Channel Strategy Lecture 10

WHAT IS A CHANNEL?

• A distribution channel consists of a group of firms or individuals involved in the process of transferring products or services from producers to customers.

• The participants in this process are referred to as channel intermediaries.

PERSPECTIVES ON MIDDLEMEN

• Plato described middlemen as "…persons of excessive physical weakness, who are of no use in other kinds of labor…"

• Aristotle labeled them as "…useless profiteering parasites" that are "unnatural, mercenary, exploitative and corrupting."

• Despite negative perceptions, middlemen serve essential roles in business operations.

TEA DISTRIBUTION IN TAIWAN

• There are approximately 20,000 tea farmers in the hills of Taiwan, supported by 280 middlemen and 60 tea refineries along the oceanfront (Ta-tao-cheng).

• Middlemen have historically had a negative reputation, often accused of exploiting farmers by purchasing tea at low prices and selling it high.

• To protect farmers, a tea auction house was established in 1923 by the governor-general of Taiwan, enabling direct sales to the highest bidding refineries.

• Despite this initiative, middlemen have persisted and the auction house has since closed.

ROLE OF MIDDLEMEN IN TEA DISTRIBUTION

• **Facilitating Search: **

  • Middlemen perform a crucial function by visiting farms to find high-quality teas, taking samples to refineries, and managing purchase orders.

  • They search for buyers for farmers' harvests and suppliers for the refineries.

• Sorting:

  • The appraisal of different tea species and qualitative assessments require skilled expertise.

• Contact Efficiency:

  • Without middlemen, the potential contacts increase dramatically: 20,000 farmers x 60 refineries leads to 1.2 million contacts to achieve optimal pricing.

FUNCTIONS OF A DISTRIBUTION CHANNEL: INCREASING EFFICIENCY

• Distribution channels reduce the number of necessary contacts:

  • A. Without a distributor:

  • Assuming a manufacturer has 3 products and a customer has 3 types of requests, the total number of contacts would be:
    $ext{Total Contacts} = 3 imes 3 = 9$

  • B. With a distributor:

  • The number of contacts with a distributor is reduced:
    $ext{Total Contacts} = 3 + 3 = 6$

CHANNELS OF DISTRIBUTION

• Economic/Functional Consequences:

  • Form Utility: The manner in which consumers desire goods.

  • Time Utility: When consumers need the goods.

  • Place Utility: Where consumers want the goods.

  • Possession Utility: Facilitates the transfer of ownership.

CHANNELS & CONSUMER BEHAVIOR

• Marketers must comprehend various aspects of consumer behavior including affect (feelings), cognition (thoughts), environment (context), and behavior through different channels.

• Key considerations include:

  • Store design

  • Location of stores

  • Type of services provided

STORE ENVIRONMENT

• Key Elements Affecting Consumer Behavior:

  • Store location

  • Store layout (Grid vs. Free-form)

  • In-store stimuli such as:

  • Signs and price information

  • Color schemes

  • Shelf space and product displays

  • Background music

  • Scents

STORE LAYOUT

• Grid Store Layout:

  • Provides structured pathways, commonly found in grocery stores.

  • Advantages include:

  • Low cost

  • Customer familiarity

  • Merchandise exposure

  • Ease of cleaning

  • Simplified security

  • Disadvantages include:

  • Limits browsing

  • Potentially depressing atmosphere.

• Free-form Store Layout:

  • Encourages browsing and a relaxed shopping experience.

  • Advantages include:

  • Increased impulse purchases.

  • Visual appeal.

  • Disadvantages include:

  • Higher costs

  • Confusion among shoppers.

PSYCHOLOGY OF COLOR IN STORE ENVIRONMENT

• Warm Colors (Red/Yellow):

  • Stimulating, attractive, can incentive quick impulse purchases.

• Cool Colors (Blue/Green):

  • Calming, may encourage deliberation in purchasing behavior.

