efficiency“The rule is very simple – the most efficient organization for the task should perform the function.”
Department storeSpecialty store
FloristsFedex
Own distributorsBox distributors
Department store (US)Jewelers (Europe)
High-end, box sales
Levi’s
Calyx & Corolla
Barco vs. Sony
Swatch
Tweeter
For what?Most efficient?Example
15.810 Marketing Management
Which functions are done best by:Sabritas or Neilson?
AssortmentLocal knowledgeLocal availabilitySalesforce efficiencyRapiditySearch costFinancialsMarket informationProduct qualityNational advertising
Neilson
Sabritas
Consumers
15.810 Marketing Management
Channel advantages come from:personal relationshipsunderstand customers
assortment economicsprovide value to the customer
represent many suppliersefficient “tours”
reduce supply chain delay (JIT)
capture some of consumer surplus
computer systems, florists, etc.
Local knowledge
Local availability
Salesforce efficiency
Rapidity
Search cost
Systems integration
15.810 Marketing Management
Will Nielsen and Sabritas always see eye to eye?
Neilson
Sabritas
Consumers
1st rule of (core) economics:
Marginal Revenue = Marginal Cost
15.810 Marketing Management
Shared demand is the root of conflict on service and quality.
Pepsico
Sabritas
Consumers
Neilson
Sabritas
Consumers
MC (product) not sharedMC (service) not shared
gain in sales shared
MR in sync with MC
both costs and benefits are shared
15.810 Marketing Management
Shared demand is the root of conflict on margins.
Pepsico
Sabritas
Consumers
Neilson
Sabritas
Consumers
MR (Neilson margin) not sharedMR (Sabritas margin) not shared
MR (loss in sales) is shared
MR in sync with MC
both revenue and loss of demand are shared
15.810 Marketing Management
The effect of mismatch in MC ≠ MR.
tempted lowerwants higherSabritas service
wants highertempted lowerNeilson quality
tempted higherwants lowerSabritas margin
wants lowertempted higherNeilson margin
SabritasNeilson
15.810 Marketing Management
Net result without coordination.
Both have higher margins → higher prices
Sabritas provides less service
Nielsen provides lower quality
15.810 Marketing Management
ConflictDifferent goals
Coke wants vending machines stockedDistributors lose money on marginal machines. Prefer to “free ride”.Training, set-up, etc. for sound system (Tweeter vs. Circuit City)Who carries the inventory?
Multiple ChannelsHigh-end & new electronics needs selling (Tweeter vs. Circuit City)
avoid perceived overlap & enable Tweeter to capture value from service
New franchisesGray market (diversion, Swatch)Value-added resellers (VARS) conflict with distributors
Brand vs. MarketBrita gives a supermarket a trade discount on filters.Does the supermarket have the incentives to pass it on if it means only that consumers switch from other PUR filters to Brita?
Coordinating mechanisms
AssortmentLocal knowledge
Agree on margins, cheat on service
Long-term relationships
Complex accountingand monitoring
Must offer to everyone.Hard to get right.
When possible
Can work, many details
Some progress
Can align incentives.
Share the revenue to align MC = MR
Joint ownership
Contracts
Implicit understandings
Profit sharing
Quantity discounts
CONsPROs
15.810 Marketing Management
All dealers will receive a 20% discount from published suggested retail price. Value added incremental discounts will be awarded as follows:
1. Dealers with salespeople who routinely and personally visit, call on, and promote our products to at least 15% of the end-users in the dealer’s trading area. 10%
2. If not above, provide a catalog that is distributed to at least 80% of customer base in which all our major products are featured. 2%
3. Maintain and inventory of our products that represents no less than 60 days of estimated or historical sales and at least one item for demonstration or display. 5%
4. Offer open account privileges to all responsible customers and provide financing or leasing alternatives for large purchases. 2%
5. Schedule at least 1 week of detailing with us and organize not less than 2 clinics per years with at least 12 end-users , the cost to be paid by the dealer. 2%
6. Provide reasonable parts inventory and employee capability to handle routine returns, exchanges, and warranty replacement or repair. 1%
15.810 Marketing Management
Sabritas v. Neilson?Quality of the candy?
Exclusivity?
Quality of the advertising?
Quality of the service?
Candy v. salted snacks?
Neilson
Sabritas
Consumers
15.810 Marketing Management
Can Neilson monitor Sabritas?Local presence?
Local knowledge?
Understand culture?
Visit all the tiendas?
Beyond Mexico?
Neilson
Sabritas
Consumers
15.810 Marketing Management
Brand name sharing?What are Sabritas’ incentives?
What are Sabritas’ investments?What does Sabritas risk?
What are Neilson’s incentives?What are Neilson’s investments?What does Neilson risk?
Milch vs. Mr. Big and Crispy Crunch?
Is brand name sharing an effective coordinating mechanism?
15.810 Marketing Management
Some puzzlesTo illustrate how to work through channel issues.
Is it always cheaper to buy at a double-coupon store?
Do price matching guarantees help consumers?
Why can’t you ever find the item number that is reviewed in Consumer Reports?
Can it ever be cheaper (per oz.) to buy two small cans of tuna than one large can?
15.810 Marketing Management
Final case – Aravind
What is the best channel to distribute “cured eyes?”
15.810 Marketing Management
The channel is a means to serve downstream customers.
The channel is a customer too!
Analyze with 5 C’s.
MANUFACTURER
Information/Market
FeedbackServiceSelling
ActivitiesPhysical
DistributionPricing/
Financing
CUSTOMER