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 xxi

Acknowledgments xxiii

Preface xxv

Chapter 1 Distribution Channels Today 1

1.1 Introduction 1

1.2 What is New: Radical Changes in the Navigation of Distribution Channels 4

1.2.1 Changing Business Models 5

1.2.2 Omni-Channel Retailing 6

1.2.3 Data 7

1.2.4 Regulation 9

1.3 The Road Ahead 10

Part I The Bedrock of Channel Functions, Power, and Conflict 13

Chapter 2 Push, Pull, and Total Channel Performance 15

2.1 Introduction 15

2.2 An Organizing Framework Illustrated with Natura’s Distribution Channel 16

2.2.1 Push 16

2.2.2 Pull 17

2.2.3 Supplier Inputs, Downstream Effects, and Channel Performance 17

2.3 Push-Pull Inputs and Downstream Effects in PepsiCo’s Channel 20

2.4 Push and Pull for Services and Digital Channels 21

2.5 Beneficial and Harmful Feedback Loops in the Push-Pull System 23

2.6 Conclusion 26

Chapter 3 Root Causes of Channel Conflict 29

3.1 Introduction 29

3.1.1 Examples of Channel Conflict 31

3.1.2 Myopia and Four Root Causes of Conflict that Strain the Partnership 32

3.2 Uncoordinated Pricing and Selling Effort 33

3.2.1 Double, Triple, and Quadruple Marginalization 33

3.2.2 Loss Leaders Have Their Own Problems 37

3.3 Over- and Under-Distribution 40

3.3.1 Under-Distribution 40

3.3.2 Over-Distribution 42

3.3.3 Competing with Your Customers 44

3.3.4 Unauthorized Distribution 45

3.4 Division of Work and Pay: Who Sold That? 46

3.4.1 The Case of Leather Italia: Functions Performed and Margin Earned 46

3.4.2 Free Riding on Showrooms, Webrooms, and Billboards 49

3.5 Adapting to Change: Where Does the Future Lie? 51

3.6 Conclusion 52

Chapter 4 Middlemen in Today’s Channel Ecosystem and Their Functions 57

4.1 Introduction 57

4.2 Brick-and-Mortar Intermediaries 60

4.3 New Digital Intermediaries 64

4.4 Support Service Providers 67

4.5 What’s Different about Today’s Channel Functions 69

4.5.1 The Critical Nature of Delivery and Returns 69

4.5.2 Increasingly Targeted Selling and Peer Persuasion 71

4.5.3 Location Means More, Not Less 72

4.5.4 Agglomeration is Alive and Well 74

4.6 Conclusion 74

Chapter 5 The Sources and Indicators of Power in the Channel 79

5.1 Introduction 79

5.2 Power in the Channel and Its Sources 81

5.2.1 How Social Psychologists and Economists Think about Power 81

5.2.2 Sources of Power in the Distribution Channel 83

5.3 Consumer Search Loyalty: The Ultimate Source of Power 85

5.3.1 Loyalty to the Brand or to the Channel? 86

5.3.2 Search Loyalty: Hard to Get, Harder to Measure in the Physical World 87

5.3.3 Fake It Till You Make It? 89

5.3.4 is Loyalty a Dinosaur in the Digital World? 89

5.4 Economic Indicators of Power 91

5.4.1 Monopoly Power: The Lerner Index and Price Elasticity 91

5.4.2 Manufacturer versus Retailer Price Elasticity and How It Can Distort Power Assessment 93

5.4.3 Profitability as a Sign of Power 94

5.5 Conclusion 96

Chapter 6 Using Power Without Using It Up 99

6.1 Introduction 99

6.2 Applying Power in Channel Relationships 100

6.3 Investments and Safeguards: Efficient Partnership or Power Struggle? 103

6.3.1 Make Partner-Specific Investments with Open Eyes 103

6.3.2 Safeguards Protect Each Party’s Interests 104

6.3.3 Safeguards Can Outlive Their Usefulness 105

