[MUSIC] So let's dig a little bit more into this notion of show-rooming, which is an extreme form of horizontal free riding. For better or for worse, this show-rooming is really facilitated by technology. Both mobile technology and other Internet technologies, even our laptops and our desktops. So the data I'm showing you here is data that's going through 2011 and it shows the fraction of consumers, actually even increased through 2012 and 2013 of people who actually used their mobile device to find a better price while shopping in the store. Many of you may have done this yourselves, you've been in a local store. You've been gathering information during a little bit of horizontal free riding and then you've picked out your mobile phone and you've gone to Amazon or another supplier to buy it. So let's look at some additional data that kind of gets under the hood a little bit and see what happens here. So if you're someone who is want to do this, who's prone to do it, who's looking at mobile phone information and prices and so fourth while shopping. The good news is that some of these people will actually buy from the website of the store that they are currently in, but notice also about 25% of these individuals end up buying from somebody else, Amazon or a competitor. So the question becomes for the traditional retailer, what can be done to push back or fight back against this practice? Now you'll see as we go through these statistics it relates back to some of our early discussion about why omnichannel retailing now makes sense and you need to touch customers both in the physical world and the virtual world, as well. Again, here's some more data on the kinds of product categories that are most susceptible to show-rooming. Right at the top there is consumer electronics and then it declines a little bit through apparel and clothing and so on. My own hypothesis about why consumer electronics is are the top is this is a product category where we like to be fairly well-informed before we make a purchase. So we may want to actually interact with a salesperson. But because it's a pretty big ticket item, what ends up happening is we may then be persuaded or may be inclined to after having figured out from the salesperson or the physical store the best product to buy to then go online and do it at a much cheaper price. Just simply because of the value of the items involved. So how could manufacturers and retailers fight back against this practice? One thing that's happening now is literally the same TV produced by a big manufacturer like a Sony or a Sony or somebody else may end up having a slightly different model name for different suppliers. So then it becomes more difficult for me to compare the price and to buy one electronically, as oppose to buying it in the store where I end up shopping. There are however, some good news for retailers in physical stores about how they can push back against this practice of show-rooming. So the chart that I'm showing you now is the purchase intentions of individuals who are engaging in the show-rooming behavior, namely being in the physical store and taking out friendly mobile phone and looking for information in the virtual world and then thinking about buying it. So a third of them always plan to buy the product online. These are kind of the hardcore horizontal free riders. I’m going to go into Chris’s Hi-Fi store, learn everything I can and then just buy it at the cheapest possible online website. However, the other 60-odd percent actually planned to buy it in-store, but something happened that caused them to end up buying it online instead. So let me say a little bit more about that opportunity represented by the 56 or close to 60% of individuals that say, you know what? I would've bought the product in the store, but I ended up buying it online instead. So my two colleagues, Tony Moreno at the Kellogg School of Management and Santiago Gallino there at the Tuck School. Investigated this through something they called the B-O-P-S, buy online, pickup in store. As a way for traditional retailers to fight back against this phenomenon of show-rooming. So the idea of buy online, pickup in store is the following. I could go to the website of a large retailer and Tony and Santiago looked at a large retailer operating both within the United States and Canada that had about 80 or 100 stores in this analysis. And the retailer implemented a program where you could buy the product online, then go to the store and pick it up. B-O-P-S, buy online, pick up in store and so what they found was the following. You might hope, actually that sales at the websites would then go up. Because now as a consumer, I can go onto the website, I can see that this coffeemaker that I’m interested in is in stock and then I can buy it online and go to the store on the way home and pick it up. So the hope was that by offering consumers this option that the sales at the website would increase and I should mention that the retailer in question, I cannot disclose the name, but the retailer in question was mainly selling products that are for your home. So bedding, towels, coffee makers, those kinds of things and this very important for the explanation that comes later on. Now what Tony and Santiago found is that instead of sales at the website going up, sales at the website actually went down. Doesn't sound too good, but there's a silver lining. They found after this B-O-P-S was implemented, sales in the stores went up. So what was happening? So imagine myself, as a consumer, I want to buy a coffee machine from this particular retailer. I go to the website, I see that the product is in stock and the price is good. But because it's a coffee machine, I'd still like to perhaps taste the coffee or touch the sweater or try out the bedding. So because most of what this retailer was selling were products that required some physical inspection by the customer to make them feel comfortable, what the customers were doing were going online to make sure the product was there, then going into the store and actually purchasing in the store right then and there. So offering that option was very variable and actually led to an overall increase in sales of that retailer so much, so that the new acronym instead of B-O-P-S, buy online, pick up in store. Tony and Santiago referred to this as