(Distribution) Channels

Communication, distribution, and sales Channels comprise a company's interface with customers. Channels are how we get our products from the company shop to the customers' hands.

Channels serve several functions, including:

• Raising awareness among customers about a company's products and services
• Helping customers evaluate a company's Value Proposition
• Allowing customers to purchase specific products and services
• Delivering a Value Proposition to customers
• Providing post-purchase customer service.

Finding the right mix of Channels to satisfy how customers want to be reached is crucial in bringing a Value Proposition to market. An organization can choose between reaching its customers through its own channels (direct), through partner channels (indirect), or through a mix of both (omnichannel). Partner Channels are indirect and span a whole range of options, such as wholesale distribution, retail, or partner-owned Web sites.

Partner Channels lead to lower margins, but they allow an organization to expand its reach and benefit from partner strengths. Owned Channels and particularly direct ones have higher margins, but can be costly to put in place and to operate. The trick is to find the right balance between the different types of channels, to integrate them in a way to create a great customer experience, and to maximize revenues.

When thinking of a companies distribution channels, we should be asking:

• Through which Channels do our Customer Segments want to be reached?
• How are we reaching them now?
• How are our Channels integrated? Which ones work best?
  • Which ones are most cost-efficient? What are the advantages and disadvantages of each channel?
• How do our channels (individually and as a whole) contribute to our companies overarching strategy to connect with our customers?
• How are we integrating them with customer routines?

As we have learned, channels can take on a variety of forms. From physical and virtual channels to channels that are either direct (owned) or indirect (partnerships), each distribution channels tells us something about an organizations strategy for connecting with customer segments. Primarily, channels are aimed at accomplishing the following things:

• Raising awareness among customers about a company's products and services
• Helping customers evaluate a company's Value Proposition
• Allowing customers to purchase specific products and services
• Delivering a Value Proposition to customers
• Providing post-purchase customer support

Each physical distribution channel has its own unique set of strengths, weaknesses and costs. Some channels are "indirect," with a company selling through intermediaries sometimes called "resellers" (distributers, value-added resellers, dealers, etc.), who then sell to an end user. For example, when a handheld video-game maker wants to use local independent toy stores as a channel, those toy stores buy merchandise from a local or national distributor. Your company calls on the distributor but can't possibly afford to visit every independent toy store in America. In general, physical distribution is as complex as it is costly. Here are some of the most common alternatives.

Direct Sales

These are salespeople you employ to either call on end users (consumers or businesses) or sell to other resellers.

• Strengths: Superb oversight and control; sales force focused on/dedicated to your company's products.
• Weaknesses: Most expensive alternative; hard to find great talent and even more difficult to manage. The product price/margin may not support expenses.

Independent Sales-Rep Firms

Independent salespeople represent multiple companies to a particular channel or chain, generally on a geographic basis (although some rep firms are national). They typically hand compatible but not competing product lines. They often work on commission, less often on retainer or a per-sale fee.

• strengths: Fast way to get national distribution at a variable cost with little upfront spending.
• weaknesses: They're loyal to their customer, not to you, the selling company they're more of a conduit than a proactive marketer.

Distribution/Resellers

Mid- and low-volume business and consumer products are often sold through distributors - intermediaries between manufacturer and retailer who do little more than stock the product locally and make it available in modest quantities to local stores. Some distributors (think CDW for computers, Arrow for electronic components, McKesson for pharmaceuticals) are national in scope and carry literally thousands of items. It's difficult and costly to get a distributor to promote a particular product.

• strengths: They provide personal attention and can showcase and promote products they like.
• weaknesses: Expensive. Generally have an "order taker" mentality and are rarely marketing/promotional partners. They may have the rights to return your product. Typically don't pay until the product is "sold through."

Dealers (aka Retailers)

Unlike a distributor, a dealer has bought the product. Whether they're selling to businesses or consumers, resellers are usually independent retailers or small chains that display and promote what's generally a limited selection of products. Typically, they take a large markup (often double their costs, called a "keystone") on the wholesale price to compensate for higher operating costs and smaller volumes. Dealers seldom deal directly with "the factory" (your company), instead buying goods from a distributor or similar intermediary, in more modest quantities than, say, Costco. Consumer products are also still sold in "mom-and-pop" food and convenience stores.

• strengths: They provide personal attention and can showcase and promote products they like.
• weaknesses: It's hard and costly to build a new business using dealers as the principal channel.

