In this section, we'll talk about the key decisions that go into structuring your go to market or

distribution strategy.

A marketing channel of distribution refers to really any venue that a company chooses for moving its
product or services out into the world. There are variety of different ways in which a firm can choose to
do that in a variety of different players and intermediaries that the firm might choose to employ along
the way. So, for instance in the US, about 50% of GDP flows through distributors and of this proportion
about 2/3 of all goods and services are passing through retailers. The remainder is sort of split among a
variety of different distributor types, including value added resellers and manufacturers’
representatives.

Today we'll talk about what are the major functions of a distribution channel, what questions a firm
needs to ask were considered when engaging in channel design and will also mentioned some potential
types of channel conflict that can arise, and how a firm can go about mitigating some of these different
conflicts.

At a broad level, a key feature of a distribution channel is that it introduces efficiency gains in the
market. So, if we compare the left-hand side of the picture here, where there are three different firms
selling directly to three different consumer types without an intermediary or a distributor, the number
of necessary contacts here are three times, three or nine. Now versus the right-hand picture where the
distributor service is an intermediary between the firms on the consumers, the number of necessary
contacts in this market are three plus 3 or 6.
Alright, so today we'll focus mostly on firms over on the left-hand side here, making decisions about how
to structure their distribution channels to bring their offerings to market. But you should also keep in
mind that given this opportunity for efficiency gains here in this picture on the left-hand side, it is
essentially an opportunity for an entrepreneur to create a business that introduces these efficiencies to
firms and consumers.

And we’ve seen a lot of this in recent years, right? So, Uber provides a platform that brings together
drivers and consumes, and that is one type of intermediary or Airbnb, for instance, provides a platform
to bring people looking to rent out their place, and those looking for a place to stay together, right? So
similarly. Connecting these two sides of the market.

But again, in the session here will really be focusing on how a firm is going to decide how to structure its
distribution channel, and what distribution channel members to use. Alright, so let's start off by talking
about the different functions that are distribution channel member can fulfill for the firm that's
employing.
So, the first one is demand generation. These are all the type of activities that are going to increase
the demand for your product over and above what you, as a manufacturer or as a firm or provider of
this product can do. There are several different ways that a distribution channel member can do this. So
for instance, if we take the example of a car dealership. Switches one channel member of a car,
manufacture a car. Dealership can provide detailed information about the cars that they sent to.
Consumers have commented their dealership right, so we saw this in the BMW case. As another
example, Amazon generates demand for the products that are sold through its website through product
reviews or recommendation engine and things like promotions. So there's number different ways that
Channel members can engage in demand generation.

Something that firms do have to be careful about here, however, is something that is known as the
showrooming. In effect, showrooming is when a consumer shows up to a physical store to, let's say
evaluate that in the product in store, but then later goes to a different distribution channel to buy that
product more cheaply or conveniently.

So here we might think of someone going to Best Buy to try out a camera or another gadget, but then go
home and search for the best price for that same product. Not right? So it's fine if you as a manufacturer
just engaging a number of different retailers, but it's not so fine for somebody like Best Buy who clearly
is the one that wants to make. That's it. So how do you come? Add this? Well, one way to do this is to
offer price guarantees. So Best Buy and Target permanently matched the price of what they can also do
the research online.

Another function of a distribution channel is demand fulfillment, so distribution channel may also take
care of your just physical distribution logistics. So, a retailer like Amazon clearly does all three of these.
The ordering, transportation, and storage of the products that are sold through Amazon the distribution
channel. If we think of another online retailer like Etsy, for instance, we see that it only really serves one
of the demand fulfillments functions the ordering and potentially some demand generation functions
here.

The third type of function that a channel member could is after sales service. After sales service can
mean a variety of things, including financing, payment, maintenance, as well as post sale customer
relationship. Car dealerships as an example often perform all three of these after sales service functions.
Sometimes financing might be provided by the manufacturer. Sometimes the dealer can reach out to
lenders on your behalf, but often dealerships are going to provide maintenance and repairs so I can
support. The final function of the channel can be 1.to provide information or market feedback to the
manufacturer 2. The primary firm for additional strategy development.

So for instance, it can answer things like So what are people buying? What difficulties are they
experiencing with the product? So on and so forth, right? So if it is the case that this channel member is
really engaging with that end user and they might have a really good sense of what are some of the pain
points of the consumer decision making process and they getting passed that along to you. Is the
manufacturer of the firm providing this person? And This is why maintaining good relationship with your
distribution channel members is beneficial for you as a firm, because you can get a lot more feedback
about your own customers and this distribution channel member consensually act as a helpful
contributor to your own market research.
OK, so having talked about the different general functions, let's now think about how you might decide
which one or which combination of these functions you might want your channel members to fulfill. The
key to an answer here will be as before to really understand how your target customer segment or
segments value the different features of the channel. Members can provide because essentially the
functions provided by these channel members can act to augment that product or service that you're
selling.

