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“Department Stores’ Big Sales Are Getting Smaller,” according to the Wall Street Journal article (http://www.wsj.com/articles/department-stores-big-sales-are-getting-smaller-1479830406 ).   Designers of brands like Coach, Michael Kors, Fitbit, North Face, and dozens of others don’t want their current-season merchandise discounted when the same products are offered at full price at other retailers — including the designers’ own outlets.  Some brands are choosing more exclusive distribution as a reasonable tradeoff between smaller sales levels and greater channel pricing control and consistency.  This problem sits squarely at the intersection of channel management and pricing strategies.

How does this affect you?  Speak up if you have issues like this with your products and channels.

Our newly-published book, A Field Guide to Channel Strategy: Building Routes to Market, provides insight into channel pricing challenges and strategies (Chapter 13), as well as the full range of other channel design and channel management topics.  Find the book on Amazon.com at:

https://www.amazon.com/Field-Guide-Channel-Strategy-Building/dp/1539987744/

Authors:  Anne T. Coughlan and Sandy D. Jap

 

 

You run a small e-commerce startup firm, with a great stable of products, IP protection, a finely-tuned social media promotional strategy, a fantastic web interface, a reliable contract manufacturer, good financing.  In short, you think you’re ready to go.

However, you face a serious hurdle – the discrepancy between your costs to ship to your buyers and those facing your mega-sized online retail competitors.  Your e-commerce dream may seem to be slipping away, not because your products or concept are at fault, but because you can’t compete on shipping.[1]

Shipping Costs: Disproportionately High for Smaller Sellers

The channel cost of handling, shipping, and delivering inventory to a consumer has fallen on average over time.  But the averages disguise the differences between steep discounts on shipping costs available to the biggest online sellers, and much higher shipping costs for others.

In 2015, Amazon shipped over 1 billion parcels, while the 10 next largest shippers together shipped 703 million parcels.  Those that ship at least $100 million annually can reap overnight-shipping discounts of more than 80%, and up to 60% for ground residential deliveries.  If you’re not in that set, it’s tough to compete by selling direct online, as these shipping costs show[2]:

Consumers Have Been “Taught” that Shipping is “Free” and “Quick”

Combine this with consumers who have “learned” that shipping is both “free” and “quick,” particularly through Amazon Prime membership.  Of course it’s not really “free,” both because of the $99/year Amazon Prime membership fee and because many sellers up-price the products they sell through Amazon Prime.  Despite this, separate surveys show that the percentage of e-shoppers starting their search at Amazon increased from 30% to 44% from 2012 to 2015.  While Amazon doesn’t publish the number of Amazon Prime members, survey-based estimates placed it at 40 million subscribers in early 2015 – a lot of buyers.  And although shipping isn’t truly “free,” Amazon has made it truly “quick,” with next-day and Sunday deliveries a commonplace service criterion.

The confluence of high shipping costs and demand-side learned expectations for free and speedy shipping means high hurdles to smaller retailers wanting to sell online.

What Can You Do?

What can you do as a small seller?  Let’s think as a channel strategist about your best channel structure choice.  You can stick with the DIY channel option, facing the high cost of shipping and trying either to pass it on to your (reluctant) consumers or to eat those costs to gain online market traction.  Or, you can enlist a go-to-market channel partner like Amazon, both for the benefit of reaching all those loyal Amazon shoppers and piggybacking on Amazon’s shipping network.  Amazon of course charges its Amazon Prime resellers a hefty fee to pick, pack, and deliver their products, but given your cost to go it alone, it’s an option that you, like many other sellers, are likely willing to consider.  Or, you can do both with a multi-channel targeted selling strategy.

