CHAPTER 1
Distribution Channels Today

1.1 INTRODUCTION

Marketers today must develop well-informed strategies for managing their distribution channels during times of significant change. Those strategies will include anticipating, minimizing, and addressing the channel conflict inevitably wrought by change. This book is about how firms can select metrics, design strategies, and implement policies that free them to adapt to the rapidly evolving landscape that combines physical and digital routes-to-market.

Our book is primarily intended for marketers and those who train them, but marketers aren't the only ones paying attention to channel dynamics. Economists, regulators, and social psychologists are also interested in how distribution channels affect competition, efficiency, and consumer welfare. They want to understand the marketing challenges of distribution channels, the causes and consequences of channel conflict, and the approaches to managing that conflict. So, while our writing is rooted in marketing, we also incorporate these other perspectives.

What is a distribution channel? By its simplest definition, it is the chain of distributors, retailers, and other intermediaries through which a supplier's product reaches end consumers, implying a unidirectional movement of goods along one route, from the point of production to the point of consumption.1 Even simple distribution channels are delicate systems, where suppliers and their independent resellers struggle to balance a cooperative partnership against a desire for a bigger share of the total profit available in the channel. The partners need to cooperate in ways that create value for consumers, appropriate some of that value in the form of profit for the channel, and share the profit in a way that sustains the partnership.

Modern, mainly digital, technology has complicated that partnership. These days, firms must employ a multitude of distribution channels-sometimes complementary, but almost always competing-in a way that satisfies consumers' needs for products, services, and information. What a unidirectional, one-route perspective can easily miss is the variety of interactions and conflicts among firms in the ecosystem, because each firm performs some functions and tries to appropriate some of the value created.

Conflict and power go together in any relationship between interdependent entities. The (mis)use of power can exacerbate conflict, but a channel member's power position also determines the strategies it can use to appropriate value and manage conflict. Accumulating channel power and exercising it wisely is a key to surviving and prospering in periods of change. In the words of Professor Raymond Corey of the Harvard Business School, marketers must learn "to use power without using it up."

The sources of power, and the ways to exercise it, have been complicated by recent technological, market, and legal developments. Distribution practices that were developed and refined over years have become vulnerable. Some challenges are easy to recognize (should digital books be priced the same as paper copies in book stores?) and others are more nuanced (how does resale price maintenance affect trade promotions?). Some are fundamentally new and require different thinking (how can we measure and manage distribution coverage online or assess the power of a channel member that operates a multisided platform?), while others are simply different manifestations of enduring channel issues (double marginalization, free riding, and the tug between intra- and inter-brand competition). Throughout the book, we try to distinguish what is new from what is not. The former needs fresh thinking and emerging solutions. The latter has a history with important lessons that marketers ignore at their peril.

Technology has also blurred the distinction between distribution channels and communication channels, especially since some of the new digital distribution channels mainly satisfy consumers' need for information rather than directly sell the products and services (consider Trip Advisor and Trivago for hotels, for example). A purely consumer-centric view might suggest that any sources of products or information that the consumer seeks out or is exposed to would qualify as "channels." By that definition, search engines, blogs, and social media would be "channels."

The consumer is certainly at the center of it all, but our perspective in this book is firmly rooted in firms that sell through independent distribution channels. Our view is that, for an entity to be viewed as a distribution channel, it must perform, and be paid for, at least some of the functions involved in the sale of a particular product along the route to market from a clear upstream supplier to a clear downstream reseller or end customer. So, DoubleClick is a distribution channel for firms that sell advertising, but it is not a distribution channel for the product being advertised. A wine brand's sales may be affected by what an influential wine blog writes about it, but the blog is not a distribution channel. Drawing this line between distribution and communication channels is useful to guide the strategies of marketers and it delineates the scope of the issues we tackle in this book. Of course, it is not a bright line and one can easily see how it might blur. For example, what if the blog has a link to the wine brand's site and gets paid to route demand to the wine marketer? Such an "affiliate" arrangement would make the blog a distribution partner.

Most frequently, we take the perspective of suppliers selling through independent resellers (distributors, retailers, aggregators, marketplaces, and other middlemen), but this requires analyzing the viewpoints of the middlemen too. Other disciplines, notably operations and strategy, refer to these middlemen as members of a "supply chain" or "value chain." So, what's the difference between supply chains, value chains, and distribution channels?

Our view is that the distinction is largely in perspective and emphasis. The terms "upstream" and "downstream" are used to describe those firms that are closer to the production versus the consumption "end" of the channel, and we will do that too. This kind of thinking can subconsciously imbue the upstream firm with more responsibility, power, or authority. Our counterparts in manufacturing and operations take the perspective of a "downstream" firm-often a manufacturer looking backwards at its raw material and component suppliers.

Those in the strategy and economics domains refer to the "value chain" as the entire collection of firms and activities in producing and delivering a product or service with an emphasis on the "value added" (not too far from margins) at each stage. Value chains therefore include a firm's backward supply chain and forward distribution channels in addition to its own value-adding operations. Where relevant, we adopt some approaches from these other disciplines to enrich our understanding of how channels work and how they can become more efficient.

1.2 WHAT IS NEW: RADICAL CHANGES IN THE NAVIGATION OF DISTRIBUTION CHANNELS

The sustainability of channel partnerships is a goal that businesses value highly. Pricing, marketing communications, and even products are quite often easier to change than distribution-channel relationships. Frequently, businesses are built around serving end-consumer markets through a specific set of immediate customer-distribution channels. For example, automobile manufacturers have learned to market through their dealers, major soft drink manufacturers Coke and PepsiCo through their bottling networks, and Avon and Natura through their independent consultants. Learning to serve these channel customers along with end consumers is a critical competency. Channel affiliations are also often personal relationships, even friendships, that go well beyond golf games once a year. That's why a channel partnership is not often severed, and only happens after some serious soul searching (or its commercial equivalent).

Often, growth necessitates expanding into new channel relationships while maintaining existing ones. Retailers add more suppliers and categories while also opening more stores and expanding into new markets. Manufacturers add more retailers, expanding to service new geographic markets. They also add new types of retail formats that service additional market segments. Although these types of expansions are sure to bring "growing pains," businesses today are encountering challenges far beyond normal growing pains. That is why, even though channel management is a well-worn topic in marketing, we believe it is worth a new look now.

We see four general areas of change in the economy that call for a renewed study of the management of multiple routes-to-market. To some degree, all four areas have been affected by digital technologies.

1.2.1 Changing Business Models

The first set of changes relates to new business models for distribution that derive from technology. Firms based on these new business models are inserting themselves into traditional routes-to-market, bringing corresponding opportunities for suppliers to gain or lose strategic advantage by managing or mismanaging their distribution channels.

When products are digitized, the marginal costs of manufacturing and distribution may approach zero though the fixed costs remain high, making pricing challenging....