Now you can think about this as optimizing your channel to best bring your product or service to your
existing target segment or segments. But I also want to point out that similarly to differences in
willingness to pay that we've considered in previous classes, differences in how consumers value the
channel functions can actually help you decide which consumers you would want to target to begin
with.

Right, so for instance, if you have a very strong relationship with your distributors and your distribution
partners are particularly strong in one area, is providing one of the channel functions well, you might
want to incorporate that knowledge into your evaluation of competitive advantages that you have for
the different target segments that you're a valuating. Right, and that can help you select the final set for
the final target segment.

OK, So what are some benefits that consumers look for with respect to these different functions? And
how might consumers
differ on their valuation of these benefits?

So, for one, consumers might be looking for detailed information about your product. For instance, they
might want some education about just your product or some demonstration of that product use. They
might also be looking for comparative information, so really trying to understand along which
dimensions the different products compare, and again different sentiments of consumers may have
different needs here.

Consumers might also differ on the extent to which they need these additional services that your
channel Members can provide, such as delivery and installation, for instance, right if we ceased first,
such as Best Buy, providing delivery installation for the less electronic savvy consumers, but not
everybody needs that, right? So, recognizing that different consumers may have different needs for a
service such as delivery, installation but also repairs and. It could also be that particular consumers are
looking for particular convenience, benefits or logistics.

So, for instance, a firm might want to ask whether the target consumer values, spatial convenience or
abundance with locations where they can find the product, and if so, you might want to make sure that
you have very wide distribution in order to serve those targets. So, for instance, Toyota has great spatial
convenience compared to other brands, and that helps consumers save on transportation costs in
buying and repairing their cars. It's also known for reliability and great super so good spatial coverage
aligns very much with the target consumers need for this reliability insert list. It's a very much to
distribution as the convenience of the distribution is in line with what the consumer is looking for. A firm
prefers a smaller set of products to choose from.

Another thing to consider is whether the consumer may want to buy in bulk or buy one product at a
time. So, someone going out to lunch will only want to, let's say, by one can of Coke versus someone
shopping for groceries for the month. Might want to buy the Coke in bulk. And so, depending on what
we need, you're trying to serve there. You're going to want your channel Member to provide different
quantities of product package together.

And finally, the firm might think about whether the consumer values are short, waiting time between
ordering delivery, right? Remember, in the calyx case, we saw that some consumers, the forgetful gift
givers, might really value being able to get the product immediately rather than order much in advance,
and so segmenting on. This waiting time might actually help you understand how you need to engage in
the distribution of that product.

Right so all of these points are to recognize that there will be variation in how different consumers are
going to value different channels services. And so how you design your channels should reflect these
games of your target segment or on the flip side how you select your targets should depend on what
strengths you as a company have on the distribution side.

Alright, so given this understanding you can start thinking about some possible channel features. So first
we need to think about which channel members you might want to use and the teachers that different
channel Members will provide a different function or fulfill different needs for the consumers.
So depending on what you need or needs the firm wants, they might choose to use a different set of
players or channel numbers. Alright, so by definition, any manufacturer, any firm is a member of the
channel or channel, and so the firm can always engage in direct distribution via its own store or website.
So certainly you can set that up. Apple stores function like this a lot of online shops now function like
this, so on and so forth.

What can be some other potential channel members so one potential channel member can be a
wholesaler. The wholesaler is going to be an entity that sells products to retailers or other businesses, so
these are largely B to B players. Wholesalers are going to take ownership of or physical control of
inventory. They might potentially buy bulk inventory, hold that up, and then sell it to retailers in smaller
quantities. They might also promote the product and services and arrange for financing, ordering and
payment with their customers or the retailers. Another feature of wholesalers that retailers are more
likely to trust promotions from wholesalers than manufacturers and this is because wholesalers see a lot
of different products and don't necessarily have a vested interest in just one manufacturer or one firms
product. Of course, sometimes they might do to establish partnerships.

The second type of player that can be engaged here is the retailer. Alright, so here you might think
about a variety of different retail formats through which products are sold to end consumers. These are
typically to see firms so business to confirm, and these firms are going to pay more attention to things
like the promotion that has features such as the end consumers buying location and so on and so forth.
So these types of players include things like convenience, stores, websites, warehouse clubs, drugstores,
so on and so forth and they can be online or offline distribution as well.

Force you as a friend. We can always choose some combination of these three or even more or not
covering the full set go or just covering the main players. And sometimes there's no other option.

