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1 Success Strategies in Channel Management Channel Implementation Distribution Intensity and Vertical Restraints.

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Presentation on theme: "1 Success Strategies in Channel Management Channel Implementation Distribution Intensity and Vertical Restraints."— Presentation transcript:

1 1 Success Strategies in Channel Management Channel Implementation Distribution Intensity and Vertical Restraints

2 2 Issues Regarding Distribution Intensity and Vertical Restraints Coverage versus Assortment Why Downstream Channel Members Dislike Intensive Distribution How Channel Members Drop Brands Degree of Category Exclusivity The Nature of the Value Offer Category Brand Strategy: Quality Positioning and Premium Pricing

3 3 Issues Regarding Distribution Intensity and Vertical Restraints The Degree of channel intensity (alternatively, degree of selectivity) is a major factor driving the producer's ability to implement its channel programs. Intensive distribution means that a brand can be purchased through many of the possible outlets in a trading area (at saturation, every possible outlet). The opposite is exclusive distribution, whereby a brand can be purchased only through one vendor in a trading area, so that the vendor has a "local monopoly" on the brand. Both saturation and exclusivity are out of the ordinary.

4 4 Distribution Intensity and Vertical Restraints When and why should a producer limit coverage? To what degree should a producer seek to impose unusual contractual restraints on the downstream channel member's conduct of its own business? These vertical restraints constitute interference in another business. There is a great variety of such mechanisms, including restricting the channel member's ability to seek out whatever business it pleases, to resell the value offers, to set the price, and to carry competing brands. These contractual means of interfering with the autonomy of another business raise legal issues. Vertical restraints are designed to oblige the downstream channel member to set aside its own goals and to act as if it were a unit of the producer.

5 5 Coverage versus Assortment When it comes to availability of a brand in a trading area, more is better - or so it would seem. It appears almost a truism to say that the more outlets carry a brand, the more it will sell. This should happen because better coverage makes it easier for a buyer to find the brand. This matters particularly for those brands that do not command strong loyalty. How Could it not be true that more coverage is better? The answer hinges on the nature of the value offers category. Many categories of value offers are routine, low- involvement purchases, which the buyer considers minor and low risk. FMCG brand market share is disproportionately related to distribution coverage. Small retailers, constrained by space, stock only the top one or two brands, knowing that will suffice for most of their customers on most of the purchase occasions a small store serves. Collectively, they move large amounts of merchandise, and in these stores, consumers have very little brand choice. Hence, coverage over a threshold level boosts coverage in small outlets, which rapidly boosts a brand's market share disproportionately. This creates a spiral:

6 6 Intensive Distribution Intensive distribution often creates a situation of lack-lustre sales support, defection of downstream channel members, and even bait-and switch tactics. How can the producer remedy this situation? One solution is contractual: The producer can attempt to impose a contract on the channel member demanding certain standards of conduct. Another solution is to invest in a pull strategy to build brand equity. Customer preference may then oblige the channel member to carry the brand, pay a high wholesale price, charge a low retail price, and make up the low gross margin elsewhere. A third solution for the producer with low sales support is to bow to the inevitable and limit its market coverage, that is, elect some degree of selectivity in its distribution. In some trading areas, a fourth solution is possible - the imposition of resale price maintenance (RPM). RPM is a vertical restraint; that is, an interdiction by the producer of normal behaviour for channel members.

7 7 Why Downstream Channel Members Dislike Intensive Distribution From the downstream channel member's perspective, more coverage for a given brand is a negative, not a positive. Among other factors, channel members differentiate themselves by offering unique assortments. Intensive distribution means that a channel member's competitors have the same brand, thereby eroding the outlet's uniqueness. Each channel member would prefer exclusivity. When a market is saturated, that is, all possible outlets carry a brand, a channel member cannot present the brand as a reason why a buyer should visit that outlet rather than a competing outlet. Channel members, realizing the brand is unprofitable for them, will press for relief in the form of lower wholesale prices. Except for the most powerful brands, the likely outcome is that some channel members drop the brand.

8 8 Channel Members Drop a Brand in Three Ways They may do so overtly, by discontinuing the saturated brand and substituting another that is less intensively distributed in their trading areas. Of course, for very strong brands, the clientele will not accept the substitution, but for more typical brands, the substitution strategy is likely. Channel members may discontinue the entire value offers category if they cannot find a satisfactory substitute brand and the category is not essential. A channel member may appear to carry a brand by offering nominal stock and display, but attempt to convert prospective customers to a different brand once they are on site. The most flagrant form of this behaviour is to advertise one brand to bring customers to the site ("bait"), then persuade them to buy another brand ("switch"). Bait-and- switch tactics are most common for brands with high buyer recognition, because such brands are attractive bait.

9 9 Degree of Category Exclusivity A certain degree of intra-brand competition in a market area is beneficial to the producer. It brings forth each channel member's best efforts, without going so far as to put the channel member in a losing situation. Yet, attaining enough coverage to create the optimal degree of intra-brand competition can clash with other objectives, as described later. One of the greatest drawbacks of selective distribution is the danger that selectivity fosters lacklustre representation.

10 10 The Nature of the Value Offer Category In deciding how much selectivity to grant to channel members in a market area, the producer should begin with features common to the value offers class. Buyers will not expend much effort to purchase convenience goods such as milk or copier–printer paper. To fit buyer behaviour, these should be distributed as intensively as possible. For shopping goods such as an electric kettle or a fax machine, buyers will do some comparison of brands and prices across outlets, suggesting an intermediate degree of selectivity is desirable. For specialty goods such as a stereo or production machinery, buyers will expend considerable effort to make the "right choice." For this, they will make an effort to find outlets they can trust, suggesting that highly selective, even exclusive distribution is acceptable, even desirable, to the buyer. This generalization applies to both industrial and consumer value offers and services. To distribute specialty goods, and to a lesser degree, shopping goods, it is less important to have many outlets than it is to have the right outlets.

11 11 Brand Strategy: Quality Positioning and Premium Pricing In any value offers category, the strategy of a given brand may be to attempt to position as high quality. Operationally, this means conveying an image that the brand has superior ability to perform its functions, or, more simply, that it is so superior as to be excellent. This position, typically accompanied by a premium price, is difficult to achieve. To do so, the producer must pay particular attention to the image or reputation of the channel member representing the brand, because this image will be imparted to everything the channel member sells. By definition, excellence is scarce. Producers will be obliged to focus on the subset of channel members that matches the brand's intended image. Selective distribution is called for to support the high-quality positioning. This is particularly the case when premium pricing is part of the positioning: Higher-priced value offers are usually limited in their distribution availability. High-end-image channel members will be in great demand and have their choice of brands to represent. It can be difficult to induce them to carry any given brand, even one positioned as premium.

12 12 Brand Strategy: Target Market Some brands target a niche market, that is, a narrow and specialized band of buyers. One might expect that producers would seek broad coverage in this case, to maximize the probability that these customers can be found. In practice, the reverse occurs. Producers of brands targeting a narrow spectrum of the market will target a narrow spectrum of outlets. The more restricted the target market, the more selective the distribution. For brands that appeal to channel members and therefore could achieve more intensive coverage, the great danger of offering more selective coverage is that channel members will lose motivation and become complacent.

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