[Instructor] Hi there, welcome to the video lecture
on the third P
of the four P marketing mix, which is place.
So in this section, first of all, we're gonna talk about
channels and chains and basically,
how do your goods get to the consumer?
Do you use direct markets or do you use indirect?
And it's much like we already talked about, B2B, B2C.
Next we'll think about, where do you buy inputs?
All businesses, organization buy
or at least need certain inputs.
And we'll talk about the drivers between the decision of,
do you make it yourself,
or do you buy it from somebody else?
And then finally, because I'm imagining
that a lot of you have service-based businesses,
we will talk about place in that context.
So the first thing that we're gonna talk about
is how your good or service gets to the customer.
So we're gonna be thinking about market channels,
which is the organizations and individuals
that get your product or service to customers.
You can think about it as the pipeline,
how does it get there from your door to their door?
There are two main types, direct and indirect.
And these, we've already touched a bit on the B2B,
business to business, and B2C,
business to consumer models.
And basically, these are much the same.
So direct, you're selling right to the consumer.
Whereas indirect, you are selling to,
or at least working with other businesses.
The first one that we're gonna think about
is direct markets, which is where you sell
your product or service directly to the end customer.
And in food, you're probably familiar with this,
something like a farmer's market or farm stand
where you're buying it right from the farmer.
And in many cases, you may wish to start with this.
And the reasons being that
you have a lot of control.
So you have complete control
in what is said about your product,
how it's presented, how it's packaged,
where it goes on the shelf.
All those things you have complete control over.
Next, it gives you contact with your customers.
So you can talk to them and hear from them,
what do you like?
What do you not like? What's working, what's not?
Which allows you to improve
both the product and its delivery.
And again, it can be a learning experience.
So actually being there,
interacting with the the customers,
lets you learn about your product
and what consumers like and don't like about it.
The features of direct markets
is that you retain ownership all the way through.
So until it gets into the hands, you own it.
It's up to you to collect payment.
It's up to you to provide any customer service,
explain how it works, do any refunds,
anything like that, that is all on you.
So in a way, that may be a downside.
That even though you have control,
you also have all the responsibility
and all the tasks of marketing fall on you,
that you have to do it yourself.
Your business has to do all of these tasks.
So again, here are lots of examples.
Being a food and ag guy,
these are the ones that most readily come to mind.
So farmer's market, CSA shares, farm stands, U-pick.
So all these are ways in which farmers sell food
directly to consumers, and don't use any intermediary.
In contrast, indirect markets do use intermediaries.
So here are a whole bunch of examples.
So the first two, agents and brokers,
don't actually take possession of the good.
They just make a deal, and it's up to you to deliver it.
But then folks like dealers to distributors,
wholesalers and retailers, they do actually take
physical custody of the good.
And they eventually
either sell it to or sell it to somebody else
who then sells to the end consumer.
So in every case here,
there's an intermediary that is playing some role
to help the good get to the final customer.
So we're gonna talk about this in the discussion.
So there's sort of, again, for farm produce,
there is a continuum here
for first in direct markets
where the consumer buys straight from you.
There's direct to accounts where you take it right to,
usually, some sort of food service operation,
like a restaurant or a hospital
or a school or maybe directly to a retailer.
There are food hubs, which are specialty
local food distributors that have a specific mission
of supporting local farms
and making local food more accessible.
So in many cases, so they'll buy from many
different farmers and then sell to many different buyers.
And then there is a distributor who buys and sells,
again, from many farms, but really don't have
a specific mission about local food and local farms.
And they basically sell it almost anywhere,
so it might end up in the region or out of the region.
And we're gonna explore this in our discussion about
sort of the pros and cons and volumes and prices,
and all kinds of, the features that each of these
marketing channels provide.
Now I'm going to talk about,
what are the drivers which determine
what is the right marketing channel for you?
And you'll see that they have to do with these four things,
customers, product, the environment in which they operate,
and the nature of the business.
So thinking back a few weeks
when we thought about customers, and we wanna think about,
where and when do they want to buy?
So how much is convenience,
and being able to buy it at the place
where they want important?
So if they want to be able
to access it right nearby, 24/7,
it may be that you wanna sell it through a store
that is open at that time so they could just get it.
Whereas if it's something
that they're willing to wait for,
to meet you when you're open,
or when your farmer's market stand is open,
or if they can order it online
and have you deliver it,
then the direct market might work better.
In the same way, and I want you to think about this.
usually if you have a relatively fewer
number of customers, direct might work.
But if you have many, many, many of them,
you may need to change to indirect markets
and use an intermediary.