So depending on the distributor power, the distributor power relative to your own, you might have to
use a wholesaler if you want to work with a particular retailer. So imagine the example where you are a
small size circulation magazine wanting to be stocked on the shelves of Wegmans, right? Wegman is
going to require you to use whatever distribution channels that women's wants to use? So there are
really large player and you are the small circulation magazine. So in the end, they're going to decide
what goes here. Alright, so once you choose the combination of channel members, you then have the
choice of channel intensity. So if you engage in intensive distribution, you're going to solve the product
through all suitable wholesalers, retailers who will stock and sell the product.

If you engage in exclusive distribution, on the other hand, you're going to sell through only one
distributor, or maybe in just one specific geographic area, and selective distribution is going to be some
intermediate form in between. So let's talk about when one or another menu or suitable. So intensive
distribution is really this idea that share of retail shelf space is going to deliver the share of market. So
the only retail support required is really the shelf space available for that product, not necessarily
additional information about the product. So on and so forth. So this is typically good.
For low margin goods, where little investment is required on the part of the consumer to make the
purchasing decision, and so the objective should be to distribute the product as widely and as
intensively as possible. Now, given that the good is low margin due as the manufacturer can't require
any additional retailer support. Since you don't have much margin to share with the retailer, so some
examples here are things like snack foods, soft drinks, newspapers. All of these are some of these
convenience goods. Low margin goods where shelf space is really within that matters.

On the opposite end of the spectrum is exclusive distribution, so in this case the manufacturer establish
is only one or very few resellers in each region. The point of this exclusivity is for the manufacturer to
give the channel additional incentives to also promote the product and offer sort of strong selling
support.

Convenience for the consumer has to be less critical because the distribution is going to be limited and
category competition has to be lower so that you, as the manufacturer have high margins that you can
share with the retailer the dealer. And this is really to protect the distribution channel member and get
in to invest in the sale of the product. So this is typically done for a higher margin product where the
dealer is able to give incentives to promote and keep the brand image high. These are products like
pianos for instance. Other luxury goods or cars as we saw in the BMW case. For some of these
competitors like Lexus.

And then, of course, there's the middle ground for selective distribution. This is intended to increase the
support the reseller provides to the end consumer over intensive distribution. And so that also means
that the manufacturer needs to have some margin to share with the reseller in this type of distribution.
This is intended to increase shopping convenience over exclusive distribution and can be helpful for
things like home electronics as in this example for instance. The final choice is going to be the extent to
which one should utilize online channels.
So here firms have a few choices they can sell on line only, so pure click distribution. On line and offline.
So this brick and click distribution. Of course. Offline only, though increasingly this option is becoming
less and less popular. If a firm chooses to engage in pure click distribution. Which many firms do these
days? It can save on costs by not needing to buy, rent and maintain physical space, but there can be
several possible consumer pain points.

So in particular pure click distribution is :

1. associated with lack of personal consultation.

2. Longer wait times for the product.

3. Potential issues with unintuitive website design that might make it hard for the consumer to actually
buy the product and privacy concerns.

But for each of these there's ways that from can mitigate those, right? So if the target consumer is really
worried about this lack of personal consultation, the firm can offer on line support and we see a lot of
companies doing that these days.

If it is really the longer wait time for the product that the consumer is concerned about, the firm can
offer same day delivery which again is more available these days. Of course, there's also simple ways to
mitigate unintuitive website on design by making the websites clear to use and privacy concerns. If the
target consumer is really worried about that, then the firm can invest any websites here.

The firm chooses to engage in brick and click distribution. The main possible pain point here is around
channel conflict. So in particular, the online sales might cannibalize the offline sales and vice versa.

Design Step 3, which is some possible channel conflicts. So channel conflicts are going to arise due to
different goals and objectives of the different parties and essentially this unclear allocation of rights. A
common example of goal incompatibility between a manufacturer retailer is this example of double
marginalization.

So here that here is that the manufacturer might want to achieve higher market penetration or simply
improve their overall profits by selling to more people at lower prices. So that might be profit
maximizing for the manufacturer. However, the retailer that's being employed by the manufacturer
might be on the flip side, more interested in short, run profitability, and so the retailer might introduce
fire markups than what the manufacturer might want given their long run manufacturer goals. So while
the higher market is going to offer higher short run profits for the retailer, it does not achieve this long
run market penetration goal the manufacturer might be paying for. So this is an example of goal
incompatibility and this type of goal incompatibility can be mitigated by properly structuring the
channel incentives.
So here really, the problem is that the retailer markup is seen differently by the retailer and the
manufacturer. The retailer values the margin, but it hurts the manufacturer.

