Over the last few years, there has been a variety of key industry trends that have dramatically impacted how young companies should bring their consumer electronics products to market – the dramatic growth of ecommerce, the influence of social media and what I call the Apple retail effect. Now more than ever, defining a channel strategy is of the utmost importance to a young company or it may find itself is a situation of significant channel conflict where their product value is diminished early its lifecycle impacting revenue, profit and the overall valuation of the company. Let’s explore the impact of these trends and how they effect overall channel strategy by using a typical Apple accessories company as an example .
1. The dramatic growth of ecommerce. Ecommerce has profoundly impacted the behavior of consumers and the emergence of power-houses like Amazon.com and Ebay have created online market places including 3rd party retailers that have changed the retail landscape forever. Amazon.com alone has over 100 million consumers leveraging its site to search, evaluate and buy consumer products and has successfully integrated 3rd party retailers allowing them to compete in selling the same or similar products offered on Amazon in a highly integrated way. It is this unlimited access of any retailer to large number of consumers online that has enormous implications on channel strategy. For example, if you have listed your product at a broad line distributor, many small retailers and etailers have access to your product at wholesale price. Many of these small retailers offer no differentiation in retail service so their value is simply selling on price (let’s call them “bottom dwellers”). Access to wholesale pricing and the Amazon website allows these bottom dwellers to undermine MSRP (manufacturers suggested retail price) at will, resetting what may have been a hight value product to a retail price point at some small margin above wholesale price. I believe that this is what may have happened to Otterbox, a once glorious case company that has seemed to stagnate in depths of retail conflict. (Just google shop or look at Amazon 3rd party sellers and see their channel price variability).
2. The impact of social media. The emergence of Facebook, Twitter, Groupon and other social media platforms have the effect of making any significant channel promotional event go viral in no time. Clearly, if people in your social network find a product deal worth repeating, Facebook and Twitter friends will know about it. In addition, Groupon and other flash bargain sites have also readjusted consumer behavior and the impact of over-promoting a brand’s products may in-fact lead consumers to wait for the next branded bargain price promotion. Last time I checked, no one that really cares about brand perception wanted to be known as a “promotional brand”. Care must be taken more than ever to limit this kind of promotional behavior to boost short term sales. Brands need to reasonable about market size (and their potential share) and focus on marketing awareness campaigns that drive consumers to buy branded products without relying on sustained, discounted channel promotions.
3. The Apple retail effect. CE retailers have not innovated nearly enough but Apple retail has emerged by selling incredible Apple products and creating an extremely differentiated retail experience shifting the retail environment forever. One in five consumer electronics dollars in the US market are spent on an Apple product. Apple retail owns a large market share of its own products and the third party accessories ecosystem. Apple also offers its products at a minimum margin to only a few competing retailers therefore squeezing competing retailer profitability. These competing retailers (like Best Buy and AT&T) attempt to keep up profits by selling the Apple core products and attaching the more profitable third party accessories. Of course, there are many other undifferentiated retailers that have very limited success in focusing on accessories sales. It is this broad, undifferentiated retailer base and their demand for accessories products that tempts accessory companies to over supply products to the wrong retailers causing channel inventory issues as retailer supply exceeds consumer demand. This also creates an environment for retailer “bottom dwellers” to focus on low price to differentiate.
The industry trends above suggest that a thought out channel strategy is very important to make sure that a brand maximizes its revenue and overall profitability for every new product through out the lifecycle. In formulating a channel strategy, ask yourself the following questions:
1. What is the true market size for the products?
2. Which channels will bring the most value?
3.Where can conflicts occur and how can these be controlled?
4. How does distribution fit into channel plans?
5. How do I balance sales channels to meet company goals?
It is not about, nor has it ever been about having your brand products assorted at every retailer – it is about having them at the right retailers. Starting with a channel strategy that promotes a clean, well defined channel will help pave the way to retail success.