And I'll let you think about why that is so,
and we'll discuss it in our class discussion.
The nature of the product also determines
what kind of market that you will use.
So this is a general rule of thumb,
it doesn't always apply,
but if you have a highly differentiated product,
odds are you're more likely to use a direct market.
So if it is like highly nuanced, sophisticated, high value,
sort of very unusual alternative, craft, artisanal,
at least direct markets may be an option.
Whereas if you have
a very commoditized item,
like corn, you know, number two corn,
or milk in a gallon plastic jug
with a red lid,
usually you will sell those indirectly.
And again, we'll think about why that is.
A few weeks ago, we talked about the external environment
and that is also a driver for what kind of market channel
you will use, what place.
So certainly, that we have seen
with the advent of technology
and the internet, that direct ordering and,
you know, both buying from the manufacturer,
maybe things like Etsy, where you're buying a craft
or buying, you know, some sort of commodity,
like through Amazon, say,
certainly has an impact.
What are you able to do?
And if you are doing,
and do you have the right infrastructure?
So you can think about, what do you need to have in place
if you are selling direct?
And what do you need to have in place
if you are selling indirect?
So few examples, if you're selling direct,
you know, a farmer's market,
you're gonna need tables and boxes and signs and shelter
and things like that.
If you sell indirect, you're gonna need
pallets, and, you know, large boxes,
large case size boxes to put things on,
et cetera.
If you sell like a craft,
if you sell it direct,
then you need to be able to, you know, have a website,
have someone that can do all that work.
If you sell it indirect, again,
through somebody like Etsy,
they can do the brokering.
So think about, do you have the infrastructure
and the equipment that you need?
Which is a better fit for you?
And speaking of what's a better fit for you,
what resources do you have?
What are the human, the technological,
the equipment and infrastructure,
as well as the entrepreneur's time?
Because pretty much throughout
the life cycle of any business,
the entrepreneur's time is the scarcest resources.
So to what extent does it make sense for you to,
you know, in the beginning you may sell direct
for all those reasons I said,
but it may be that eventually that your time is better spent
working through a distributor.
Where instead of sort of waiting on the orders
or waiting at the farmer's market,
where you can just make one call, sell a whole load
to a distributor and save
a lot of time.
So where is your time best spent?
What use of your time
brings the greatest return to your business?
That's a decision and a question
that you should be asking yourself all throughout.
So you wanna think about,
as you're choosing a strategy, what is effective?
What will meet the customer's needs?
Where do they wanna buy, and why?
And how long will they wait?
How hands on do you wanna be?
Can the customer find you?
What's the most efficient way?
And so you really wanna think about,
do I wanna do this all by myself?
Or, do I wanna work with some kind of a partner?
And note that there are a lot of costs here.
There are many tasks, distribution,
advertising, the actual sales, customer service,
who should do this?
Who will pay? Who do you wanna pay?
Do you wanna pay yourself or,
you know, not pay anybody else, but spend the time?
Or do you want to save the time
and pay somebody else to do this?
So think about, who can provide these services
at the greatest value, at the most efficient cost to you?
And what use of your time brings the greatest return
to your business or organization?
So we'll talk in class about, when is it time to change?
Many businesses, again, start direct
for all the reasons I said,
but then just find that the volume of business
and just the use
of the entrepreneur's time
sometimes calls for changing and beginning
to work through an intermediary.
One thing I hear a lot
in my research with food businesses
is that they self-deliver,
self-distribute at first.
So, you know, you begin
sort of selling to individual stores,
or maybe if you're a craft brewer,
selling kegs or cans
to local stores, local bars.
But then eventually, you know, again, you have enough volume
that you're ready to not do all that work you yourself
and work with somebody who does that very well,
who already has relationships
to lots of other restaurants, bars, or stores.
And there's that point where you change from,
they're sort of doing you a favor,
"Please carry my product,"
to "I'm bringing you business."
"There's lots of, lots of stores or bars or restaurants
that you already work with who want my product."
"I already have a customer base,
they want to buy it, you already sell to 'em,
it makes sense for you to start
to carry my product."
And in that way, you're bringing
some leverage to the relationship.
Going from, "Do me a favor,"
sort of groveling, "Please sell my thing,"
to "This works for you too."
"This is a clear benefit, I can do it myself,
but it's much more efficient if we work together."
So now we're going to talk about,
how do you get the inputs that you need?
How do you get the materials
and the services that your business needs?
So all businesses, I would say, need inputs of some kind.
They buy things from somewhere or, in some cases,
they make it themselves and they do some sort
of transformation of it, and then they sell
this transformed product.