ROPO. R-O-P-O research online purchase offline. So again, those of you are facing these kind of omni-channel problems and horizontal free riding, show-rooming for your own business. This shows that there's potentially clever ways out by really understanding what the consumers want. They want information first, but they want to touch and feel the product. And if you can deliver them that package, you can get yourself out of some of these traps. Now let me just summarize what we've talking about in terms of horizontal free riding and how these can be eliminated. There's essentially three broad strategies that can be put into place in a particular market to try and eliminate this problem between Chris and Amy. Where Chris is the high price high service seller and the customer goes to his store to get the information and then goes to Amy's store to get the lower price. The first thing that you could do is you could make sure that in different territories, different products are available. So give Chris some of the product line and give Amy something else, so there's not direct competition between them. Related to that, you might need to think carefully about the appropriate level of distribution intensity. If a lot of horizontal free riding is going on, you might want to make your distribution intensity a little bit lower and be more exclusive or more selective. Meaning that local retailers have kind of a local monopoly. And then finally, the other thing that you could is you could introduce different brands for different retailers. So literally, just call the product different names. So Chris's product has a slightly different label on it than Amy's does. And this again, works against the problem of direct comparison, which is an important component of horizontal free riding. So now let me summarize everything that we've been talking about so far in this module with respect to conflict. Here's three rules of fun that been discovered through academic research into generally what causes more conflict in a channel of distribution or a system of distribution. So three things we're going to look at. First of all, are the length of the channel. So how many players are there between a person who provides a product initially or creates it than the person buying it? Secondly, how much autonomy is there in the channel? Are all the channel members owned by the corporate entities? So their all stores owned by Starbucks may be franchised, so McDonalds might have franchised. These are rather all completely independent agents. And then thirdly, how much density is there in the channel? Is there only one retailer or distributer in the particular market? Are there two? Or are there multiple? So this is what the researchers found with respect to these three important factors. So generally, as the channel gets longer and longer. There was just more potential for conflict and there's one really fundamental reason for this. This is a term that was developed by a French economist many centuries ago and it's called double marginalization. It's a fancy term, it's a simple idea. It says, every time you add someone between the producer and the end consumer, you're adding a markup and a layer of margins. So if you have one retailer between the manufacturer and the end user, there'll be two levels of markup from the manufacturer to the retailer and then the retailer to the customer. If you have two intermediaries, there will be three levels of markup. Manufacturer to the distributor. Distributor to the retailer. Retailer to the customer. So as you link from the channel, you're always adding additional markup to the margin and you're adding more people, so there's more potential for conflict. That's fairly unambiguous. Secondly, if you look at the level of autonomy from having completely owned distributors to franchise distributors, to completely independent. Again, as people become independent, there's more and more conflict. The conflict increases. So those two, I think are fairly intuitive and fairly obvious. The last one is less so until you hear the story and this is why I think it's interesting. So the researchers who looked at this issue also looked at the density of channel. Now you have a fairly low level of conflict, if there's just one exclusive outlet per territory. Of course, as you increase to two, the conflict goes up. Because now in the competition with that store in the territory next door, he's stealing some of my customers, I'm stealing some of his. However, what the researcher notice is kind of interesting is the level of the competition or conflict start to decrease when density gets really really large. Why is that? Well, it's because there is now a tradition problem. If I see my market shares going down and I have eight different competitors in my local area that I'm competing in it, I don't know really which one of those guys is taking my market share. So paradoxically, when you have more density of retailers in a given location, sometimes the overall conflict can go down. The last little task I'd like you all to think about as you're working through this material and you're thinking about what it means, both how channels get creative in terms of who is doing what the hybrid grid. The other elements of design like intensive versus exclusive versus selective distribution. And finally, this whole area of minimizing conflict. I think to bring it all together, it would be good to have an exercise to kind of percolate on. What I'd like you to do is to try and think about a company that really innovated in the area of distribution. Either they took over some existing activity, they eliminated an activity, they turned a hard good into a soft good. They completely changed the way customers procured the product and in so doing really developed an advantage over their competitors. So try and think about that, because I think a lot of the really interesting innovations that are going to occur in markets are going to be innovations around the area of distribution and access to products and services. Particularly as I've said many times, but it bears repeating that there's about a billion of us running around on the planet, there will be more that that soon who are carrying computers in their pockets that can have all kinds of things distributed to us and things that we can also respond to. [MUSIC]
