Your client markets brand name watches in the $100 to $1,000 price range. Prior to the ubiquity of the Internet, the company distributed its watches through two channels: department stores and specialty watch stores. In the last few years, it has also been offering an online store on its website, which allows it to sell directly to customers. In addition, it has authorized a limited number of online stores to also carry its watches.
Online purchases have increased dramatically in the last year to the extent that the firm’s traditional channels, the department stores and the specialty stores, have begun to object vehemently. What can the firm to do resolve this channel conflict?
This is a typical channel conflict situation, where the manufacturer is burdened with managing conflict among its channel partners or distributors. The first issue to ascertain here is how important are the different channels to our client. One way to do this is to look at data on “channel share” trends, or the proportion of watches that flow through the different channels.
Candidate: Do we have any data available on the share of watches that are sold through the different channels?
Interviewer: Yes, we have data for the last three years.
This is useful data. It is clear that the online channel, while still miniscule, is growing rapidly. The next thing to determine is the extent of the competition. While it’s possible that the different channels meet the needs of differing customer segments, there is often overlap. Plus, you need to determine on what dimensions the distributors compete: cost, retail price, service and so on. You can start with cost and price.
Candidate: And does our client follow a differential pricing strategy for each of the three channels?
Interviewer: The firm offers volume discounts, irrespective of the buyer. As a result, wholesale prices to the department stores, which account for the bulk of sales, are 5 to 10 percent less than to specialty stores. Online retailers pay higher prices than both of the other two, since they move the smallest volumes.
You now know that the different distributors have different cost structures. It’s strange that the department stores and specialty stores should complain when they are buying the watches at a lower price than the online stores. Either the online stores are working on slim margins to compete, or they’re selling to a different customer segment.
Candidate: I would imagine that retail prices are different across the three channels. Is that true?
Interviewer: Yes, they are. The specialty stores have the highest retail prices, followed by the department stores, which are about 5 percent cheaper. The online retailers price the watches at about the same price as the department stores.
There doesn’t appear to be much basis for cutthroat pricing. So, it’s time to explore other reasons the online share is increasing. It might be due to a growth in the number of customers who prefer to purchase online; but before you explore that hypothesis, let’s rule out the possibility that our client is not aiding this growth of online sales by investing more heavily in advertising and promotion for online stores.
Candidate: How does the firm allocate its sales and marketing budget? What proportion of its marketing and sales dollars is it allocating to each of the three channels?
Interviewer: Marketing budgets are mostly focused at building the brand, with only limited channel specific advertising. The company’s channel partners sometimes choose to advertise the brand as well, but this is an independent decision. Sales force allocations are done more or less proportional to channel shares.
What other information do you need before you can give me your first take on a hypothesis?
It doesn’t look like sales and marketing are driving online sales either.
Candidate: I’d like to know a little about the company’s customers and its preferences. First, are there different customer segments?
Interviewer: Yes, the firm has classified customers into three segments. Here are some details on each segment
Good, so you’ve got information on different segments. The next obvious question is about customer preference for different channels.
Candidate: Do these three segments differ in their preferences for channels?
Interviewer: Yes, there are two noticeable trends. First, all three segments have exhibited an interest in purchasing online — an increasing percentage of each segment have been purchasing online. Second, segment 1 has shown a particularly higher interest in online purchases when compared to the other segments.
Touché. Looks like you’ve found the reason for the increase in online sales – it’s due to changing customer preferences. This is an exogenous change – it’s not something that either our client, or its channel partners, have control over. It’s a trend they will have to adapt to. In other words, the online channel is here to stay. Our client should attempt to align the different channels with the different customer segments.
Candidate: Ideally our client should meet customer preferences for distribution channels. In this case, the company should leverage its online channel presence to target segment 1, while refocusing the other two channels on the 2nd and 3rd segments.
Interviewer: How will this resolve the grievances the department and specialty stores have expressed?
You can’t expect to align the channels without facing resistance from them. Nobody likes to lose market share.
Candidate: I think their grievance is misdirected. Our client has little control over buying behavior. All it can do is make products available at the preferred locations for each of its three consumer segments.
However, our client might adopt a channel differentiation strategy by focusing channels towards specific segments. For instance, it might run ad campaigns with the department and specialty stores that target segments 2 and 3, while running different campaigns with the online stores to target segment 1.
Interviewer: So could you summarize your recommendation for me?
In addition to the summary, there may be some concessions that our client can make to appease its channel partners; this is the time to get creative and include these in your recommendation. The client could reduce or eliminate the company-owned web site completely. It could also restrict sales on the web site to only the lower end watches. And it could help its channel partners develop online stores.
Candidate: Our client is facing a situation where the rules of the game have changed. The emergence of a new low-cost distribution channel has led to increased competition. Overall, this is a positive development for our client, since the watches are available to a wider variety of customers.
Interviewer: Is there an alternative to discontinuing online sales that might be acceptable to the client’s other channels?
Candidate: Yes, there is. Our client could restrict its online sales to segment 1, which has the highest propensity to buy online. Simultaneously, it could encourage its channel partners to establish online stores themselves. This proposal might be acceptable to their distributors for two reasons. First, segment 1 watches are the cheapest; although we would have to look at the relative volumes of the three segments. Second, this proposal involves helping the distributors build online capacities themselves. A third possibility is that the bulk of online sales are coming from locations where the other channels do not exist. If this is true, this should alleviate the concerns of the distributors.