Module 1- setting the scene
Market channel: A set of
organisations (multiple
organizations) that work
together (cooperate) to
make goods available for
end users (consumers or
businesses)
Market channel: A set of organisations (multiple organizations) that work together
(cooperate) to make goods available for end users (consumers or businesses)
FMCG/Consumer durables/ Industrial product/Services
Customers are retailers in this course; This course we will look at the relationship with the
middle men ( manufacturer and middle men & middle men and end user)
Why are the retailers so big, why did the shift occur?
- Merger & acquisition
- Multi- channel operations: Retailers in the past just used brick and mortar stores.
F.e. they are also using online stores, pick up points, etc.
- Retailers becomes brands: Private label: he retailer owns the product. This makes
them more powerful because they compete with the manufacturers.
- Access to consumer data: Retailers have a lot of data about their consumers. Brand
manufacturers don’t know much about the consumer (ah bonus)
Problems for retailers:
- Retailer apocalypse: when shops are closing : The shift online (reason)
Then why is it still disruptive? Amazon’s modus operandi (amazon’s scheme):
Everything starts with selection because Amazon offers everything consumer’s need. This
causes a good consumer experience -> traffic -> more manufacturers want to use amazon
bigger selection -> …..Because the selection is becoming so big Amazon can handle a lower
cost structure -> lower prices.
- New kind of consumer that want everything, right here, right now, at the lowest cost
and zero willingness to pay. Consumers want conveniences, value, fast shipping and
much information.
Module 2- Channel design
Direct vs Indirect Channel
,Direct channel: the manufacturer sell his goods directly to the consumer, either digitally, or
physically. The manufacturer holds the inventory and sets the consumer price. The
manufacturer controls all aspects of the distribution. There is no 3 rd party involved.
- Advantage:
Higher profit margin
Can set the consumer price (it can increase its revenue by lowering the price)
- Disadvantage: (advantage of the indirect approach)
bulk breaking: middle men allow buying in small lots, whereas manufactures sell
bulks. This allows consumer to select the quantity they wish, instead being
limited to a minimum number of products when bought directly.
Assortment convenience: middle men offer a wide variety of goods
Time convenience: thanks to the middle men’s inventory, consumer van buy
without having to wait
- Higher distribution costs: the contract lines decrease, since not every manufacture
has to contact every consumer individually. Besides, transactions are less expensive
since the distribution between the middle man and the consumer is more routine.
Indirect channels: The manufacturer sells his goods to the middleman/reseller/retailer, who
in turn sells the goods to consumer, either physically or digitally. The middle men are
independent/third parties who buy and owns the product, hold inventory and sets the
consumer price. However, the interaction with the customer can still be direct, since it only
refers to how the channel is organized (Can be physical or digital good)
- Independent third parties
1. Buy& own product
2. Hold inventory
3. Set consumer price
B&M store or online store
Why do direct channel? You could have more profit since you are not selling to the
wholesale price but directly to the consumer.
Net Total profit: (Gross profit margin x sales)- distribution costs
Gross profit margin: direct > indirect
Sales: Direct <> Indirect: depends on value added by middlemen
Distribution costs: direct < indirect
Marketplaces
3th party marketplace= indirect marketplace, becomes increasingly more popular. The
marketplace purely acts as an agent. It does not buy/own products, does not hold inventory
and does not set a price. The retailer helps with payment and logistics. It gross profit is a
commission for each item sold (5-7%), as well as step-in fee. Where the marketplace costs
are only the administrative costs.
where the agent:
1. Do not buy/own products
2. Hold inventory
3. Set price
- Advantage:
Long-tail products: amazon is the most used platform for product searches
Cross-border selling
, Quick launch
No digital worries
- Disadvantage (for retailers): it could tarnish the retailers equity, amazon’s negative
reviews has rapidly increased over the years
No control over prices: high prices may damage the retailer’s image
No control over fulfilment: it may lead to inconsistent delivery times, fees and
return policies. This might frustrate the consumers
No control over product presentation: it may lead to consistent and misleading
information about product characteristics and availability
3p marketplace: is where Gillette sells to end user where Gillet owns product/ holds
inventory and set price
Online retailer: Gillette sells to Walmart.com -> Walmart sells to end consumer
Walmart owns the product and hold inventory and can set the price
Direct channel: Gillette sell the product directly to the consumer (Gillette needs to sell, ship
and handle the transaction)
Online retailer: Gross profit: Gross margin*unit sold
Costs: Inventory costs/ fulfillment costs
Multichannel
Multichannel: a manufacturer has at least two of the following channels: directly (online or
brick-and mortar stores) , via marketplace, a brick and mortar retailer and/or online retailer.
Adding a channel increases sales if it reached a new customer segment.
- under-distribution
Less convenient for consumers to find your products (lower volume sales)
Retailers may exploit their monopoly position (set higher prices and lower selling
support (not advertisement)
Effect on consumer price: every channel has different prices and are competing with each
other
- over-distribution (having too many distribution channels)
Advantage: More convenient for consumers to find your product (higher volume
sale)
Disadvantage: Fierce intra-brand price competition
a) resellers set lower prices: might dissatisfy if your channel has a very low price
and could even abandon selling your product altogether. A lower price also
imply lower profit margin. Despite the high volume, the lower prices causes a
lower sales value
b) resellers lower selling support, more channels might cause free-ride behavior
of the retailer since a consumer could get information via a B&M shop and
still process to buy it via cheaper online channels (showrooming)
(consequence of price-competition). This will lower the volume of the sales,
causing a lower sales value.
Manufacture objective:
1. Maximize market coverage
2. Minimize channel conflict (minimize price competition, maximize selling support)
How to minimize conflict and maximize coverage?
