Interesting article by Mike Shatzin about the evolving channel pricing model for e-books. Publishers evidently sell books to retailers at roughly a 50% discount and retailers are free to mark it up wherever they like. With e-books, 5 of the 6 largest publishers forced Amazon to adopt an agency model where the publisher sets the price and the channel’s margin. This is a good example of the suppliers, in this case the publishers, realizing their value without ceding that value and the corresponding margin to the channel.
Wedge Networks recently announced a new partner program that includes:
- Customer satisfaction surveys
- Deal registration
- Lead distribution
- “Protective” renewal margins
- Market development support
- Regional sales incentives
- Partner certification
Sounds like a great program. I wonder however, whether they can implement with impact across all of the elements. We often find that companies spread themselves too thin by developing programs with too many elements. I would rather see a program with one piece that makes a major impact rather than a program that spreads limited resources across the board.
A really interesting article by Timothy Aeppel about Caterpillar and the “Bullwhip effect” appeared in the WSJ recently. The bullwhip effect occurs when “small increases in demand cause a big snap in the need for parts and materials further down the supply chain.”
In the article, Jim Owens, Cat’s CEO, talked about growth it expects this year for itself and its suppliers. Cat will need to increase its production by 10% to 15% even if demand for equipment is flat. According to Owens, “the inventory burn-off is over.” The increased production will be driven by the need to restock dealers who cut inventory last year. Under this scenario, suppliers will need to increase their production by 30% to 40% because they are restocking their own shelves, Caterpillar’s and the dealers.
Under a modest growth scenario, many suppliers to Caterpillar will need to more than double their shipments to Caterpillar.
Manufacturers need to make sure that their channel programs are ready for the bullwhip. Many suppliers base their discount structures and rebate programs on growth. For many companies, rebate payouts in 2009 were very low or almost non-existent. In 2010, we can expect significant growth and payouts, simply from the bullwhip.
Suppliers often question the value of the channel. Why not just sell direct and make more money? Google’s new Nexus One phone offering highlights the value of the channel. Google’s direct-only sales appear less than stellar. The reason – no place for customers to go for support. This is very problematic given the complexities of the new Android operating system. Next time, Google, might sell more and make more money by paying for the value add of the channel.
Fascinating pricing results from a new study out of the University of Miami.
Researchers found that a strategy of “Steadily Decreasing Discounting” (SDD) can significantly increase a retailer’s profits. The idea is that the retailer slowly or steadily reduces its discounts on a sale item rather than moving the product back to its original price immediately after the sale period ends. The reasons for the profit improvement are fascinating. A gradual return to the regular price avoids:
- a big dive in sales at the end of the promotion
- people stocking up on the item during the promotion at the lowest price
- consumers perceiving the regular price to be too high because it was recently much lower
The strategy is effective because consumers see that prices are likely to increase in the future and therefore are more likely to make purchases today. In addition, shoppers are more likely to purchase if they miss the sale if the new price is a bit higher rather than going back to the regular price in a big jump.
Nice lessons to apply to discounting practices across industries and channels.
A developing channel structure in the music and gaming industries may provide lessons and the future for cloud computing and other markets. Digital Distributors (see chart and legend by Moses Avalon) charge a percentage (usually 15%) of downloads and performance royalties to represent artists (app developers?) to Digital Retailers such as iTunes, eMusic and Napster. Distributors submit music and “metadata” (artist, album, track name details, etc.) in a structured format and help the retailers upload the information in bulk.
From a margin standpoint, on a 99-cent iTunes download, about 29 cents goes to Apple, leaving about 70 cents for the Digital Distributor. The distributor takes 15% or 10.5 cents and then passes the remaining 59.5 cents along to the artist. Before the artist earns a dime, their payouts need to pass a minimum threshold which ranges from $10 to $500 depending on the distributor.
Interesting model to keep our eyes on as we hurtle forward in the digital age…
In response to low online business software pricing by amazon,com and Google, Microsoft is offering direct pricing that makes it virtually impossible for partners to compete. The question is what does Microsoft need from its partners? Pricing that eliminates channel compensation suggests that partners add no value on behalf of their supplier. Read about it in Redmond Channel Partner Online.
First post written exclusively on Droid
Interesting legal case regarding Exxon in Texas. Dealers claim that Exxon violated “open price provisions” by adding the cost of their volume rebate program back into the dealer price. The Texas Supreme Court rejected the dealers’ claims.
Based on the opinion it appears that there is nothing wrong with raising prices in order to offer a rebate program as long as there are no specific express promises about pricing made to channel partners.
Emulex updates channel programs including expanded partner margins in their deal registration program:
3. Enhanced Profitability and Incentives – We are business partners, and that starts with having the right business model that drives revenue, profits and customer satisfaction in equal portions to build a sustainable partnership. The new Emulex Edge Partner Program helps our partners through: Read more…
Nielsen figures show that Taittinger, one of the top 10 (Champagne) producers, has responded by spending more on promotional displays in American stores. The percentage of volume sold with promotions is up to 50 percent, from 35 percent, over the last two years.
Read about Champagne pricing trends here