My own purchases show that there are non-trivial incremental sales to be had with this strategy.  I’m a heavy tea drinker and I buy reasonably high-quality loose tea.  I discovered Davidson’s Organic Teas (http://www.davidsonstea.com/ if you want to buy direct) through Amazon and have ordered various tea flavors and amounts from them 17 times through Amazon since 2010, for cumulative Amazon-driven CLV to Davidson’s of $968.66 in purchases.  These are all incremental sales to Davidson’s, because I was unaware of them before finding them on Amazon.  And because I did know of them, I also bought $266.21 directly from www.davidsonstea.com in 2014 and 2015 – choosing the company’s website over Amazon in order to buy their most premium-quality tea items, which aren’t offered through Amazon at all (not to mention the word of mouth promotional value of mentioning Davidson’s in this blog post!).

Davidsons’ strategy uses Amazon to increase awareness and reach into the convenience-oriented Amazon buyer population.  Some of us, like me, enjoy variety and high quality, and Davidson’s offers that larger variety to us online.  We are likely to shop cross-channel in order to buy more of Davidson’s high-end (and higher-profit) SKUs as well.  Our direct purchases don’t incur Amazon channel intermediary costs, letting Davidson’s capture more of my segment’s purchases and profits.  In effect, Davidson’s and other smaller retailers are paying Amazon for the ability to find new consumers whose CLV would have been zero otherwise – but, once acquired, may additionally make higher-profit direct online purchases.

A Good Deal on Balance?

Remember that you (don’t) get what you (don’t) pay for, so consider what your DIY channel strategy is likely to generate in sales, costs, and profits.  You too may find that partnering with bigger online retailers like Amazon may be a reasonable investment in your multi-channel strategy.

Notes

[1] Stevens, Laura (2016), “ ‘Free’ Shipping Crowds Out Small Retailers,” The Wall Street Journal, April 27, http://www.wsj.com/articles/for-online-shoppers-free-shipping-reigns-supreme-1461789381 .

[2] Outman, Trevor (2016), “Competing in the Online Retail World: Then and Now,” http://www.PARCELindustry.com, March-April.

A response to “10 things direct-sales marketers won’t say,” published in Wall Street Journal Market Watch, October 26, 2012, by Kelli B. Grant, https://secure.marketwatch.com/story/10-things-direct-sales-marketers-wont-say-2012-10-26 .

Ms. Grant offers ten supposed “facts” about direct selling in her October 26, 2012 article, “10 things direct-sales marketers won’t say.”  These aren’t really “facts” and many of them misrepresent the nature of direct selling.  The bottom line is that you should do your homework before deciding to become a direct-selling distributor to begin with, or before homing in on your company of choice.  The products, the compensation plan, the degree and type of mentoring available, and the fit of the opportunity with your goals are all important criteria to consider.  The choice is yours – both about joining, and about the type of investment of time and money in building your business.  But these guidelines are just good business practice, whether you are considering direct selling or some other business opportunity or investment.

Here are some of the things Ms. Grant didn’t say – but you should know – about direct selling.

“Slinging French fries may be a better option for you… or not.  It depends.”

Ms. Grant’s statement that “You’d do better slinging French fries” is incomplete on two counts: first, it’s not true for everyone; second, the statement’s flawed premise is that the goal of all direct sellers is to make this their full-time job.  One of the attractive elements of direct sales is the ease of entry:  there’s no job interview and few barriers to signing up.  This means that a wide variety of people can, and do, decide to try direct selling.  Not all of them are adept at selling, and many cannot or do not acquire those skills.  Still others choose to work the business part-time rather than full-time.  But, it takes both hard work and skill to build a large enough direct-selling business to make it your primary income.  That is why legitimate direct-selling businesses are not get-rich-quick schemes.

“Invest sensibly in your direct selling business, and you won’t end up in debt.”

The idea that the direct selling company “might put you in debt” is just not correct.  A direct selling company does not “put” its distributors in debt.  How much a direct selling distributor spends on expenses like training, traveling to conferences, etc. is entirely up to the distributor, not the direct selling company.

