Getting Multi-Channel Distribution Right

KUSUM L. AILAWADI is Charles Jordan Professor of Marketing at the Tuck School of Business at Dartmouth. Her research focuses on the interaction, distribution of power, and performance of manufacturers and their distribution channel partners. She has published extensively in the top marketing journals, and several of her articles have been honored for best contributions to marketing theory, practice, and academic-practitioner collaboration, and for long-term impact. She is an Associate Editor for the Journal of Marketing, Journal of Marketing Research, and Marketing Science. She is also an Academic Trustee of the Marketing Science Institute and President-Elect of the INFORMS Society for Marketing Science. PAUL W. FARRIS is Emeritus Landmark Professor of Marketing at the Darden School of Business, University of Virginia. Over his career he has worked in marketing for UNILEVER and was a director on boards for six companies including retailers, manufacturers, and distributors. He has consulted for Apple, Best Buy, Google, Kroger, and Procter & Gamble among other companies. His authored or co-authored books and articles include award-winning research on distribution channels, marketing metrics, retail power, marketing strategy, and budgeting. He has served on several editorial boards for marketing journals and as an Academic Trustee of the Marketing Science Institute.

• About the Authors xxiAcknowledgments xxiiiPreface xxvChapter 1 Distribution Channels Today 11.1 Introduction 11.2 What is New: Radical Changes in the Navigation of Distribution Channels 41.2.1 Changing Business Models 51.2.2 Omni-Channel Retailing 61.2.3 Data 71.2.4 Regulation 91.3 The Road Ahead 10Part I The Bedrock of Channel Functions, Power, and Conflict 13Chapter 2 Push, Pull, and Total Channel Performance 152.1 Introduction 152.2 An Organizing Framework Illustrated with Natura’s Distribution Channel 162.2.1 Push 162.2.2 Pull 172.2.3 Supplier Inputs, Downstream Effects, and Channel Performance 172.3 Push-Pull Inputs and Downstream Effects in PepsiCo’s Channel 202.4 Push and Pull for Services and Digital Channels 212.5 Beneficial and Harmful Feedback Loops in the Push-Pull System 232.6 Conclusion 26Chapter 3 Root Causes of Channel Conflict 293.1 Introduction 293.1.1 Examples of Channel Conflict 313.1.2 Myopia and Four Root Causes of Conflict that Strain the Partnership 323.2 Uncoordinated Pricing and Selling Effort 333.2.1 Double, Triple, and Quadruple Marginalization 333.2.2 Loss Leaders Have Their Own Problems 373.3 Over- and Under-Distribution 403.3.1 Under-Distribution 403.3.2 Over-Distribution 423.3.3 Competing with Your Customers 443.3.4 Unauthorized Distribution 453.4 Division of Work and Pay: Who Sold That? 463.4.1 The Case of Leather Italia: Functions Performed and Margin Earned 463.4.2 Free Riding on Showrooms, Webrooms, and Billboards 493.5 Adapting to Change: Where Does the Future Lie? 513.6 Conclusion 52Chapter 4 Middlemen in Today’s Channel Ecosystem and Their Functions 574.1 Introduction 574.2 Brick-and-Mortar Intermediaries 604.3 New Digital Intermediaries 644.4 Support Service Providers 674.5 What’s Different about Today’s Channel Functions 694.5.1 The Critical Nature of Delivery and Returns 694.5.2 Increasingly Targeted Selling and Peer Persuasion 714.5.3 Location Means More, Not Less 724.5.4 Agglomeration is Alive and Well 744.6 Conclusion 74Chapter 5 The Sources and Indicators of Power in the Channel 795.1 Introduction 795.2 Power in the Channel and Its Sources 815.2.1 How Social Psychologists and Economists Think about Power 815.2.2 Sources of Power in the Distribution Channel 835.3 Consumer Search Loyalty: The Ultimate Source of Power 855.3.1 Loyalty to the Brand or to the Channel? 