Chapter 10

transaction value analysis-

a perspective that emphasizes the benefits a company brings to its partners (beyond cost reductions). -Marketers speak of all these plays and counterplays using human relationship terms: They speak of the communication between a supplier and distributor, the trust between a distributor and retailer, the satisfaction a retailer has with a supplier, etc.2 Just as with people, when a conflict arises in channels, the best way through it is by talking to each other; communication enhances trust and satisfaction. It's also clearly important to deliver on one's promises (e.g., meet delivery dates, quantities, quality, etc.). Channel experts speak of trust as both the willingness and the ability to deliver on promises.

retail outlets

are classified according to a number of criteria. -They can be compared by the extent of the manager's ownership. -Some are independent retailers (e.g., a local artist's gallery, the local florist, a village baker), and others are branded store chains (e.g., Clarks, Timberland) or franchises (e.g., Sonic, Midas). -Alternatively, we can categorize retailers by their level of service, which tends to be positively related to their price points, from Costco and SuperValu to Neiman Marcus and Macy's.

specialty stores

carry depth but not breadth; e.g., a store may carry only men's athletic shoes, but they do not carry table linens or children's clothing.

double marginalization

the manufacturer wants a profit (a margin) and so does the retailer (hence two margins). -This happens when a manufacturer goes through a retailer

reward power

One party has the ability to provide good outcomes for another. -I have goodies for you -Ex. "We're Big-Supplier and we do what we want, but when Big-Retailer asked us to make our package smaller, we did because they'll stock more and sell more for us."

Describe revenue sharing for manufacturer to customer:

-A consumer price is set, from which must be recovered the manufacturing costs (of producing the good or providing the service) and the retailing costs. -For this scenario, the manufacturer incurs the various costs of interacting with the customer. -So the manufacturer profit is a function of the customer price, the manufacturing and retailing costs, and, of course, demand.

Describe some pull marketing strategies

-A marketer can temporarily reduce pricing or enhance size or quantity. -A marketer can offer trials (small sizes at low prices) or free samples (e.g., bundled onto a complementary product). A marketer can offer coupons (money redeemed at point of purchase), rebates (money redeemed post-purchase), financing (e.g., buy now and don't pay for 6 months), and points toward rewards in loyalty programs. -The marketer still must manage its relations with distributors and retailers, but pull strategies are targeted to the end-user to engage the consumers' awareness and loyalty.

Describe Other ways that channel members have used to strengthen relationships is to exchange some personnel for short stints to learn the perspectives and needs of the other party more intimately.

-All parties need to feel that they're being heard and that their needs are understood and being met. Sometimes it's helpful to remind all members of the channel network that they have the mutual goal of customer satisfaction. Hence, occasionally, multiple channel members may sponsor joint programs of marketing research in order to see just what the customer values, so that the channel members can determine together how best to respond to those requests. -Even when all these measures are insufficient, there are still other options, including mediation (negotiate through a third party who determines the two parties' utility functions) and arbitration (the third party makes a binding decision for the two). To preclude or abate conflict, part of the communication is negotiation. Just as differential power affects pricing, buyers and sellers rarely come to the table as equals when bargaining. Suppliers have more power when their inputs are important to the buyer, when their services are differentiated, and when there are no substitutes. Customers have more power when they're large, when they're relatively few in number, and when they purchase large quantities.

Describe the growth strategies of retailers:

-First, a retailer can expand by providing additional services to serve their current customers better. For example, it's not unusual for companies known for a particular core service (e.g., a grocery store) to add peripheral services for the convenience of their shoppers (e.g., adding banking, a florist, a drycleaner, etc.). -Alternatively, the retailer can maintain their focus on their current offerings but reach out to attract additional segments of customers. -Given the importance of location and channel access, another popular course of action is to go multisite and open additional stores. While this strategy seems easy—after all, you already know how to make one shop succeed—it can be a challenge to oversee quality control in multiple locations. -International expansion is a form of multisite expansion, and it brings additional challenges in terms of tailoring one's brand (and entire marketing mix) to the local markets. International approaches include direct exporting, joint ventures, direct foreign investment, license agreements, etc. -In addition to setting up shop internationally, companies in other countries can serve as very useful channel partners. An important form of international channel support these days is global outsourcing. For example, outsourcing reliance on India is huge, for the technical training (engineers hired there are less expensive than comparable talent in the U.S., U.K., Germany, or Japan) and for skills in English, both verbal (call centers) and written (software code and medical records transcriptions). In addition, India's offerings are broadening to include the provision of auto parts, chemicals, and electronics