Of course, there are plenty of other types of new-business opportunities that do require the entrepreneur to invest a large sum of money up front:  franchising, starting your own bricks-and-mortar retail shop, starting your own online business, etc.  Unlike these opportunities, a direct-selling distributor does not have to rent shop space, pay utilities, insure the space, develop her own business plan, or develop commercially viable new products, among other expenses.

“No, selling isn’t easy… but learning successful selling and mentoring techniques leads to a viable business and friend retention.”

While Ms. Grant’s comment that “Selling ain’t easy” is true (if ungrammatical), this isn’t a critique of direct selling per se.  Some people may be “born salespeople,” but for many, selling is an acquired skill that is honed through hard work and training.  Even direct sellers who are not great salespeople or sales managers may still be very satisfied with their direct-selling experience, because many join to achieve short-term goals rather than to make a full career of it.  Direct selling companies make it clear to potential distributors that success is a function of one’s goals, and a high sales or income goal is achievable only through hard work and persistence.

Whether your friends are alienated by your direct selling business is a function of how you promote it; one of the tenets of successful selling is to find out what the buyer values, and provide that set of benefits better than anyone else can.  One of the ways in which “selling ain’t easy” is in developing this consumer insight that results in your consumers asking to buy from you rather than you asking to sell to them – whether you are in direct selling, bricks-and-mortar retailing, customer service in a hotel chain, or any other touch-the-consumer environment.

“Recruiting alone is not in your best interest, but recruiting with mentorship is part of a successful direct seller’s strategy.”

Recruiting – that is, sharing the direct selling opportunity with other people so that some of them ultimately also join as direct sellers – is in fact part of a career direct seller’s path to success, and thus is in the direct seller’s best interest.  But mere recruiting does not generate income in a legitimate direct selling opportunity; only sales does so.  A business-building direct seller therefore has to mentor and develop the business skills of distributors downline from her (those she recruits and those recruited by her recruits) in order to reap the benefits that a direct selling compensation system provides.

As for the saturation argument made here, welcome to the wide world of retail competition.  A successful retailer in any business has to figure out how to make her offering better than that of the competition.  Think about how broadly available Tide detergent, Scott paper towels, Oral B toothbrushes, Oreos, and hundreds of other grocery products are; if unique product, sold by a retailer with no local competitors, were the only path to survival and success in the grocery business, we wouldn’t see multiple grocery stores surviving in any market.  The fact that we do suggests there’s more to this game than product and price.  In fact, in direct selling as in any other retail business, the name of the game is to augment the selling process so that the consumer is able to buy your products, plus personalized and valued service, in a way that beats the competition.

“Consumers aren’t as easily duped as you think, so you will be necessary to them if you offer direct-selling services of value along with the products you sell.”

Ms. Grant’s vision of consumers is surprisingly dim; she depicts them as both gullible and ignorant, so that they fail to check out alternatives before buying and thus might not be “well served” by direct selling offers.  In reality, consumers can and do routinely check out alternatives before they buy; it’s this very behavior that is currently causing bricks-and-mortar retailers concern about “showrooming.”

Further, consumers buying from legitimate direct sellers don’t have to keep a product they regret buying.  Direct selling companies that are members of the Direct Selling Association are required to offer a standard three-day cooling-off period for every sale, and to offer a full refund if the consumer changes her mind in this time period. Beyond this, direct sellers commonly offer 30-day 60-day, 180-day, or one-year return and refund policies, which can be easily found in an online search.

But beyond these protections, consumers routinely make quick purchase decisions in many retail environments without spending agonizing time and effort looking for the very best offer in every market.  How often have you bought a bottle of Coke at a gas station and spent twice as much on it as you would have spent at your grocery store?  Yet you aren’t dissatisfied by this purchase, even though you are aware that you could have paid less for that product.