Now. It turns out that the total channel profits can be at least in this case if the retailer lowered the
price, thus reducing his margins, and the manufacturer paid a fixed fee to the retailer to incentivize the
retailer to do so. So instead of worrying about the margin, now it's incentive compatible for the retailer
to keep the price that the manufacturer will want. And the total channel profits are improved.

The second source of conflict here can be unclear roles, and right. So, for instance, HP may sell laptops
to large accounts through its own sales force, but it's licensed dealers might also be trying to sell it to
large accounts, right? So two different competing for the same. In consumer mind, this can be mitigated
by setting out clearly who does what within a channel or across channels. So for instance, HP can
mitigate this by saying that the sales force sells to large accounts and the dealers sell to everybody else.

We can further categorize potential channel conflicts as vertical, horizontal or multi channel. So the
double marginalization example, as well as the example that we saw in the previous slide this own
website distribution versus physical retailer distribution both apply to this vertical channel conflict
type.

Horizontal Channel Member conflict arises if channel members at the same level or of the same type
thing there is, let's say, too much competition or have differential effects on the overall brand of the
product, right? So for instance, in the case of many car dealerships being located too close together.
These are all general members that are similar and there is really close competition just because they're
really located together.

So one way to mitigate this is to limit the dealerships have fewer dealerships in a particular location.
Now, in this other example, where different channel members have different impacts on the brand, it
could be that one of the dealers offers or one of the retailers offers poor service, which hurts the overall
brand image of the entire product and has spillovers on the other distributors. Are there other retailers
for that's a product in order to mitigate, add the manufacturer or the provider of the product or service
can require certain standards of service for their distributors or new channel members.

The third type here is the multi channel conflict and it can happen when the manufacturer has
established two or more channels that sell to the same market, and they're not really channels or
distributors of the same type. This can be especially intense when rights are allocated differently across
these different channels. So, for instance, when Goodyear began selling its popular tire brands through
places like Walmart and Discount Tires, it really angered its independent dealers because the dealers are
saying they just can't compete against some of these much larger distributors.

Eventually Goodyear ended up placating these independent dealers by offering exclusive tire models not
sold in other retail outlets. That's one way that you could think about mitigating this type of conflict. But
it takes time to mitigate this type of conflict. You also, as a firm might have to make decisions about
which channel members you might want to continue to engage with the most closely and potentially
give some other channel members up.
OK, we've gone through this fairly quickly, and that is because we're really only getting an overview of
these concepts in this class. In reality, this is an extraordinarily complex decision process, and ideally you
as a firm to think about the profits from each alternative before choosing ultimately how to design your
channel. But more importantly, as with other topics we've seen this class strategically. Channel design
can be a point of differentiation for me was a firm because I can provide an augmented product or
service to the consumer. So remember the Netflix example that we've seen from the beginning of class,
which means that practically existing channel functions can be an input to the multi-attribute model in
deciding who to target. And you can also view it as something that you can tailor to the target segment.

One last element to consider here is the extent to which you promote your product or service to the
consumer through the different distribution channels versus direct.
This is where we talk about push versus pull marketing.

So push marketing is going to place emphasis on the intermediary. The notion here is that you as a firm
use sales and promotion dollars to the different distribution channel members to push your product
through the channel to the consumer. So really, the emphasis is that your promotion goes to some of
these channel members to stop or promote your product and give favorable terms to your product such
that the end consumer is more likely to bite.

Pull marketing places an emphasis on the consumer, so in a pull strategy you are really using
advertising to the consumer and you're spending promotion dollars to the consumer and such that the
consumer really wants to pull the product through the distribution channel from there.

When is push or pull marketing appropriate so push marketing can be appropriated for products with
low brand loyalty or low knowledge about product benefits for also product where brand choices
made in store or as an impulse item, pull marketing can be appropriate with products with high brand
loyalty or high involvement consumption where people are aware of the differences across the brands
and choose brands before they shop. But, in reality, Top marketing companies, Coca Cola, Apple, Nike.
All these companies will skillfully employ both push and pull marketing in order to make their product
more attractive to the consumer and push strategies often going to be more effective when
accompanied by a well designed and well executed post. That activates consumer. This is because
without at least some consumer demand, it can be very difficult to gain much channel acceptance and
support. Alright, so with that we wrap up our discussion of distribution strategy to summarize,
distribution channels are used to bring a product or service to the consumer. They can also be used to
augment the final product or service to the consumer. Channel design is going to involve assessing
consumer needs for information service, convenience, and logistics, and choosing the different types of
channel features such as channel types, channel intensity, as well as whether or not you distribute
online, offline versus combination an. As always, channel design is going to involve trying to mitigate
some of these. Conflicts that can arise with too many players in your distribution channel.