Selective distribution channels-

channels in which expensive goods and services are distributed -They are not intense

Describe how a manufacturer can also engage in backward integration by controlling some of the raw material inputs.

-For example, Amazon no longer simply sells books—it also publishes them. -Retailers backward integrate when they set up private labels (e.g., foods, fashions, toys). Private labels offer a number of advantages: (1) If they sell well, they give the retailer negotiating power with the manufacturers. (2) They can offer significant margins. (3) They can help the retailer differentiate itself.

Describe how a manufacturer could engage in so-called forward integration by opening its own retail stores.

-For example, Sony and Apple computers used to be only in manufacturing; subsequently, they (partially) forward integrated, opening Sony and Apple stores. -Ralph Lauren took its fashions forward in two retail channel formats; they have a few select flagship stores to carry their entire line (thus offering more SKUs than what they make available to department stores such as Bloomingdales). -Perhaps the most popular means of forward integrating has been manufacturers' providing their wares online for direct purchasing

Describe an example of how COGs are distributed intensely

-For example, many brands of snack foods, personal care products, utility goods (pens, lighters, candles, newspapers and magazines), and so forth, are sold in many kinds of stores: drugstores, supermarkets, discount stores, convenience stores, etc. Why? -1.First, as a consumer, consider how far you'd drive for a pack of gum (not very far) because it's a low-cost item and often an impulse purchase. Accordingly, to stimulate sales, gum needs to be widely available to consumers. -2.Second, given that CPGs are inexpensive, companies require big volume sales to make big bucks, hence the extensive distribution. -3.These goods are relatively small, so it is easy for manufacturers to box up a lot of units into a fairly small box, put many boxes onto a truck, and get the goods all over the place to many various retail outlets. -4.Finally, these goods are simple: no sales force is required to explain to the consumer, "Okay, this is how M&M's work ...." So companies advertise directly to the consumer, who pulls the goods from the manufacturer.

Describe the research surrounding a relationship between employee satisfaction and customer satisfaction

-If a retailer isn't selective in hiring employees, and if the employees are not trained or paid well, then the service they provide will be suboptimal, and there are clear and immediate repercussions on customer dissatisfaction. -Not surprisingly, this situation isn't particularly pleasing to employees either; they experience the stress of role conflict, that is, they may want to please the customer but not be able to do so. -Sooner rather than later, they resign, and new workers are hired as replacements, and this churn exacerbates poor service, since newbies rarely know how to do something in an organization. -If instead, the retailer has foresight, they'll select good people, train them, pay them and reward them well, and trust them enough to empower them to make on-the-spot decisions to make customers happy.

Describe how The intensity of distribution is a function of consumer convenience in access, information search, etc.

-If the goods are simple, inexpensive, easily transported, etc., it's typical that they're distributed widely and intensively. -If the goods are complex (requiring assistance in purchasing) and relatively expensive (therefore feeling like a somewhat risky purchase), channels are often structured to be more selective.

What are the 3 forms of distribution channels?

-Manufacturer → consumer -Manufacturer → retailer → consumer -Manufacturer → wholesaler → retailer → consumer -The three different channels systems have to deal with different issues. The PC or cell phone company doesn't have to deal with other companies, yield to their goals, split profits with them, or any of that. But they have to do everything themselves. Amazon has to have cooperation and reliability from its suppliers, and then it has to deal with customers. Pixar has to deal with its distributors and then is somewhat removed from its audiences.

