Strategy Dynamics Briefing 59: Competing through intermediaries

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Intermediaries give rise to powerful type-3 rivalry, both in B2C and B2B cases. Often, a key objective for suppliers is to capture more share of the intermediaries’ attention, so they promote the supplier’s product more strongly to the end-customer.
Attention” comes in various forms:

  • A consumer-goods producer wants retailers to allocate a larger share of shelf space to its product than to rival products in the same category.
  • Business supplies companies fight for more pages in distributors’ catalogues than competitors.
  • Insurance companies want brokers to spend more time selling their policies than those of rivals.
  • Intel wants PC manufacturers to feature Intel processors in more of the models in their product ranges, rather than AMD processors.
  • Many kinds of supplier want Web channels to give more space and prominence to their products than to those of competitors.

The quality of attention is important too. Stores’ shelf space near the entrance and at eye level is more useful than at floor level to the back of the store. Space on a Web site can be prominent, or buried away below other pages. Insurance brokers may focus their best sales people on a product or less capable people.

Leaving aside this quality issue for now, figure 1 shows a situation in which our consumer product company has a single competitor with an equally appealing product, aimed at a market of 5 000 disloyal consumers in the locality surrounding a single store. We and our rival charge a wholesale price of $1.50 (bottom-left), to which the store adds a 25% mark-up—38 cents—resulting in a retail price of $1.88 per unit. The store has 20 feet (6 metres) in total for the product category, initially allocated equally between the two products. Total sales of 30 000 units per month give the store a gross profit of $11 250/month, or $562.50 for each foot of shelf space. (There are some small rounding differences in figure 1).

Figure 1: A wholesale price reduction captures retailer shelf space from rival products. (Click image to view larger)

A wholesale price reduction captures retailer shelf space from rival products.

To boost sales and profits, we cut the wholesale price from to $1.30, with the following results:

  • The store chooses to cut the retail price by the same fraction as we cut the wholesale price, to keep the same percentage margin on our product. (Other store policies are also possible, of course).
  • The lower retail price enables our product to capture a larger share of consumer purchases.
  • If nothing else changed, the store would make less cash margin on the same total sales, but the lower retail price also increases consumers’ total purchases.
  • With higher total sales, and an increase in our product’s share, the store makes substantially more cash per foot on our product than before ($377), and rather less on the rival product (top left).
  • The store therefore allocates 3 feet more shelf space to our product, taking the same amount from the rival.
  • The following month, the store makes still more cash per foot on our product, and moves still more space away from the competitor. We win more sales and make more profit, despite the lower price.
  • In each subsequent month our product is given still more shelf space, until the store reaches a point where it is reluctant to have its sales dominated by a single product – ours.

A real competitor is unlikely to accept this outcome, and may respond with price cuts of its own. Total product sales would then increase again and the store would reallocate shelf space away from our product. If this tit-for-tat price cutting continues, the outcome is a progressive reduction in wholesale price towards the minimum that we and our competitor can tolerate, causing a great loss of profit between the two suppliers.

Until next time…

 

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Components competing to be adopted

Strategic Management Dynamics book coverCompetition to supply manufactured components includes an important feature — suppliers win by getting their components included in new products and lose out when older products are discontinued. For example, Intel once enjoyed exclusive supply of microprocessors to the whole of Dell’s range of PCs and servers. However, in May 2006, Dell announced that it would for the first time use AMD processors in its high-end servers—the last of the major server manufacturers to do so. Intel then started to lose share of Dell’s product range as each Intel-based product was discontinued and each AMD-based product was added. Thereafter Intel would be fighting AMD for each new Dell product, a battle that it had not previously needed to fight.

This briefing summarises material from chapter 7 of Strategic Management Dynamics, pages 466-472.

Read more about the book on our website

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