Mass Merchandisers

In the U.S. national chains from Walmart to Costco and Home Depot to 7-Eleven move massive amounts of merchandise to consumers. As a result, they wield enormous influence over manufacturers and extract their "pound of flesh" by often charging 50 percent of the retail price for carrying the product. They seldom launch new products without a successful "test market" in a modest number of stores. And when that test succeeds, the retailer asks for "slotting allowances" in the tens of thousands of dollars (in addition to their markup) for agreeing to display the product.

• strengths: Massive distribution and advertising/marketing potential
• weaknesses: Long lead time to sell into (at times a year or more), extremely high cost, little marketing control and less opportunity to influence. May have the right to return unsold product months later. Pay painfully slowly, sometimes taking six months or more.

Much like the physical distribution channel, each web/mobile channel has its strengths, weaknesses and costs. (Increasingly, physical products are sold both online and in a physical channel.) As a startup you should pick the one distribution channel that provides the optimum balance between the company's value proposition, its costs and revenue model, and how customers prefer to buy. (You can add additional channels as you scale and grow.)

Dedicated e-commerce

You company offers its products for sale directly on you own "dedicated" e-commerce website (which can be hosted anywhere). Customers access the site via a web browser. Whether the product is physical or web/mobile, consumers and businesses each learn details, see products, compare features, and complete the transaction at the single URL.

• strengths: Basic sites are easy to create, and deliver complete control or price, product presentation, inventory and more.
• weaknesses: Company must bear all challenges and costs of traffic building and converting visitors to buyers.

Online Retailer (Two-step e-distribution)

This is how your company can reach many more customers by simultaneously selling your products on e-commerce sites that help generate awareness and demand. It is the most common web/mobile channel, encompassing every conceivable retailer from Amazon.com to Bestbuy.com, the Android and Apple app stores to small e-commerce sites. Distribution costs vary, with Amazon.com at the high end, charging 55 percent of retail prices to sell a physical book. For that hefty sum, this channel maintains inventory, packs and ships the goods, and collects payments. As a rule, the more the retailer does to generate consumer demand, the more it earns for making the sale.

• strengths: Fastest way to get national distribution at a variable cost with little upfront spending.
• weaknesses: Little control of on-site promotion or product visibility except with extra spending.

Mobile-app Commerce

A web/mobile application distribution platform behaves in many ways just like a physical channel's retail store. Mobile apps and many web pages and games are sold on web/mobile platforms. Apple and Google's Android offer app stores that allow mobile users to buy everything from games to expense account software for their iPhone or Android phones.

Dedicated marketplaces like the iPhone app store or the Android are the primary "platform-as-channel" marketplace for smartphone app. The Apple App Store charges 30 percent of retail pricing for downloadable iPhone applications. Smartphone apps dominated sales in this channel, but salesforce.com opened its AppExchange for business-to-business applications and other companies will follow.

• strengths: Massive reach in a fast-growing channel for games, software, shopping applications and more. Its a channel that's "always on" and quite handy (for literally many million of people). This is an explosive business opportunity.
• weaknesses: Costly intermediaries, file-size constraints, product presentation and payment challenges, operational complexity, extremely difficult to get consumers' attention or promote app or its marketing messages.

Flash Sales

Flash sales offer a list of consumers deep discounts on branded merchandise with offers expiring in 24 or 48 hours. Gilt.com, Groupon and scores of clones assemble massive e-mail and social networking lists of consumers eager to obtain product discounts in specific categories of geographies. These social-commerce sites deliver the revenue and a volume of customers.

• strengths: Fast, potentially massive distribution; great for product launches, awareness-building, and fast cash.
• weaknesses: Often painfully expensive. End users often expect 50 percent discounts from retail price; manufacturer then pays 50 percent of its 50 percent sales price to the social commerce site. Can generate debt very quickly.

Free-to-paid channel

While it's hard to say whether this is a platform, a channel, or a demand-creation strategy, it's an increasingly powerful way to create customer relationships, particularly among companies with web/mobile products that require little or no customization. A few fast-growing companies such as Zynga have used social networking to create vast audiences of free users of games like Farmville and Mafiawars. They provide a certain amount of game play for free, sometimes even all of it - but sell lots of web/mobile goods for real cash as they "hook" their users on the game.

Other examples include free storage on box.com with additional storage and features being charged. Tax software companies offer free federal returns and try to upsell people with more complex returns.

• strengths: Accelerates trial and adoption at relatively low cost. Terrific as a launch strategy.
• weaknesses: Free-to-pay is sexy but dangerous. You can get tons of users fast, but if they don't convert and pay, you're dead.