6.3.4 How Automobile Dealer Safeguards Came to Be 106

6.4 The Challenge of Preserving Power 107

6.4.1 Using Up Power: The “Objectification” of Leather Italia USA 108

6.4.2 Pushing Power Too Far or Giving It Up: Retailers and Their Private Labels 110

6.4.3 Should National Brand Manufacturers Produce Private Labels? 111

6.5 Vertical Restraints: Welfare Enhancing or Anticompetitive? 112

6.6 Conclusion 116

Part II Metrics, Tools, and Frameworks for Getting the Right Distribution 121

Chapter 7 Metrics for Intensity and Depth of Distribution Coverage 123

7.1 Introduction 123

7.2 A Framework for Measuring Distribution and Matching It to Demand 124

7.3 Measuring Stocking Outlet Findability: Metrics for Intensity of Distribution Coverage 127

7.3.1 Importance of Outlets Can Be Measured by Their ACV, PCV, and GMV 128

7.3.2 Traffic and Search are Important, Perhaps Even More Than Sales Volume 131

7.3.3 Online or Offline, Stocking Outlets Have to Be Findable 133

7.3.4 The Double-Edged Sword of Increasing Importance of a Channel Member 136

7.3.5 Integrate Metrics Across Offline and Online Channels 137

7.4 Metrics for Distribution Depth 138

7.4.1 Total Distribution Provides More Information Than Brand Distribution 139

7.4.2 Aggregate Other Depth Metrics Only Across Stocking Outlets 140

7.4.3 Getting the Data to Monitor These Metrics 141

7.5 Conclusion 142

Appendix: An Example to Calculate Basic Distribution Metrics 143

Chapter 8 What are You Managing Towards? 147

8.1 Introduction 147

8.2 A Hierarchy of Performance Metrics 149

8.2.1 Compliance Metrics Can Catch Problems Early 150

8.2.2 Cross- and Omni-Channel Metrics are Increasing in Importance 152

8.2.3 Both Parties Care about Sales, Share, and Sales Velocity but in Slightly Different Forms 154

8.2.4 Gross and Net Margins, Category, and Customer Profitability 156

8.3 Conclusion 160

Chapter 9 The Challenge of Optimizing Distribution Breadth 163

9.1 Introduction 163

9.2 Classic Categorizations of Products and Distribution Coverage 165

9.3 Consumer Search Loyalty and Distribution Elasticity 167

9.3.1 How Consumer Search Loyalty Reduces Distribution Elasticity 169

9.3.2 Empirical Evidence of Distribution 170

9.3.3 Feedback Effects and Longer-Term Distribution Elasticity 172

9.4 The Difficulties of Optimizing Distribution Coverage 172

9.4.1 The Complexity of Distribution Costs 173

9.4.2 Discontinuities Arising from Retail Structure 175

9.4.3 Distribution is Not under the Complete Control of the Supplier 175

9.5 Conclusion 176

Chapter 10 Using Velocity Graphs to Guide Sustainable Distribution Coverage 179

10.1 Introduction 179

10.2 The Concept of a Velocity Graph 180

10.2.1 Sustainable Positions Likely Lie Close to the Velocity Graph 181

10.2.2 Special Logistics Can Allow a Brand to Persist “Off” the Graph 182

10.2.3 Three Main Variants of Velocity Graphs 182

10.3 Insights from Velocity Graphs: An Illustration with Laundry Detergents 183

10.3.1 Brand Distribution Velocity Graphs 183

10.3.2 Total Distribution Velocity Graphs 186

10.4 Velocity Graphs, State Franchise Laws, and Overdistribution of U.S. Auto Makers 188

Chapter 11 Augmenting the Distribution Mix: Digital Channels and Own Bricks and Clicks 193

