Up to now, we have discussed the channel benefits that customers want and how they can be used as a segmenting device. But now we want to move towards the nuts and bolts of how to systematically think about extract, and leverage this information. In other words, let's establish a framework that could be used. For example, like the grocer who is considering an online channel in the last session. The channel benefit audit is a framework where market research and strategy meet. Our goal will be to identify the consumer's utility function for channel benefits. What's the utility function? Economists tell us that each customer may have their own unique weighting for each of a product's attributes. These weights combine together to determine an overall utility score or what we might call evaluation for a specific product. This overall utility score corresponds to the customer's willingness to pay for the product. In other words, the higher the utility valuation, the more the customer is willing to pay to acquire the product. The same logic applies to the utility valuation for channel benefits. As discussed in previous sessions, we have established that customers may have different valuations for a channel benefit. As an example, variety and assortment may be weighted very highly for you but not for me, or my utility weighting for convenience may be higher on different purchase occasions depending on how I plan to use the product. The channel benefit audit is an attempt to systematically capture these differences so that the firm can act upon it. The goal is to identify or estimate the consumer's overall utility valuation for various channel benefits. We want to understand which benefit is weighted the most or the least, and how various channel benefits come together to collectively determine a customer's overall utility valuation. The presumption is that if we understand which channel benefits matter the most to a customer, This should also correspond to their willingness to pay for the provision of those benefits. A benefit audit can help us answer key questions such as number 1, if this retailer was targeting a large segment of customers who shared your own channel benefit utility valuations, how well-positioned is the retailer relative to their competitors? Number 2, what is the price difference between the two retailers? Is that difference justified via the differences and channel benefits? Number 3, what new retail approaches might emerge and threaten this retailer's competitive advantage? Number 4, what steps might this retailer take to protect its marketplace position going forward? Here's how to conduct a benefit audit. I typically will ask my students to purchase an identical product from two different channel formats. They might shop for either a, a specific book, b, coffee, or tea if you drink tea at two different retail outlets, sometimes students will purchase a book at Barnes & Noble and on Amazon. The audit is not restricted to just brick and mortar stores. Others might purchase at two different online retailers. The important thing is to not vary the product across the two retail outlets. Before you purchase, take a minute to imagine your ideal shopping experience for this product. What channel benefits would be met in your ideal shopping experience? For example, I'd like to have a retail location close to where I live or I'd like to have a trained salesperson to educate me. You should list as many different channel benefits that would come into play or be desired in the entire ideal shopping experience. All the way from gathering information and learning about the product to shopping, making a decision, and after-sales support. You should allocate 100 points among these channel benefits according to the relative importance of each to you. Then think about what attributes, activities, or characteristics of a retailer you might measure to determine how successful they are at meeting each channel benefit need that you have. For example, if a child benefit need was something like I would like a trained salesperson to educate me, then you might measure how knowledgeable and helpful the salespeople were at the retailer, et cetera. Just be sure that the measurement criteria are ones that can be observed and or measured. The second step is to then purchase your chosen product in two different retail outlets and assess how well the retailer delivers on your expectations. This is the actual delivery of channel benefits. This process helps to identify the gaps between a customer's utility function for channel benefits, that is, their ideal experience and what they actually receive. This gap then informs what managers in the firm must do to create and deliver a purchase experience that customers value and will ultimately pay more for. Let's look at some audit data to help illustrate how to use the framework and identify next steps for the firm. I'm going to share two of the most common outcomes from a channel benefit audit. Here are the results of Stephen's shopping experience for a cup of tea. Stephen's ideal shopping experience would be to have a wide variety of tea flavors available. This is his most important channel benefit as he weighs it at 35. His next most important benefit is convenience. The store location needs to be accessible. The next two most important channel benefits are the products packaging, perhaps the tea has to have a sleeve that keeps the cup from burning his fingers and checkout speed. He doesn't have patients for long lines. Finally, friendly staff would be nice, but it's not the most important channel benefit in his mind. Stephen purchases his tea from a McDonalds and a Starbucks. You can see how well each of the channel benefits were met in the columns on the right. Now Starbucks clearly outperforms McDonalds. This is due to the fact that they score fives on Stephen's most important channel benefits tea variety and convenience. Perhaps Starbucks is located in his office building. They also do a better job at providing the packaging he needs. It's important to note that these three scores of the five collectively account for 75 percent of Stephen's total valuation for channel benefits. This is clearly what drives Starbucks dominating delivery of channel benefits over McDonalds. In