Engineering 245The Lean Launch Pad

Session 5: ChannelsProfessors Steve Blank, Ann Miura-Ko, Jon Feiber

http://e245.stanford.edu

Channels

How does each customer segment want to be reached?

Through which interaction points?2

Test Hypotheses: Channel

3

Two Critical Questions about Channels

First one is obvious: How do you want to sell your product?

4

1

Second one is subtle, but more important than the first: How does your customer want to buy your product?

2

How Do You Want to Sell Your Product?

Yourself

Through someone else

Retail

Wholesale

Bundled with other goods or services

5

üüüüü

How Does Your Customer Want to Buy Your Product?

Same day

Delivered and installed

Downloaded

Bundled with other products

As a service

…

6

üüüüüü

Nature of Product Impacts Channel: Atoms or Bits?

Access to customers changes dramatically Logistics related to product complexity People as products

7

The Sales “Channel”

8

Web

System Integrators

Direct Sales Force

Value-Added Resellers (VARs)

Dealers

Distributors

Retail/Mass Merchants

Your Company

Your Customers

Types of Channels

OEM VAR Reseller Distributor

9

Direct Indirect Licensing

The Channel as a Customer

Some products are embedded in others (OEM) Some products are resold by others (VARs) Some products are distributed by others Who’s the customer?

10

Distribution Complexity

11

Evangelists

ServiceTechnicians

Higher Value Added

Higher Volume Direct Sales

VARs

Retail

Web, Telesales

Systems Integrators

Mainframes

MinisLANs

PC ServersDesktop PCs

PrintersKeyboards

Toner

WANs

Global Systems

Solution Complexity

Mar

ketin

g C

ompl

exity

How Are Channels Compensated?

Commission Percentage of sales price Discounted pre-purchase

12

How Are Channels Motivated or Incented?

Money! – what makes them the most? Training Marketing to the channel SPIF

13

Channel Economics: “Direct” Sales

14

Cost of Goods(Supply Chain) Profit + SG&A + R&D

End

Con

sum

er

EU

Dis

coun

ts

RevenueList

Price

Source: Mark Leslie, Stanford GSB

Channel Economics: Resellers

15

Cost of Goods(Supply Chain) Profit + SG&A + R&D

End

Con

sum

er

EU

Dis

coun

ts

Reseller

RevenueList

Price

Source: Mark Leslie, Stanford GSB

Cost of Goods(Supply Chain) Profit + SG&A + R&D

Channel Economics: Distributors/Resellers

16

End

Con

sum

er

EU

Dis

coun

ts

Reseller

Dis

trib

utor

RevenueList

Price

Source: Mark Leslie, Stanford GSB

Channel Economics: OEM or IP Licensing

Your Product Becomes Your Customer’s COGs

17

Source: Mark Leslie, Stanford GSB

End

Con

sum

er

ResellerProfit + SG&A + R&D

Cost of Goods(Supply Chain)

EU

Dis

coun

ts

Reseller

Dis

trib

utor

Mas

ter

Dis

trib

utor

Profit + SG&A + R&DCost of Goods(Supply Chain)

RevenueList

Price

Example: Book Publishing

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Publisher National Distributor Printer Wholesaler Retailer Customer

Book Publishing

Percent of Retail

19

For their efforts, distributors take an additional 10% of retail. That means you get 35% of retail, the distributor gets 10%, the wholesaler gets 15% and the retailer gets 40% less any

discount they offer the end customer

Publisher National Wholesaler Distributor Retailer Customer

35% 15% 10% 40%

$7.00 $3.00 $2.00 $8.00 $20.00

Book Publishing Economics

20

Publisher National Distributor Wholesaler Retailer Customer

Wholesale costs

Markup

Allowances

Payment guarantees

Payments

Bills

Credit guarantees

Payment guarantees

Return rights

Credits

Book Publishing Delivery

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Publisher National Distributor Printer Wholesaler Retailer

Merchandise titles

Sell magazines

Acknowledge returns

Determine allocations

Dispose of returns

Prepare film (content)

Establish identity

Create demand

Prepare galleys

Receive Schedules Print

orders Bundle

counts Film

Print and ship

magazines

Deliver orders

Bits vs. Atoms

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Bits

Physical

Product

Web Physical

Channel

Product and Channel Are Bits

23

Bits

Physical

Product

Web Physical

Channel

Rapid Agile and Customer development

Fastest to acquire early customers and scale

Web 2.0 – Product and Channel Are Bits

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Bits

Physical

Product

Web Physical

Channel

Google Twitter Facebook Zynga Cloud Services

Product Is Bits, but Channel Is People

25

Bits

Physical

Product

Web Physical

Channel

Rapid Agile and Customer development

Fastest to acquire early customers and scale

Rapid Agile and Customer development

Traditional sales channel

May require installation

Traditional Enterprise Software

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Bits

Physical

Product

Web Physical

Channel

Google Twitter Facebook Zynga Cloud Services

Microsoft SAP Oracle

Physical Products Sold Over the Web

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Bits

Physical

Product

Web Physical

Channel

Rapid Customer development

Logistics, shipping and manufacturing critical

Customer service

Rapid Agile and Customer development

Fastest to acquire early customers and scale

Rapid Agile and Customer development

Traditional sales channel

May require installation

Killing Traditional Storefronts

28

Bits

Physical

Product

Web Physical

Channel

Zappos Amazon Cafepress Netflix Consumer electronics

Google Twitter Facebook Zynga Cloud Services

Microsoft SAP Oracle

The Factories May Be in China

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Bits

Physical

Product

Web Physical

Channel

Rapid Customer development

Logistics, shipping and manufacturing critical

Customer service

Rapid Agile and Customer development

Fastest to acquire early customers and scale

Longer customer feedback cycle

May require large capital requirements for scale

Rapid Agile and Customer development

Traditional sales channel

May require installation

We Still Make Things that Need Salespeople

30

Bits

Physical

Product

Web Physical

Channel

Zappos Amazon Cafepress Netflix Consumer electronics

Google Twitter Facebook Zynga Cloud Services

Cars Solar panels Wind turbines Bookstores Consumer electronics

Microsoft SAP Oracle