865.3.2 Search Loyalty: Hard to Get, Harder to Measure in the Physical World 875.3.3 Fake It Till You Make It? 895.3.4 is Loyalty a Dinosaur in the Digital World? 895.4 Economic Indicators of Power 915.4.1 Monopoly Power: The Lerner Index and Price Elasticity 915.4.2 Manufacturer versus Retailer Price Elasticity and How It Can Distort Power Assessment 935.4.3 Profitability as a Sign of Power 945.5 Conclusion 96Chapter 6 Using Power Without Using It Up 996.1 Introduction 996.2 Applying Power in Channel Relationships 1006.3 Investments and Safeguards: Efficient Partnership or Power Struggle? 1036.3.1 Make Partner-Specific Investments with Open Eyes 1036.3.2 Safeguards Protect Each Party’s Interests 1046.3.3 Safeguards Can Outlive Their Usefulness 1056.3.4 How Automobile Dealer Safeguards Came to Be 1066.4 The Challenge of Preserving Power 1076.4.1 Using Up Power: The “Objectification” of Leather Italia USA 1086.4.2 Pushing Power Too Far or Giving It Up: Retailers and Their Private Labels 1106.4.3 Should National Brand Manufacturers Produce Private Labels? 1116.5 Vertical Restraints: Welfare Enhancing or Anticompetitive? 1126.6 Conclusion 116Part II Metrics, Tools, and Frameworks for Getting the Right Distribution 121Chapter 7 Metrics for Intensity and Depth of Distribution Coverage 1237.1 Introduction 1237.2 A Framework for Measuring Distribution and Matching It to Demand 1247.3 Measuring Stocking Outlet Findability: Metrics for Intensity of Distribution Coverage 1277.3.1 Importance of Outlets Can Be Measured by Their ACV, PCV, and GMV 1287.3.2 Traffic and Search are Important, Perhaps Even More Than Sales Volume 1317.3.3 Online or Offline, Stocking Outlets Have to Be Findable 1337.3.4 The Double-Edged Sword of Increasing Importance of a Channel Member 1367.3.5 Integrate Metrics Across Offline and Online Channels 1377.4 Metrics for Distribution Depth 1387.4.1 Total Distribution Provides More Information Than Brand Distribution 1397.4.2 Aggregate Other Depth Metrics Only Across Stocking Outlets 1407.4.3 Getting the Data to Monitor These Metrics 1417.5 Conclusion 142Appendix: An Example to Calculate Basic Distribution Metrics 143Chapter 8 What are You Managing Towards? 1478.1 Introduction 1478.2 A Hierarchy of Performance Metrics 1498.2.1 Compliance Metrics Can Catch Problems Early 1508.2.2 Cross- and Omni-Channel Metrics are Increasing in Importance 1528.2.3 Both Parties Care about Sales, Share, and Sales Velocity but in Slightly Different Forms 1548.2.4 Gross and Net Margins, Category, and Customer Profitability 1568.3 Conclusion 160Chapter 9 The Challenge of Optimizing Distribution Breadth 1639.1 Introduction 1639.2 Classic Categorizations of Products and Distribution Coverage 1659.3 Consumer Search Loyalty and Distribution Elasticity 1679.3.1 How Consumer Search Loyalty Reduces Distribution Elasticity 1699.3.2 Empirical Evidence of Distribution 1709.3.3 Feedback Effects and Longer-Term Distribution Elasticity 1729.4 The Difficulties of Optimizing Distribution Coverage 1729.4.1 The Complexity of Distribution Costs 1739.4.2 Discontinuities Arising from Retail Structure 1759.4.3 Distribution is Not under the Complete Control of the Supplier 1759.5 Conclusion 176Chapter 10 Using Velocity Graphs to Guide Sustainable