Describe the important of location in retailing:

-Marketers are hired to study environmental data such as population densities, income and social class distributions, median ages, and household composition if that is relevant to a particular store (e.g., placement of a toy store vs. a dance club). -Site location models essentially predict the likelihood of a successful outlet as measured by predicted sales as a function of those density stats. If you're Starbucks, it's population density and urban, upscale, high foot traffic. If you're Walmart, it's rural for the store's footprint but well placed with respect to car traffic, and average or downscale socioeconomic ZIP codes.

Describe self service:

-One streamlining phenomenon that IT is facilitating is self-service. We take self-service for granted in a number of industries: retail banking, check-ins at airports, checkouts at hotels, etc. -Internet retailing is also clearly a form of self-service; instead of flipping through a catalog and calling an 800-number to place an order with a customer rep, we go online and click, click, click. -Beyond these forms, a number of retailers are experimenting with self-service in areas like checkout. There are personnel, e.g., at grocery or hardware stores, as backup in case the machines are too confusing and to discourage theft. IT has made the checkout staffing needs more efficient (e.g., one person supervising six self-checkouts instead of six checkers). It's a development to watch.

What are the two major classes of franchising?

-Product franchising -Business format franchising

Describe e-commerce

-Retail sales online are about $180 billion, growing by about 10% a year, but that's still only about 11% of total retail sales -those online still tend to be younger and more affluent, but gaps are closing toward being representative of general markets. -Second, the U.S. dominates, but not by much or perhaps not for long. the countries with the next largest Internet presences are Japan, Germany, the U.K., France, and Korea. China's population is around 1.3 b, with only 400 mm online. India's population is right behind -The Internet is frequently characterized as a tool to empower customers >>>>As always, it's important to consider the target customer segment(s) when designing or choosing channels: Different channels appeal to different individuals and customer segments. Increasing consumer choice is a central manifestation of empowerment. -e-commerce offers convenience and sometimes even smarter shopping. For example, the online services of "my lists" and order histories make reorders easier

Describe how the extensiveness of distribution channels is also related to the brand's life cycle or to the company's maturity in the marketplace:`

-The brand that comprises the sole offering of a new firm is typically sold through very few channels—probably a website primarily. -Beyond that, it's hard to convince a retailer to support an unknown brand. -As the company matures, it may go broader if doing so is consistent with the desired corporate and brand image.

Describe manufactured through a channel:

-The number of links is the number of manufacturers plus the number of consumers. -Presumably, some cost is associated with each link (e.g., managing that marketing relationship), and, as a result, if the costs are roughly the same, it follows that the marketplace with the fewest links, or costs, is more efficient. Thus, the system with an intermediary channel member (Figure 10.3), is more efficient than all firms going direct to consumers. -the channel member is not well defined, so there are 3 forms of distributions channels

Describe the terms "push and pull"

-The terms "push" and "pull" refer to whether the manufacturer targets consumers or its channel partners with its marketing communications. -Consumers are said to pull goods through the channel, whereas trading partners push the goods down the food chain. -The manufacturer can use any marketing mix variables to push to partners or encourage pull from consumers, but you'll see there are some common trends.

Describe catalog sales:

-The top 10 catalogers are B2B companies, including Dell, Thermo Fisher Scientific (lab supplies), IBM, Staples, and the like. The biggest B2C catalogers are Sears, JCPenney, Williams-Sonoma, L.L. Bean, Fingerhut, and Doctors Forster & Smith (pet supplies). -80 of the top 100 catalogers continue to see sales growth. While conducting business via the Internet is dirt cheap, many costs for cataloging, such as color printing, have come down also (however, postage costs occasionally rise). -the photography in catalogs is beautiful and sensual. Catalogs serve as a prompt, stimulating a customer to go to a website more frequently. Thus, these channels are complementary and not competitive.