Omni, or "omnichannel retail," refers to supporting consumers how they prefer to shop, whether that's on e-commerce websites, in physical stores, via tablets, smartphones or physical catalogs or brand engagement over social media. The main premise is that consumers expect to shop for whatever they want, whenever they want, across multiple platforms, or channels, online or offline. Retailers are now tasked with ensuring seamless customer service and marketing to attract customers and explain shopping's new iterations.

Stores and online are now forever intertwined. The two compliment each other.

The majority of consumers, hovering around 90%, still purchase products in person, even if it means they've reserved the item ahead of time to try on in store, or if they are simply picking up an item already purchased on a tablet.

Across categories, in-store sales influenced by digital channels doubled to 36% in 2013 from 14% in 2012. Meanwhile, mobile now influences over half of digitally influenced in-store sales. By 2015, that number reached 50%.

Omnichannel Evolution

The new focus on omnichannel has forced companies to stop the silo of activities where each division of retail operated independently of other divisions. The mindset of tracking total sales is considered progress to help alleviate executive infighting across all kinds of retailers. This makes it critical to see what contact points are actually driving consumers to end sales. Finding the best paths to encourage users is currently far from a science.

At Macy's, 75% of consumers visit Macys.com before going to a store.

Consumer-Centric Approach

Now omnichannel means that consumers who shop at Gap, for example, are able to reserve an item via the website, go to the store, try it on and then decide to buy it-in the store. It also means that retailers are shipping product from stores because it's faster and cheaper for both the company and the consumer.

Target has taken the mobile application business a step further by offering a coupon service called Cartwheel, accessible via smartphones and with "offers," or coupons, redeemable in stores. Now with more than 8 million users, Cartwheel has saved its users $96 million and counting. Further, when members come to stores, 20% of them buy more items than just their Cartwheel "offers," Target reports. More than half of guests use Cartwheel again after the first use, with active Cartwheel users increasing their spending at Target by about 30%.

Mastering the Omnichannel Era

Retailers are now tasked with setting themselves apart by allowing consumer to swiftly shift from retail channel to channel during all phases of the purchase journey. This omnichannel approach entails providing easy online research tools, facilitating and blending in-store and online buying process connected to accurate product availability, easing research in stores via QR codes or other mobile research-based technologies, offering recommendations in store and online, providing the same product info and ability to buy or reserve online and pick up in store, or by easing the ability for consumers to purchase via mobile devices.

Big-box home furnishing retailer Ikea acknowledges that 60-70% of consumers are going online and researching before making purchases. Online purchases are easier but they cannot replace the emotional and tactile elements that help shape the store experience-the feel of the fabric, the fit, the color, the satisfaction of rewarding yourself.

Moosejaw Mountaineering has 12 stores and $100 million in revenue. In stores, Moosejaw employs "endless aisles," whereby sales associates via iPad minis can access items only available online but in stock at its 80,000-square-foot warehouses. Sometimes items are not available to see in stores so associates will ship an item of, in the case of footwear, various sizes to stores and have a customer come back to view or try on before purchasing.

Theses are the things that make the in-store experience so critical for Moosejaw. This creates the type of customer experience that drives loyalty. It moves the company relationship beyond transactional to long-term commitment.

Technical Challenges

The foundational layer of an effective omnichannel business comes down to making inventory available across the entire enterprise. More than 70% of consumers expect to view in-store inventory online and 50% expect to buy online and pick up in store. The problem is today's point-of-sale systems and inventory management technologies simply can't keep up with the fluidity by which consumers move. Simple things, such as swiping a credit card on an iPad, are hard for retailers. The future is certainly in these mobile technologies. Yet only half of retailers surveyed use smartphones and only 33% use tablets to access point-of-sale software in the field. Just one-third of retailers have implemented the basics of "buy online and pick up in store".

Best Practices for Communication

1. Consistency - develop a brand voice that can communicate across all platforms
2. How-to info - rather than sending pointless emails and promotions, send customers videos that helps them use your products better
3. Be relevant - CVS doesn't just provide coupons for items being purchased, they also provide coupons for products that could be used with it

Vocabulary

• Channels

Student Activity

Student Activity 1

Read the Warby Parker Articles about merging Physical and Virtual Distribution channels. Answer the following questions:

1. What is the Product-Market Fit for Warby Parker?
2. How has WP traditionally distributed their product?
3. How is WP integrating the physical store with the online experience to build a better brand?

Student Activity 2

Read the Amazon.com articles attached below about the development of Amazon Physical Stores. Answer the following questions:

1. Pick a company: Apple, Target, Disney, Starbucks, Sephora, Crate and Barrel, Walgreens, burberry.
2. Explain ways they are using omnichannel marketing.