Distribution Coverage 17910.1 Introduction 17910.2 The Concept of a Velocity Graph 18010.2.1 Sustainable Positions Likely Lie Close to the Velocity Graph 18110.2.2 Special Logistics Can Allow a Brand to Persist “Off” the Graph 18210.2.3 Three Main Variants of Velocity Graphs 18210.3 Insights from Velocity Graphs: An Illustration with Laundry Detergents 18310.3.1 Brand Distribution Velocity Graphs 18310.3.2 Total Distribution Velocity Graphs 18610.4 Velocity Graphs, State Franchise Laws, and Overdistribution of U.S. Auto Makers 188Chapter 11 Augmenting the Distribution Mix: Digital Channels and Own Bricks and Clicks 19311.1 Introduction 19311.2 A Variety of Own-Stores to Augment Distribution by Independent Resellers 19411.2.1 Store-Within-a-Store to Improve Distribution Depth 19411.2.2 Flagship Stores and Outlets Stores are at Two Extremes of the Branding Spectrum 19611.2.3 Look Before You Leap with Regular Physical and Web Stores 19811.2.4 Showrooms are a Little Like Flagship Stores 20011.3 The Inevitability and Challenge of Online Distribution 20111.3.1 Whether to Be Online is No Longer Debatable 20111.3.2 Coverage Versus Control is a Steeper Trade-off Online 20211.3.3 How Viable is the Online Channel’s Revenue and Profit Model? 20511.4 Be Clear about “Why” to Decide “How” to Distribute Online 20511.4.1 Which Segments are You Trying to Reach and Why Do They Go Online? 20611.4.2 Own Website is Usually Not Enough and Omni-Channel Retailers Will Expect to Sell Online 20811.4.3 Think Hard About the Functions That Pure Play Web Intermediaries Perform 20911.4.4 Whether and How to Do Business with Tech Behemoths is a Strategic Question All Its Own 209Chapter 12 Is Three Cases on Online Distribution 21512.1 Introduction 21512.2 The Saga of Brooks Running and Amazon.com 21512.2.1 What Do Segments of Runners Search for Online and Where? 21612.2.2 Coverage without Sacrificing Control 21812.3 Aggregation: Work Worth the Pay in the Online Travel Channel? 22012.3.1 Why Online Travel Intermediaries Thrive 22112.3.2 Power from Consolidation and Pull Marketing 22312.3.3 Limits to Power from Regulation and Competition 22412.3.4 What is Sustainable? 22812.4 Building a Viable Revenue Model Online: News, Music, and TV 22912.4.1 Online Erosion of a Two-Sided Platform’s Business Model 23012.4.2 Music and Pay-TV Tread More Carefully 23112.5 Conclusion 235Part III Aligning the Marketing Mix to Manage Distribution 239Chapter 13 Using the Product Line to Manage Multiple Channels 24113.1 Introduction 24113.2 Channel-Motivated Expansion of SKUs, Brands, and Categories 24313.3 Portfolios of SKUs for a Portfolio of Channels 24513.3.1 Product Line Length is Tied to Marketing and Distribution Structure 24513.3.2 Product Line Guidance from Total Distribution and SKU Distribution Velocity Graphs 24613.3.3 Use the Opportunity to Be a “Category Captain” Judiciously 24813.3.4 Be Clear About Why and How SKUs are Aligned with Channels 25013.4 Portfolios of Brands to Protect Equity and Mitigate Channel Conflict 25213.4.1 Get Clarity on Your Brand Portfolio Strategy and Brand Architecture 25213.4.2 Real Differentiation is Harder than It Looks 25413.5 Expanding to Support an Exclusive or Direct Channel 25513.5.1 Enticing Consumers to the Direct Channel Requires Greater Scale and Scope 25513.5.2 Sometimes It Makes Sense to Sacrifice Profits to Support the Channel 25713.5.3 But Make Sure the Long Tail is Not Wagging the Strategy Dog 25813.6 Cautions at All Three Levels of Product Line Expansion 25913.6.1 