Hi, everyone. Welcome back. Let's talk about the ripple rug cat scam. This case study is just one example of the challenges that manufacturers and suppliers face on third party online platforms such as Amazon. As you saw, there is no policing. Amazon doesn't do much except charge fees for being online. But anyone can be a middleman or middle person, and it is relatively costless and often very profitable to do so. This creates a nightmare for manufacturers as these middle people can set any prices they want. They can pass along return costs to the manufacturer, all the way making a very nice margin and creating a lot of damage to the brand. But is this sustainable? Not at all. Anyone can come in and undercut the price. Competing on price is never a sustainable strategy. Part of what the manufacturer needs to do is make consumers aware of the drawbacks to buying from these intermediaries, but more on that to come. Now as consumers, we make this problem worse by purchasing from these intermediaries and really being too lazy to check whether they are authorized or even whether we are getting the best price. Online, we have worked through the benefits and drawbacks for all the players in the system, the manufacturers, the intermediaries, and the customers. You've generated some implications and potential solutions such as legislation, regulation, sometimes doing nothing. But the most prominent solution suggested is that, the manufacturer must take control back, and you are right. We will talk about how to do this further. But before we do, I want you to be aware that the problem that we are witnessing on Amazon is not really a new problem to the channel strategist. It has been around for a long time and it is more commonly referred to as the gray market problem. Now, when I was a doctoral student, I conducted some interviews with buyers at Kroger's headquarters in Cincinnati. I remember at one point in the interview, a guy with a handlebar mustache, I kid you not, a black cape and a black hat, walking quickly through the offices. It was very mysterious. When I asked the Kroger buyers who it was, they said quietly, "That's our divertor. " This is because Kroger was buying quantities from manufacturers at low prices and reselling them like in places other than Kroger stores. This activity is typically unauthorized, and this type of behavior is what is referred to as the gray market problem. It refers to unauthorized reselling in the distribution channel of products. Now this results primarily from a pricing problem, which is that usually prices are too high, and volume discounts in the channel are too high. So distributors buy in large volumes, then they find an underserved market and they sell at a price lower than the average market price, but still high enough to make a profit. This happens a lot in product categories like electronics. Product prices typically start high at premium levels to take advantage of innovators segments who are willing to pay and ready to adopt first. Then prices are reduced slowly over time as competition enters in the market cross. But the ripple rug cat case is not your typical gray market problem, because in this case, the manufacturer or the rackles actually priced too low, and this is unusual. But the problem arises because the Internet and the Amazon marketplace make it super easy for new intermediaries to enter. There are no barriers to entry, it's cheap and it's easy because customers aren't going to take the time to price check. This is a nightmare, and I tell you it is on the mind of most businesses today. The good news is that a channel lens can help to provide some important answers to this problem. Let's take a look at what manufacturers like Fred can do. Yes, you can say that we need more government intervention and better laws, but that takes time and you'll lose your lunch sitting around waiting. What manufacturers need to do instead is, they need to monitor the online platform, and yes, this is a lot of work. If you're going to sell in third party marketplaces, then you have to do the work of monitoring, monitor what's happening to your products, check for arbitrageurs like the intermediaries and the ripple rug case. You may have to send out cease and desist letters and you can try to renegotiate your terms with the platform. But frankly, unless you're selling food or medicines or products that can put consumers at risk, you're probably not going to get too much of a response from the platform. Elephants, after all, don't always respond to flies. Another option is to use a different route to market. Get off the platform and create your own, and this is similar to vertical integration. If you can't control the platform to your satisfaction, then you have to do it yourself, and this is why Amazon must establish it's own distribution warehouses instead of working with the channel partner to do it for them. This is why Starbucks has purchased Brightloom, formerly known as Eatsa, which is a company that specializes in mobile ordering and payment, loyalty perks, and delivery order management. This is what they needed in order to accelerate it's technology adoption in all of it's Starbucks stores around the world, and to help them understand new ways of creating purchase convenience. Now back to the ripple rug case. The need for control and the inability to bring your own downstream members in line means that you may need to create your own site and drive traffic to it. Recognize that whenever you vertically integrate, it means that your costs will increase as you now have to pay for the advertising to make customers aware of your product. In this channel, strategies, you understand the need to create channel benefits and how customers buy, and this might require key functions such as set up services or delivery. Put differently, all the value added functions that Amazon performed for you, like placement in front of thousands of potential customers must be replaced. Remember, you can change out the channel members, but someone still needs to perform the function. For manufacturers, this means that they must find new intermediaries, coordinate, and incentivise them. This is what the ripples had to do. Was it easy? No. Was it cheap? Well, not in the short term. Does it pay off? Well, it depends on the value you create and how customers want to buy. Vertical integration is always a perfect solution. But remember, it is expensive, you need deep pockets. It requires skills and capabilities that you just might not have nor want to develop, and this is the big downside, but it is the trade-off that must be faced. To summarize, think through what functions are absolutely necessary. The more critical it is, the more it makes sense for you to have more control or influence over it. If you don't vertically integrate, then maybe you need a close partnership with a channel member who you can trust, and will give you lots of visibility into their activities. Other ways of keeping partners close are to use a franchise agreement, a joint venture involving equity stakes, et cetera. The more control you need, the more likely you will need to vertically integrate. This is why vertical integration is often called the make-or-buy decision. Because someone has to provide critical functions and the need to have control over critical issues such as pricing, brand equity, and all your sales processes will determine the extent to which you will either purchase these capabilities from others or make, that is, do it yourself. This my dear friends is an introduction to the problem one faces when distributing on Amazon.