The reason this kind of very common consumer behavior is not ignorant is because the consumer is buying not just the product, but also a bundle of services; it’s the entire bundle of the product plus services that the price pays for.  If it doesn’t make the consumer happy, she is perfectly free to say “no.”  This explains why a consumer might be happy to buy that Tomboy Tools cordless screwdriver from the direct seller rather from K Mart, which Ms. Grant notes offers the item for $11 less.  That consumer might be comparing the convenience of purchasing from the direct seller with the inconvenience of driving several miles (and paying for gas to do so) to get to the nearest K Mart – perhaps to find that the item is not in stock.  It’s easy to see why paying more for the same product is still a good deal – when you factor in the “full cost” of finding the lowest-priced product.  The direct seller who recognizes the full value the consumer seeks won’t be unnecessary, because she’ll be providing the combination of product plus service that merits the extra $11 in price.

“Direct selling companies require their distributors to tell the truth about their products – so if you hear a cancer-curing promise, be skeptical and alert the company.”

It is illegal for any firm, direct seller or not, to fraudulently represent their product as curing a disease if it does not do so.  So it isn’t clear why this is a reason to suspect direct sellers in particular.  A legitimate direct selling firm does not misrepresent its products’ performance characteristics any more than a legitimate non-direct-selling firm does.

“Consider your work environment if you join a direct-selling company just as you would if you interviewed for an office job.”

Allegations of “cult-like” status of direct selling companies are overstated.  Individuals become direct sellers for many reasons, some of which are purely economic and others that are more social in nature.  As with any other business prospect, it’s up to the potential direct selling distributor to assess the climate of the business and decide if it’s right for her.  Becoming a direct-sales distributor is a personal choice, not a forced action, and the distributor is free to quit any time she wants.  Departure from a legitimate direct selling company is as easy as joining, with the direct selling company taking back your unsold and in-date product.

(c) 2012 Anne T. Coughlan.

In today’s (December 7, 2011) Times of India, the following article reports on the suspension of a plan to expand Foreign Direct Investment (FDI) restrictions in India.  Such a relaxation would have had profound effects for non –Indian retailers seeking to enter and expand in the Indian market.  Concomitantly, it also has had a profound political effect in India, given the predominance of small, local retailers in the Indian economy.  This issue actually stalled the Indian government, until the announcement today that the issue would be suspended for now.  See the article at this URL:

http://timesofindia.indiatimes.com/india/FDI-row-Centre-finally-shuts-door-on-retail-FDI/articleshow/11025448.cms

I just arrived in Delhi last night and am all the more interested to see how this developing story is reflected in the company visits we will begin tomorrow.  Next week (Dec. 14), we will be visiting executives at The Future Group, a major Indian retail group; by then, this story will no doubt have further developed, but regardless, it should be a lively and extremely informative discussion.  I’ll continue posting on this as we travel through India.

This is my first blog post and the first to this particular blog.  I’m a marketing professor at the Kellogg School of Management at Northwestern University.  My main interests are in the structure and management of routes to market (aka distribution channels); sales force compensation, structure, and management; and pricing.  You can find out more about me at my webpage at Kellogg:

http://www.kellogg.northwestern.edu/Faculty/Directory/Coughlan_Anne.aspx

I’m running my “Distribution Channel Management: Bridging the Sales and Marketing Divide” course at the Allen Center at Kellogg this week.  It’s an executive education course, open to managers from around the world; participants from 9 different countries are here this week, which is great.  If you are interested in this course, see more information about it at this URL:

http://www.kellogg.northwestern.edu/execed/Programs/CHANNEL.aspx

So, what’s on my mind in the realms of routes to market, distribution, and sales force?  A few things:

  • How to solve distribution problems in emerging markets — by finding new “best practices” that the first world may not yet know about
  • How to marry microfinance insights and interests with building new market presence and sales
  • How to compensate key account managers and why they are different from either field salespeople or sales managers
  • What’s going to happen to paper-based publishing, and what its effects will be on authors, academics, and the academic career management process

As solutions or other ideas occur to me on these or related topics, I’ll bring them here.

Cheers for now.