Preempt, Monitor, and Control Unauthorized Distribution 25913.6.2 Curation is More Important than Ever 26013.7 Conclusion 261Chapter 14 Harnessing the Power of Price and Price Promotions 26714.1 Introduction 26714.2 Why One “Everyday” Price to Resellers is Usually Not a Smart Idea 26814.2.1 Variable Supplier Prices Can Alleviate Double Marginalization 26814.2.2 Trade Promotions Fund Retail Promotions to Consumers 27114.3 The Many Varieties of Trade Promotions 27214.3.1 Trade Promotion Goals Evolve Over the Product Life Cycle 27414.3.2 Pay-for-Performance Trade Promotions Tie Funding to Reseller Actions 27514.4 The Challenge of Assessing the Costs and Profitability of Trade Promotions 27614.4.1 What is the Cost of a Trade Promotion? 27714.4.2 How Much of the Sales (and Profit) Bump is Incremental for Whom? 27814.4.3 Additional Metrics for Key Value Items and Loss-Leaders 28114.4.4 Baseline Sales Evolve Over Time 282Appendix: Trade Promotion, Retail Price Discrimination, and Promotion “Cost”: A Numerical Example 284Chapter 15 Managing Prices and Incentives Across Channels 28715.1 Introduction 28715.2 The Goals and Challenges of Channel Incentives 28815.2.1 Sales and Channel Management Goals 28815.2.2 Challenges in Implementing Incentives 28815.2.3 Conditioning Incentives on Reseller Efforts or Performance 29115.3 How to Maintain Reseller Prices 29315.3.1 Incentives to Keep Reseller Prices from Being Too Low 29315.3.2 Control Inventory to Control Price 29415.4 Decide Whether to Differentiate or Harmonize Across Multiple Channels 29615.4.1 Different Products, Retail Prices, and RetailServices Across Channels 29615.4.2 Harmonized Retail Prices Across Channels Can Reduce Showrooming 29715.4.3 Minimum Advertised Price (MAP) Policies Can Help 29815.4.4 Differential Incentives for Valuable Channels that Serve as Showrooms 29915.4.5 Use Targeting to Reduce Channel Conflict 30115.5 Challenges Even When You Control Retail Price Directly 30315.5.1 Don’t Erode Your Own Price to Get the Buy Box 30415.5.2 Paywalls: When Information Wants to Be Free but Two-Sided Markets Fall Apart 30515.6 Conclusion 307Appendix: Excerpts from Mizuno’s MAP Policy 309Chapter 16 Summary: Dashboards and Principles for Managing New Directions in Distribution 31316.1 Pulling (and Pushing) It all Together 31316.1.1 An Expanded View of the Push-Pull System 31416.1.2 A Note About Pull 31616.1.3 What Does It Mean to Coordinate Pull and Push? 31816.1.4 Measure, Match, and Manage to Nurture Beneficial Feedback Loops 32016.2 Distribution Dashboards 32116.2.1 A Simple Illustration of the Insight from Push-Pull Dashboards 32216.2.2 A Distribution Dashboard for Pete and Gerry’s Organic Eggs 32316.2.3 A More Complicated Distribution Dashboard for Hotel Companies 32616.3 The Magical Number Seven Plus or Minus Two Nuggets of Wisdom 33016.3.1 Consumer Search Loyalty Bestows Power and Can Create Conflict 33016.3.2 Prevent Power Outages: Power is Precious and It’s Easy to Use It Up 33116.3.3 Be the Expert on Where and Why Your Target Consumer Visits, (Re)Searches, and Buys 33116.3.4 Form Should Follow Function with Channel Pay and Incentives 33216.3.5 The Direct Approach Can Work, but You Really Have to Know What You’re Doing 33216.3.6 The Devil is in the Details, and So is the Profit 33316.3.7 Avoid Future Shock by Planning and Managing the Rate of Change 33316.4 Conclusion: Who Will Be the Masters of Multi-Channel Distribution? 334Author Index 337Subject Index 343

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