Describe salesforce:

-We've talked about machines (the Internet, self-service IT systems) as a channel and about frontline employees at retail shops as channel representatives, but another human element of a channel is a company's sales force. -For the companies high on push, such as many B2B channels, the sales force is an enormously important part of the corporate system and contributor to the bottom line. If we look at the performance of highly trained sales teams in industries such as shipping and metals, we see that the highest-educated and longest-tenured sales teams have growth rates in the mid-20% range. Particularly for more undifferentiated products, the quality of the sales force is often the single most significant means of differentiation. Stated another way, for these products, a company's sales force is its most important driver of performance. -The issues regarding sales forces are two: First, how many salespeople should we have (and where will they be deployed)? Second, how should salespeople be compensated for their efforts? The determination of the size of a sales force is usually done via some estimation of expected workload. We'd solve for the optimal number of salespeople by factoring in how many customers we must serve, how frequently we must call on a customer throughout the year, the average amount of time necessary to spend with each client, etc -Newer brands and companies might well take advantage of current selling partners. As the brand grows, the sizing issue is easier to clarify, and the salesperson's roles are beginning to be defined and specialized. As the brand matures, the salespeople need to be generalists in order to cover multiple products. And with the brand in decline, the sales force might be cut; indeed, the company might return to the use of selling partners. -Here are the three biggest complaints by B2B buyers about salespeople: (1) "The sales person isn't following my company's buying process." (2) "They didn't listen to my needs." (3) "They didn't bother to follow up." Avoid these problems, and the account is yours!3

Describe revenue sharing for a manufacturer going through an intermediary

-When the manufacturer goes through an intermediary, not surprisingly that player wants to make some money too for the services they perform. There's a markup (a profit to be made) when the manufacturer yields product to the retailer, and there's a second markup (more to be made) when the retailer makes the product available to the consumer. -If the channel is not managed well, we quickly run into a situation where, in order to recover these markup costs, we'd be tempted to set a rather high price to the end user consumer. -In fact, the price may become so high that demand would start to drop off, and then both the manufacturer and retailer lose. -This problem is called "double marginalization" because the manufacturer wants a profit (a margin) and so does the retailer (hence two margins). -The channel partners must share.

describe product franchising:

-a supplier authorizes a distributor in some territory (a prescribed geographic area) to carry its products, use its brand name, enjoy the efforts of its advertising, etc. -The biggest example of product franchising is the automobile dealership (e.g., Ford dealers are meant to sell Ford cars and trucks). Other product franchises include Coca-Cola bottlers, Dunkin' Donuts shops, Subway restaurants,

Describe business format franchising:

-an arrangement where the company offers a tried-and-true system in which to conduct business, along with the marketing support, brand name, advertising, etc. to the franchisee—i.e., the owner who will run the local arm of that business. -Examples are fast food outlets, some hotels, and a variety of other businesses, such as 7-Eleven convenience stores, Supercuts hair salons, Senior Helpers, etc.

What are the functions of the distribution network?

-customer-oriented activities, such as ordering and handling and shipping, -product-oriented activities such as storage and display, -marketing-centric activities such as promotion, -financial activities such as, well, financing, etc.

Describe push marketing strategies:

-involve manufacturers offering incentives to distributors (dealers, wholesalers, retailers) to sell product to end users. -Although the manufacturer targets the channel member rather than the consumer, push marketing tools resemble those of pull. -For example, a marketer can offer the distributor or retailer temporarily reduced pricing, an allowance to help cover marketing activities, a discount for purchasing larger quantities (e.g., a twofer or a bogo [buy one, get one free]), financing a payment for several months, spiffs (incentives for the sales force), etc.