Solution for manufactures to avoid conflicts whilst maximizing coverage:
Market channel: A set of
organisations (multiple
organizations) that work
together (cooperate) to
make goods available for
end users (consumers or
businesses)
Market channel: A set of organisations (multiple organizations) that work together
(cooperate) to make goods available for end users (consumers or businesses)
FMCG/Consumer durables/ Industrial product/Services
Customers are retailers in this course; This course we will look at the relationship with the
middle men ( manufacturer and middle men & middle men and end user)
Why are the retailers so big, why did the shift occur?
- Merger & acquisition
- Multi- channel operations: Retailers in the past just used brick and mortar stores.
F.e. they are also using online stores, pick up points, etc.
- Retailers becomes brands: Private label: he retailer owns the product. This makes
them more powerful because they compete with the manufacturers.
- Access to consumer data: Retailers have a lot of data about their consumers. Brand
manufacturers don’t know much about the consumer (ah bonus)
Problems for retailers:
- Retailer apocalypse: when shops are closing : The shift online (reason)
Then why is it still disruptive? Amazon’s modus operandi (amazon’s scheme):
Everything starts with selection because Amazon offers everything consumer’s need. This
causes a good consumer experience -> traffic -> more manufacturers want to use amazon
bigger selection -> …..Because the selection is becoming so big Amazon can handle a lower
cost structure -> lower prices.
- New kind of consumer that want everything, right here, right now, at the lowest cost
and zero willingness to pay. Consumers want conveniences, value, fast shipping and
much information.
Module 2- Channel design
Direct vs Indirect Channel
,Direct channel: the manufacturer sell his goods directly to the consumer, either digitally, or
physically. The manufacturer holds the inventory and sets the consumer price. The
manufacturer controls all aspects of the distribution. There is no 3 rd party involved.
- Advantage:
Higher profit margin
Can set the consumer price (it can increase its revenue by lowering the price)
- Disadvantage: (advantage of the indirect approach)
bulk breaking: middle men allow buying in small lots, whereas manufactures sell
bulks. This allows consumer to select the quantity they wish, instead being
limited to a minimum number of products when bought directly.
Assortment convenience: middle men offer a wide variety of goods
Time convenience: thanks to the middle men’s inventory, consumer van buy
without having to wait
- Higher distribution costs: the contract lines decrease, since not every manufacture
has to contact every consumer individually. Besides, transactions are less expensive
since the distribution between the middle man and the consumer is more routine.
Indirect channels: The manufacturer sells his goods to the middleman/reseller/retailer, who
in turn sells the goods to consumer, either physically or digitally. The middle men are
independent/third parties who buy and owns the product, hold inventory and sets the
consumer price. However, the interaction with the customer can still be direct, since it only
refers to how the channel is organized (Can be physical or digital good)
- Independent third parties
1. Buy& own product
2. Hold inventory
3. Set consumer price
B&M store or online store
Why do direct channel? You could have more profit since you are not selling to the
wholesale price but directly to the consumer.
Net Total profit: (Gross profit margin x sales)- distribution costs
Gross profit margin: direct > indirect
Sales: Direct <> Indirect: depends on value added by middlemen
Distribution costs: direct < indirect
Marketplaces
3th party marketplace= indirect marketplace, becomes increasingly more popular. The
marketplace purely acts as an agent. It does not buy/own products, does not hold inventory
and does not set a price. The retailer helps with payment and logistics. It gross profit is a
commission for each item sold (5-7%), as well as step-in fee. Where the marketplace costs
are only the administrative costs.
where the agent:
1. Do not buy/own products
2. Hold inventory
3. Set price
- Advantage:
Long-tail products: amazon is the most used platform for product searches
Cross-border selling
, Quick launch
No digital worries
- Disadvantage (for retailers): it could tarnish the retailers equity, amazon’s negative
reviews has rapidly increased over the years
No control over prices: high prices may damage the retailer’s image
No control over fulfilment: it may lead to inconsistent delivery times, fees and
return policies. This might frustrate the consumers
No control over product presentation: it may lead to consistent and misleading
information about product characteristics and availability
3p marketplace: is where Gillette sells to end user where Gillet owns product/ holds
inventory and set price
Online retailer: Gillette sells to Walmart.com -> Walmart sells to end consumer
Walmart owns the product and hold inventory and can set the price
Direct channel: Gillette sell the product directly to the consumer (Gillette needs to sell, ship
and handle the transaction)
Online retailer: Gross profit: Gross margin*unit sold
Costs: Inventory costs/ fulfillment costs
Multichannel
Multichannel: a manufacturer has at least two of the following channels: directly (online or
brick-and mortar stores) , via marketplace, a brick and mortar retailer and/or online retailer.
Adding a channel increases sales if it reached a new customer segment.
- under-distribution
Less convenient for consumers to find your products (lower volume sales)
Retailers may exploit their monopoly position (set higher prices and lower selling
support (not advertisement)
Effect on consumer price: every channel has different prices and are competing with each
other
- over-distribution (having too many distribution channels)
Advantage: More convenient for consumers to find your product (higher volume
sale)
Disadvantage: Fierce intra-brand price competition
a) resellers set lower prices: might dissatisfy if your channel has a very low price
and could even abandon selling your product altogether. A lower price also
imply lower profit margin. Despite the high volume, the lower prices causes a
lower sales value
b) resellers lower selling support, more channels might cause free-ride behavior
of the retailer since a consumer could get information via a B&M shop and
still process to buy it via cheaper online channels (showrooming)
(consequence of price-competition). This will lower the volume of the sales,
causing a lower sales value.
Manufacture objective:
1. Maximize market coverage
2. Minimize channel conflict (minimize price competition, maximize selling support)
How to minimize conflict and maximize coverage?
Solution for manufactures to avoid conflicts whilst maximizing coverage:
