Engineering 245 The Lean Launch Pad

1. Engineering 245The Lean Launch Pad Session 5: Channels Professors Steve Blank, Ann Miura-Ko, Jon Feiber http://e245.stanford.edu

2. Channels • How does each customer segment want to be reached? • Through which interaction points?

3. Test Hypotheses: Channel

4. Two Critical Questions about Channels 1 Second one is subtle, but more important than the first: How does your customer want to buy your product? 2 First one is obvious: How do you want to sell your product?

5. How Do You Want to Sell Your Product? ü ü ü ü ü Yourself Through someone else Retail Wholesale Bundled with other goods or services

6. How Does Your Customer Want to Buy Your Product? ü ü ü ü ü ü Same day Delivered and installed Downloaded Bundled with other products As a service …

7. Nature of Product Impacts Channel: Atoms or Bits? • Access to customers changes dramatically • Logistics related to product complexity • People as products

8. The Sales “Channel” Web System Integrators Your Company Your Customers Direct Sales Force Value-Added Resellers (VARs) Dealers Distributors Retail/Mass Merchants

9. Types of Channels Direct Indirect Licensing • OEM • VAR • Reseller • Distributor

10. 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?

11. Distribution Complexity Evangelists Global Systems Systems Integrators WANs Mainframes Direct Sales Higher Volume Minis LANs VARs Marketing Complexity PC Servers Higher Value Added Desktop PCs Retail Printers Keyboards ServiceTechnicians Web, Telesales Toner Solution Complexity

12. How Are Channels Compensated? • Commission • Percentage of sales price • Discounted pre-purchase

13. How Are Channels Motivated or Incented? • Money! – what makes them the most? • Training • Marketing to the channel • SPIF

14. Channel Economics: “Direct” Sales ListPrice Revenue Cost of Goods(Supply Chain) Profit + SG&A + R&D EU Discounts End Consumer Source: Mark Leslie, Stanford GSB

15. Channel Economics: Resellers ListPrice Revenue Cost of Goods(Supply Chain) Profit + SG&A + R&D Reseller EU Discounts End Consumer Source: Mark Leslie, Stanford GSB

16. Channel Economics: Distributors/Resellers ListPrice Revenue Cost of Goods(Supply Chain) Profit + SG&A + R&D Reseller Distributor EU Discounts End Consumer Source: Mark Leslie, Stanford GSB

17. Channel Economics: OEM or IP Licensing ListPrice Revenue Cost of Goods(Supply Chain) Profit + SG&A + R&D Master Distributor Distributor Reseller EU Discounts End Consumer Cost of Goods(Supply Chain) Profit + SG&A + R&D Reseller Source: Mark Leslie, Stanford GSB Your Product Becomes Your Customer’s COGs

18. Example: Book Publishing Publisher National Distributor Printer Wholesaler Retailer Customer

19. Book Publishing Publisher National Wholesaler Distributor Retailer Customer 35% 15% 10% 40% $7.00 $3.00 $2.00 $8.00 $20.00 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 Percent of Retail

20. Book Publishing Economics Publisher National Distributor Wholesaler Retailer Customer Allowances Wholesale costs Bills Markup Credit guarantees Payment guarantees Payment guarantees Return rights Credits Payments

21. Book Publishing Delivery Publisher National Distributor Printer Wholesaler Retailer Prepare film (content) • Receive • Schedules • Print orders • Bundle counts • Film Determine allocations Merchandise titles Deliver orders Sell magazines • Establish identity • Create demand Prepare galleys Print and ship magazines Dispose of returns Acknowledge returns

22. Bits vs. Atoms • Channel • Web • Physical • Bits • Product • Physical

23. Product and Channel Are Bits • Channel • Web • Physical • Rapid Agile and Customer development • Fastest to acquire early customers and scale • Bits • Product • Physical

24. Web 2.0 – Product and Channel Are Bits • Channel • Web • Physical • Google • Twitter • Facebook • Zynga • Cloud Services • Bits • Product • Physical

25. Product Is Bits, but Channel Is People • Channel • Web • Physical • Rapid Agile and Customer development • Fastest to acquire early customers and scale • Rapid Agile and Customer development • Traditional sales channel • May require installation • Bits • Product • Physical

26. Traditional Enterprise Software • Channel • Web • Physical • Google • Twitter • Facebook • Zynga • Cloud Services • Microsoft • SAP • Oracle • Bits • Product • Physical

27. Physical Products Sold Over the Web • Channel • Web • Physical • Rapid Agile and Customer development • Fastest to acquire early customers and scale • Rapid Agile and Customer development • Traditional sales channel • May require installation • Bits • Product • Rapid Customer development • Logistics, shipping and manufacturing critical • Customer service • Physical

28. Killing Traditional Storefronts • Channel • Web • Physical • Google • Twitter • Facebook • Zynga • Cloud Services • Microsoft • SAP • Oracle • Bits • Product • Physical • Zappos • Amazon • Cafepress • Netflix • Consumer electronics

29. The Factories May Be in China • Channel • Web • Physical • Rapid Agile and Customer development • Fastest to acquire early customers and scale • Rapid Agile and Customer development • Traditional sales channel • May require installation • Bits • Product • Rapid Customer development • Logistics, shipping and manufacturing critical • Customer service • Longer customer feedback cycle • May require large capital requirements for scale • Physical

30. We Still Make Things that Need Salespeople • Channel • Web • Physical • Google • Twitter • Facebook • Zynga • Cloud Services • Microsoft • SAP • Oracle • Bits • Product • Cars • Solar panels • Wind turbines • Bookstores • Consumer electronics • Physical • Zappos • Amazon • Cafepress • Netflix • Consumer electronics