Describe franchising:

-it's a means for a company to quasi-integrate; the company can retain some control without complete ownership or capital expenditure. -Franchising systems offer benefits to both the franchisor (the company) and the franchisee (the local frontline). -For the franchisors' part, they receive some capital, they enjoy some scales of economy, they know they have committed people in their franchisees, their expansion and investments are relatively reduced in risk, and, having put their franchises in good hands, they can focus on their core functions, such as their expertise in product development. For the franchisees, they immediately inherit a company with a well-known brand and some market awareness, supplier relationships are largely intact, there are templates for training the staffs they hire, and there is central firm support for many business concerns, including marketing. -In either case, a franchisee pays an upfront fee to buy into the system and then continues to pay royalties to the franchisor. In exchange, the franchisee enjoys an established brand name, as well as corporate support on equipment, the training of personnel, and marketing and advertising -Franchises are a low-capital, low-risk means of being an entrepreneur with a safety net. Most owners have some business management experience, and they can see the advantages of the economies of scale; the profits earned by all the outlets help finance the operations of the entire system, e.g., marketing the brand name, advertising dollars, operations, capital (buildings, land, equipment), etc. The franchise system has appeal to customers also because the brand name implies a level of standardization and predictability in quality across the outlets;

What are the actors in the distribution network?

-manufacturing firms -distributors or wholesalers -retailers, consumers -other players with other names.

Describe situations in which some goods and services are more complicated and expensive:

-the consumer needs a salesperson to explain the purchase (e.g., choices among brands, features to select, etc.), and to reduce their feelings of anxiety associated with the risk, hence inducing a greater likelihood that they would buy. Salespeople can seem pushy, but, let's face it, they're useful. The guys at car dealerships, or those working at electronic stores, or the guys in department stores selling major household appliances probably know more than you about these SKUs. -For the consumer's part, these more expensive purchases require information and deliberation. They aren't typically impulse purchases, and they aren't typically frequent purchases. As a result, the consumer is probably willing to drive 5 or 10 miles to a dealership or to a department store to buy some household appliance. Thus, the manufacturer doesn't need an extensive distribution system. -Every choice has pros and cons. It's true that sales forces are useful, but they are also expensive to maintain, so manufacturing companies can't afford to staff many retail outlets in a given geographic area. In addition, given that goods that require a sales force are expensive, customers don't buy a lot of them. Without frequent repurchasing, there is only a certain level of demand in any given area. Accordingly, such goods are usually available via selective distribution channels (i.e., not intensive distribution).

Describe channel profits:

1. When the manufacturer sells directly to the customer: manufacturer profit = (p - cm - cr) × demand, where -p = price to consumer -cm = costs to the manufacturer of producing the good -or service -cr = costs of providing the retailer function, interacting with the customer, etc. (incurred by the manufacturer) -demand = a function of price, quality, service, etc. When the manufacturer goes through an intermediary: manufacturer profit = (pr - cm) × demand retailer profit = (p - pr - cr) × demand where -pr = price to retailer (i.e., wholesaler price) -cm = costs to the manufacturer of producing the good (assume same as above) -cr = costs to the retailer of providing the retailer function -demand = a function of price, quality, service, etc. (assume same as above—just different channel member providing this function) If we've managed the channel properly, the customer shouldn't see any difference in price, and every player gets a piece of the pie. For example, manufacturer profit when going direct = manufacturer profit when going indirect + retailer profit in indirect channel or:

Describe how Selectivity in channels offers additional benefits to the manufacturer.

By definition, there are fewer relationships to manage, which means that the manufacturer has somewhat more control (e.g., over distributors engaging in price cutting), and costs of interactions are less (e.g., trade discount deals to push new products need to cover fewer parties).

legitimate power

By size or expertise, one party can make claims and threats which encourage the other party to conform. -Great dane and a chihuahua -Ex. "We're Big-Pharma-Supplier and we will not supply you with more of Drug X because it's running into testing problems."

How can conflict be managed between channel members?

