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SUMMARY MARKETING CHANNEL MANAGEMENT – OCTOBER 2021Setting the scene
Marketing channel is a set of organizations that work together to make goods available for
end users. A channel is the link between the manufacturer and the middle men (upstream)
of the link between the middle men and the consumer (downstream).
How retailers have become bigger and more powerful than manufacturers:
1. Mergers and acquisitions
2. Multi-channel operations, for example Click & Collect to be not only in store but also
online.
3. Retailers becoming brands – Private Labels: retailers can compete with manufacturers
and get insight in the cost structure of products.
4. Access to consumer data: retailers have the most data about consumers, know what
they buy and at what time, etc.
Retailers also have a hard time due to the retail apocalypse the fact that many stores
(retailers) are closing down, downsizing or even going bankrupt caused by the shift to
online (already started before Covid). A major disruptor are Amazon and Alibaba.
Retail apocalypse is not happening because the online sales are disrupting the industry
because sales are replaced by online sales, but because of the business model of Amazon.
Amazon’s modus operandi
Start with selection: offer as much as possible gives
consumers a good experience, can find everything they
talk to other consumers about it which increases traffic
attract more third-party sellers because of the large
number of consumers selection will grow because there
are more sellers better experience etc. benefit
from economies of scale and scope lower cost structure
lower prices.
Consumers turned into greedy monsters, got used to getting products right now, without
delivery costs, at low price, etc. Retailers cannot compete with this causes retail
apocalypse fueled by Covid-19 (NOT the cause!)
Channel design
Two types of channels as manufacturer:
1. Direct channels: sell to consumer directly yourself, don’t use other parties.
- Company-owned: manufacturer holds inventory and manufacturer sets consumer
price.
2. Indirect channels: through independent companies that are specialized in retailing
- Sell product to 1 or more middlemen who sell it to consumers. They buy and own the
product, hold inventory and set the consumer price.
Manufacturer’s net total profit = (gross profit margin x sales) – distribution costs
, Why go indirect?
1. Middlemen may add value: Manufacturers often get a higher gross margin per product
by using direct channels, but if it sells much more by going indirect it’s total profit may
become higher depends on the value added by the middlemen.
- Bulk breaking: break supply down into smaller lots so that consumer can buy the
desired quantity
- Assortment convenience: manufacturers typically produce limited variety,
consumers want a wide variety middlemen compose assortment from different
manufacturers
- Time convenience: may reduce time consumer must wait between ordering and
receiving (by holding inventory).
2. Distribution costs: without middlemen, manufacturer has to interact with every potential
consumer. Every consumer has different questions, product delivered at different
address, this is all routine for retailers. Typically, middlemen are less costly.
Manufacturers need to find the right mix of direct, indirect, online and offline options.
Type of indirect online channel = 3P marketplace bring together manufacturers and
consumers, facilitate transactions between them. They do not own product, hold inventory
or set the price. A marketplace helps manufacturers with logistics and payment.
Profit generation for online retailers:
- Gross profit = gross margin * unit sold
- Costs: inventory costs + fulfillment costs (to deliver to consumers)
Profit generation for marketplace:
- Gross profit = commission * units sold + step-in fee (minimal)
- Costs: administrative costs
Reasons to sell on marketplace as manufacturer:
1. Huge consumer traffic: access to huge consumer bases.
- Long-tail products (niche products) that are not appealing to sell for middlemen
- Cross-border selling: reach international consumers
2. Quick launch: low set-up costs and no digital worries
Marketplaces are an easy/light way to scale up.
Pitfalls for marketplaces: E.g., Amazon ‘learns’ from its marketplace & includes best-selling
models in its own (retailer) assortment.
Pitfalls for retailers when expanding marketplaces:
1. Marketplace has no control over consumer prices
2. No control over fulfillment inconsistent delivery times, fees, return policies
3. No control over product presentation inconsistent & misleading information about
product characteristics & availability
consumer satisfaction with the retailer may decrease and their brand equity can get
damaged.
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