NON-STORE BEHAVIOR

• Non-electronic, Non-store purchases:

  • Modes include catalogs, direct mail, vending machines, and television home shopping.

• Electronic, Non-Store purchases:

  • Analyzed for advantages and disadvantages related to product, promotion, price, and channel effectiveness.

• Advantages:

  • Convenience

  • Low operational costs

  • Initially limited range, now broadened

• Example: Innovations from Japan in vending technology.

TV SHOPPING

• Market Relevance:

  • Despite changing viewership habits, TV shopping remains active with product promotions.

ONLINE CHANNELS AND POST-PANDEMIC BEHAVIOR

• Trend toward increased online shopping, heightened by:

  • Development of technology (Internet and mobile)

  • Digital marketing tools (search engines, social media)

  • Online shopping benefits: virtually unlimited product offerings (e.g., Amazon's extensive catalog).

DISADVANTAGES OF ONLINE RETAILING

• Challenges include:

  • Increased competition from all geographic locations

  • Rising price competition leading to easier price comparisons

  • Consumers often check prices in-store using smartphones.

OFFLINE RETAIL ADVANTAGES

• Advantages of physical retail:

  • Haptic consumption (touch/feel/experience)

  • Immediate purchase fulfillment

  • Entertainment factor, enhanced service

  • Brand trust; consumers prefer purchases from known brands.

  • Physical presence boosts consumer confidence in transactions.

MULTI-CHANNEL STRATEGY

• Manufacturers may use various channels (e.g., Apple selling through its online store, its retail outlets, and third-party retailers).

MULTICHANNEL SHOPPING BEHAVIOR

• Consumers prefer:

  • Searching online and buying in person

  • Browsing in person and buying online

  • Buying online and picking up in person

• Emphasis on convenience, cost-effectiveness, and information availability.

ONLINE-OFFLINE TRADE OFF

• Factors to consider:

  • Does the product/service have high-touch elements?

  • Can customers endure delayed gratification vs. added travel costs?

  • Firm considerations include: store capacity and demand forecasting.

DIRECT TO CONSUMER (DTC) MODEL

• Separation between traditional retail and direct sales:

  • Traditional Retail:

  • Manufacturer -> Wholesaler -> Retailer -> Consumer

  • Direct-to-Consumer:

  • Manufacturer -> Consumer, often aided by e-commerce and targeted advertising.

• Notable DTC brands include Casper, Everlane, Brooklinen, Warby Parker, Away Luggage.

INDUSTRY SHIFT TO DIRECT-TO-CONSUMER

• The landscape is evolving, suggesting that DTC will integrate more with retail elements. Brands must innovate through a mix of technological channels, creative marketing, and physical experiences.

SHOWROOMING

• Concept where consumers explore products in-store but purchase them online in search of better prices.

CHANNEL STRATEGY CRITERIA

• Key considerations in designing channel strategies include:

  • Control, characteristics of intermediaries, competence, commodity, consumers, coverage, condition, costs, and competition.

1. Channel Function – Middlemen

Scenario:
A honey farmer sells through a distributor who connects products to grocery stores.
Application:
Middlemen save time and money by linking producers to retailers efficiently.

2. Store Environment

Scenario:
A clothing store adds soft lighting and calm music. Shoppers stay longer and buy more.
Application:
Store design, colors, and music affect how customers feel and spend.

3. Non-Store Channels

Scenario:
Smart vending machines on campus sell snacks anytime.
Application:
Non-store options add convenience and make products easy to access.

4. Online Retailing

Scenario:
A small bookstore sells rare books online and reaches more buyers.
Application:
Online stores offer unlimited space and global reach for niche products.

5. Multi-Channel Strategy

Scenario:
Apple lets customers test products in stores and buy online.
Application:
Using multiple channels gives customers more ways to shop and builds trust.

6. Direct-to-Consumer (DTC)

Scenario:
Warby Parker sells glasses online and in showrooms.
Application:
Combining online and physical stores builds convenience and confidence.