11.1 Introduction 193

11.2 A Variety of Own-Stores to Augment Distribution by Independent Resellers 194

11.2.1 Store-Within-a-Store to Improve Distribution Depth 194

11.2.2 Flagship Stores and Outlets Stores are at Two Extremes of the Branding Spectrum 196

11.2.3 Look Before You Leap with Regular Physical and Web Stores 198

11.2.4 Showrooms are a Little Like Flagship Stores 200

11.3 The Inevitability and Challenge of Online Distribution 201

11.3.1 Whether to Be Online is No Longer Debatable 201

11.3.2 Coverage Versus Control is a Steeper Trade-off Online 202

11.3.3 How Viable is the Online Channel’s Revenue and Profit Model? 205

11.4 Be Clear about “Why” to Decide “How” to Distribute Online 205

11.4.1 Which Segments are You Trying to Reach and Why Do They Go Online? 206

11.4.2 Own Website is Usually Not Enough and Omni-Channel Retailers Will Expect to Sell Online 208

11.4.3 Think Hard About the Functions That Pure Play Web Intermediaries Perform 209

11.4.4 Whether and How to Do Business with Tech Behemoths is a Strategic Question All Its Own 209

Chapter 12 Is Three Cases on Online Distribution 215

12.1 Introduction 215

12.2 The Saga of Brooks Running and Amazon.com 215

12.2.1 What Do Segments of Runners Search for Online and Where? 216

12.2.2 Coverage without Sacrificing Control 218

12.3 Aggregation: Work Worth the Pay in the Online Travel Channel? 220

12.3.1 Why Online Travel Intermediaries Thrive 221

12.3.2 Power from Consolidation and Pull Marketing 223

12.3.3 Limits to Power from Regulation and Competition 224

12.3.4 What is Sustainable? 228

12.4 Building a Viable Revenue Model Online: News, Music, and TV 229

12.4.1 Online Erosion of a Two-Sided Platform’s Business Model 230

12.4.2 Music and Pay-TV Tread More Carefully 231

12.5 Conclusion 235

Part III Aligning the Marketing Mix to Manage Distribution 239

Chapter 13 Using the Product Line to Manage Multiple Channels 241

13.1 Introduction 241

13.2 Channel-Motivated Expansion of SKUs, Brands, and Categories 243

13.3 Portfolios of SKUs for a Portfolio of Channels 245

13.3.1 Product Line Length is Tied to Marketing and Distribution Structure 245

13.3.2 Product Line Guidance from Total Distribution and SKU Distribution Velocity Graphs 246

13.3.3 Use the Opportunity to Be a “Category Captain” Judiciously 248

13.3.4 Be Clear About Why and How SKUs are Aligned with Channels 250

13.4 Portfolios of Brands to Protect Equity and Mitigate Channel Conflict 252

13.4.1 Get Clarity on Your Brand Portfolio Strategy and Brand Architecture 252

13.4.2 Real Differentiation is Harder than It Looks 254

13.5 Expanding to Support an Exclusive or Direct Channel 255

13.5.1 Enticing Consumers to the Direct Channel Requires Greater Scale and Scope 255

13.5.2 Sometimes It Makes Sense to Sacrifice Profits to Support the Channel 257

13.5.3 But Make Sure the Long Tail is Not Wagging the Strategy Dog 258

13.6 Cautions at All Three Levels of Product Line Expansion 259

13.6.1 Preempt, Monitor, and Control Unauthorized Distribution 259

13.6.2 Curation is More Important than Ever 260

13.7 Conclusion 261

Chapter 14 Harnessing the Power of Price and Price Promotions 267

14.1 Introduction 267

14.2 Why One “Everyday” Price to Resellers is Usually Not a Smart Idea 268

14.2.1 Variable Supplier Prices Can Alleviate Double Marginalization 268

14.2.2 Trade Promotions Fund Retail Promotions to Consumers 271

14.3 The Many Varieties of Trade Promotions 272

14.3.1 Trade Promotion Goals Evolve Over the Product Life Cycle 274

14.3.2 Pay-for-Performance Trade Promotions Tie Funding to Reseller Actions 275

14.4 The Challenge of Assessing the Costs and Profitability of Trade Promotions 276

14.4.1 What is the Cost of a Trade Promotion? 277

14.4.2 How Much of the Sales (and Profit) Bump is Incremental for Whom? 278

14.4.3 Additional Metrics for Key Value Items and Loss-Leaders 281

14.4.4 Baseline Sales Evolve Over Time 282

Appendix: Trade Promotion, Retail Price Discrimination, and Promotion “Cost”: A Numerical Example 284

Chapter 15 Managing Prices and Incentives Across Channels 287

15.1 Introduction 287

15.2 The Goals and Challenges of Channel Incentives 288

15.2.1 Sales and Channel Management Goals 288

15.2.2 Challenges in Implementing Incentives 288

15.2.3 Conditioning Incentives on Reseller Efforts or Performance 291

15.3 How to Maintain Reseller Prices 293

15.3.1 Incentives to Keep Reseller Prices from Being Too Low 293

15.3.2 Control Inventory to Control Price 294

15.4 Decide Whether to Differentiate or Harmonize Across Multiple Channels 296

15.4.1 Different Products, Retail Prices, and RetailServices Across Channels 296

15.4.2 Harmonized Retail Prices Across Channels Can Reduce Showrooming 297

15.4.3 Minimum Advertised Price (MAP) Policies Can Help 298

15.4.4 Differential Incentives for Valuable Channels that Serve as Showrooms 299

15.4.5 Use Targeting to Reduce Channel Conflict 301

15.5 Challenges Even When You Control Retail Price Directly 303

15.5.1 Don’t Erode Your Own Price to Get the Buy Box 304

15.5.2 Paywalls: When Information Wants to Be Free but Two-Sided Markets Fall Apart 305

15.6 Conclusion 307

Appendix: Excerpts from Mizuno’s MAP Policy 309

Chapter 16 Summary: Dashboards and Principles for Managing New Directions in Distribution 313

16.1 Pulling (and Pushing) It all Together 313

16.1.1 An Expanded View of the Push-Pull System 314

16.1.2 A Note About Pull 316

16.1.3 What Does It Mean to Coordinate Pull and Push? 318

16.1.4 Measure, Match, and Manage to Nurture Beneficial Feedback Loops 320

16.2 Distribution Dashboards 321

16.2.1 A Simple Illustration of the Insight from Push-Pull Dashboards 322

16.2.2 A Distribution Dashboard for Pete and Gerry’s Organic Eggs 323

16.2.3 A More Complicated Distribution Dashboard for Hotel Companies 326

16.3 The Magical Number Seven Plus or Minus Two Nuggets of Wisdom 330

16.3.1 Consumer Search Loyalty Bestows Power and Can Create Conflict 330

16.3.2 Prevent Power Outages: Power is Precious and It’s Easy to Use It Up 331

16.3.3 Be the Expert on Where and Why Your Target Consumer Visits, (Re)Searches, and Buys 331

16.3.4 Form Should Follow Function with Channel Pay and Incentives 332

16.3.5 The Direct Approach Can Work, but You Really Have to Know What You’re Doing 332

16.3.6 The Devil is in the Details, and So is the Profit 333

16.3.7 Avoid Future Shock by Planning and Managing the Rate of Change 333

16.4 Conclusion: Who Will Be the Masters of Multi-Channel Distribution? 334

Author Index 337

Subject Index 343

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