contrast, you can see how and where McDonalds falls short. Variety is the chief offender. McDonalds actually does pretty well as indicated by the fours on 50 percent of the benefits that's Stephen cares about. But since checkout speed and friendly staff aren't the most important benefits, it doesn't really boost his overall utility score. Now let's think about these results more broadly. It's important that you don't look at the scores and say, well, that's just one person, so who cares? Well, let's imagine that these are the results of market research and that these scores are representative of a segment of the population. I'm often asked, how would a firm get these scores? Well, a focus group might be held in which customers are probed as to how they want to buy. In other words, they are asked which channel benefits are important when they purchase or consume a firm's product. Then the firm might send a survey out to its current or potential customers to assess how important each benefit is. This is to collect the information on the benefit weight of valuation. This can also be collected using a technique known as conjoint analysis. A conjoint analysis would present a range of profiles in which the levels of channel benefits would vary and a consumer would be asked to choose the profile that they would prefer. Now using a mathematical process involving fractional factorials, it would then be possible to back out the consumers valuation weights for each channel benefit. Market research is really at the heart of this process. Now let's suppose that McDonalds or Starbucks did this and now they're trying to determine what would have to be done to better target or acquire the variety seeking segment who wants their products to be convenient? That is customers like Stephen. Let's add some pricing information to help us answer this question. Stephen's, tea at McDonalds costs a dollar and at Starbucks, his tea costs $2.25. Now, this is a big price differential. The question is whether this difference is justified. We can see that McDonald's costs less, but also delivers less channel benefit value than Starbucks does. Now, at this point, I will often ask the student, Stephen, in this case, which retailer they would prefer to purchase from in general. In most of the time, they will indicate that they prefer the retailer that offers higher benefits even though it costs more. Now, think about this. Customers prefer purchase options that deliver on channel benefits even if it costs more. In other words, consumers are not always looking for the lowest price in the marketplace. Put differently, channel benefits can lead to a greater willingness to pay. So don't forget to monetize whenever you are providing channel benefits. Now, the next question to ask, what should Starbucks or McDonald's do if they want to acquire or keep a segment full of individuals like Stephen? Well, for McDonald's, the best thing they could do to improve their overall score would be to offer more tea variety. That's because this is the attribute that Stephen cares about the most. It's weight is 35. Fortunately, this is also something that McDonald's can easily do, or at least it would be less expensive to improve that channel benefit than to try and improve their score on convenience. Putting up another McDonald's location that is more convenient to Stephen's home, school, or work location would be a costly investment. Let's consider Starbucks' viewpoint. Where should Starbucks allocate their next dollar if they want to attract customers like Stephen? Should they try to improve their checkout speed or train their staff to be friendlier? It's true that their two and three scores are low, so certainly there is room for improvement. But on the other hand, checkout speed and friendly staff are of the least importance to Stephen. So Starbucks would be spending money on something that really wouldn't move the needle for consumers like Stephen. All of this is to illustrate how studying these scores can inform what either retailer or a competitor looking to enter should do. If you are a retailer, you really want to major on the majors. Look at which channel benefit would provide the biggest bang for the buck in terms of improving the overall utility score. Then consider how costs feasible it would be to improve that channel benefit. Even for channel benefits that are not highly weighted, there's still insight. These scores tell us that even if Starbucks were to improve staff friendliness given their low weight, it might not even matter. In fact, you could even say that given that Starbucks is dominating McDonald's substantially on Stephen's benefit valuations, do they need to do anything at all? As long as they have a relative advantage over existing competitive alternatives for Stephen, there's really no need for them to hit a perfect overall score of five. One extension would be to add additional columns, one for each viable competitor in the market who might target customers with a profile like Stephen. This would allow you to see the full set of market options that Stephen faces and understand their differences in the combination of channel benefits they offer. Now, many students will point out that customers don't usually come into McDonald's to purchase tea, so this analysis is incorrect. But I push back and say that it is still informative because the fact of the matter is that Stephen does and did purchase tea there. Sure, the reality is that while customers may not go into McDonald's for tea, the product is playing a role in the customer's shopping basket, which may be why McDonald's offers it on their menu at all. So for McDonald's, although this analysis focuses on tea, they might want to know more broadly, what do customers who value flavor variety in convenient locations want in general? I will admit that I've simplified this exercise. By that, I mean I've abstracted away from shopping cart issues or segment sizes, and I've simplified the number of possible competitors in order to illustrate how to think about the trade-offs and benefit valuations that we observe in the data. This is where the real kernel of learning is in this exercise. Let's use these numbers as illustrative and not ask more from this analysis than it can really afford.