Conflict can be quashed if one player is inherently more powerful than another. Perhaps it shouldn't be true that might makes right, but, indeed, power is usually defined by size and it is effective; e.g., if you produce a few lines of a niche product and Walmart doesn't like how you're doing something (your packaging, price points, delivery schedules, etc.), who do you think will blink first? Or if you're the big player and your partner is a little entrepreneur, you similarly expect your "Jump!" to elicit the appropriate response—"How high?" Power isn't a great way to resolve conflict in the long-term, however, since the less powerful player can feel resentful and look to leave the channel arrangement as soon as another opportunity becomes available. Or, worse, they could create a competing product, with the knowledge and technology learned from you! Similarly, sometimes conflict arises between two mighty companies, and then a show of strength will be ineffective; it will be a standoff that just generates a lot of hot air and noise.

coercive power

One party can make another do something by taking away benefits or inflicting punishment. -Bully -Ex. "We're Big-Retailer, and we won't stock your stuff until you give us a better trade margin."

referent power

One party cooperates with another because the former seeks affiliation with the latter. -I want to be like you -Ex. "We're Little-Guy and we cooperate with Market-Leader because they have a great brand name. We're riding their coattails as we establish ourselves."

information (expert) power

One party gets cooperation because they have information the other seeks. -Know it all -Ex. "We're Big-Online-Retailer and we won't provide you with your SKUs sales data for your CRM database until you purchase more advertising in our space."

Describe manufacturers direct to consumers:

The number of contacts in the network is the number of manufacturers times the number of consumers

channel members

The partners that are downstream -they provide the way to channel stuff to the customer

channel profits

These terms summarize the discussion on "Revenue Sharing," a means of negotiating win-win channel relationships.

logistics

coordinating the flow of all those goods and services and information throughout the channel, among the channel members.

exclusive channel

e.g., a small city might have only a single Infiniti dealership. Exclusive channels can be a little tricky because they can tend toward being monopolistic (by definition, there is less competition), creating potential legal problems.

Distribution intensity

how many intermediaries will the manufacturer go through to distribute its goods to end-user consumers

Transaction cost analysis

is a model that considers channel members' production costs and governance costs, both of which are ideally minimized. -Costs of producing and bringing products to market are often reduced by having intermediaries because those channel partners operate with economies of scope and scale. -Costs of governance are the relational issues incurred by trying to coordinate the enterprise and control one's partners.

distribution channel

is a network of firms that are interconnected in their quest to provide sellers a means of infusing the marketplace with their goods and buyers a means of purchasing those goods, doing all as efficiently and profitably as possible.

True or false? ? To optimize delivery systems, we consider several factors: whether we want to distribute intensively or selectively, and how we will align the motives of all these partners to smooth over these large systems. Several kinds of partners are special (e.g., retailing, catalogs, e-commerce), so we will look at their concerns as well.

true

True or false? Channel members also frequently bicker over (i.e., negotiate terms on) prices and margins.

true

True or false? Many consumer packaged goods (CPGs) are distributed intensively.

true

True or false? Wide distribution usually goes with heavy promotion, lower prices, and average or lower-quality products

true

True or false? more exclusive distribution accompanies exclusive promotional efforts, higher prices, and higher-quality merchandise.

true

true or false? Channels are supposed to make access easier for customers.

true

True or false? Retailing falls under the general rubric of services, and just as the employees are more noticeable to customers, so are the operations elements, such as IT

true -A tool that marketers have found useful is to draw a flowchart depicting the front-stage, meaning all the elements that a customer sees, as well as the backstage elements of the service provision that the customer does not see but that also must run efficiently to support the front stage. Since services— such as a customer walking into a retail outlet, wandering around, picking up merchandise, putting some back, considering what to buy, finally checking out—all unfold in real time, the flowchart map can given the marketer a sense of the elements that need to be managed: What parts of the process flow smoothly? What parts bog down quickly during peak periods? What parts of the process might be streamlined or eliminated altogether?

supply chain management

when a company is dealing with partners that are upstream,

general merchandise retailers

where product assortment is broader -department stores, which carry shoes, linens, and kids' clothes, but perhaps not as many brands of men's athletic shoes as the specialty shoe store -Other general retailers include the monster-sized mass merchandisers (e.g., discount warehouse clubs like Costco or Sam's or hypermarkets), or smaller general stores, such as convenience stores and drugstores.