So this photo that you see here
is a man named Ronald Coase
who was a Nobel Prize winning economist,
and one of his landmark work
is on transaction costs.
And we'll talk a little bit about
transaction costs and, specifically,
he applied it to what he called the theory of the firm
and the make or buy decision.
So a firm needs some kind of input.
So I am a professor, say,
there are certain inputs that I need.
Do I make them myself or do I buy them?
So an example is a laptop.
Right now I am talking to a laptop, it is recording.
It really doesn't make sense for me
to make my own laptop.
I don't really how to do it,
there's a lot of 'em available,
I can just buy it and use it.
On the other hand, it doesn't make sense for me
to pay someone to teach the class for me.
I feel like I do that well, it's something I enjoy.
I don't wanna have to pay somebody to do it.
I wanna keep my whole paycheck for myself,
so the instruction part I make.
And Coase argued that this
is determined by transaction costs.
And he talked about how this helps to determine
that the make or buy decision
is determined by transaction costs,
and that the make or buy decision
helps to outline the boundary of the firm.
What do I do? What do I not do?
So for me, the boundary of my firm is,
I deliver the material,
I develop it and deliver it myself,
but I don't make computers.
And hopefully, this will make more sense as we move forward.
So anyway, Coase talks about
that there are three kinds of transaction costs.
Transaction cost is the cost of doing business,
the cost of sellers and buyers
finding each other and reaching
an agreement that works for both.
So from the buyer's standpoint, I have three types.
First is search, so who has this thing?
Who has it for sale?
Who's out there that has the thing that I want?
So in the case of a laptop,
there's Apple, there's Dell, there's lots of 'em out there.
Next is, how much do I pay?
You know, there's a clear market
for laptops, I can go online,
I can go to a store, it has a fairly well-established price.
And finally, how do I ensure
that what I want is what I am getting?
So in this case, you know, again,
a laptop has fairly clear specifications
and it should perform in ways that I hope it does.
So in the case of me finding someone
to deliver it, this is a much more unusual thing.
So first, I would have to find somebody
who has enough expertise.
I would have to figure out
how much I would have to pay this person.
And last, I would have to monitor him and make sure
that he is delivering the material
in a way that works
and is effective and that, you know,
gives students the value that they deserve.
So what I'm arguing here and what Coase argued
is the more differentiated a product is,
the higher the transaction costs,
and the more common it is, the lower.
So let's think about a true commodity,
such as that gallon of white milk
with the red cap in the plastic jug.
So search, who has it?
Lots of stores have it, grocery stores have it,
gas stations have it,
convenience stores has it, broadly available.
What do I pay?
Well, there's a very well-established price.
Going from store to store,
the price for that gallon of milk is probably
gonna be pretty close.
And how do I know I'm getting it?
Well, because it's so homogeneous,
it's a one-size-fits-all,
basically every one is the same.
There's not a lot of information there.
And if I want this gallon
of white milk, really they're all the same,
and I really don't have to go to a lot of bother
to make sure that it's exactly what I want.
And the last point on this slide
is that there are three options, spot markets,
vertical integration, and strategic partnerships.
And I am going to talk about each one.
The first kind of market,
or the first option, is spot markets.
Spot markets are all the way
at the buy and of the continuum.
So this is best for inputs
that are sort of at the commodity end,
that are broadly available.
They're routinely bought and sold,
they tend to be very homogeneous and routine in quality.
There are many vendors, there are many options.
And in many cases, the buyer should just
select one that works for them,
in many case, the lowest
priced one or maybe the most convenient one.
So again, if you are buying
a gallon of milk, it doesn't make sense for you
to make the milk yourself, to have a dairy farm,
and to do all that work yourself,
it makes much more sense to buy it.
As a professor, it makes more sense for me to buy a laptop.
I don't know how to make them,
there are many of 'em available.
I can go online, I could go to a store,
and I just go and pick the one that's best for me.
So inputs that are broadly available,
that are routinely bought and sold,
those are the ones that you would use
a spot market and buy them.
And these tend to be fairly
arms length and anonymous relationships.
I might go buy the milk,
the gallon of milk, from Hannafords one day
because I'm doing some grocery shopping,
but it might be that I just need to,
I'm already at the drugstore
to pick up a prescription
and I remember that I need milk too.
So I really don't, you know,
I don't work with the same person all the time.
I don't tell them how to make that milk,
I don't know what farm that it comes from.
There's just like lots of it available,
I just go and pick the one that works best for me.
And I'm gonna say a bit more,
I'm gonna give you a more concrete example
for a specific business for each of these.
At the other end is the make.
So this is when something is highly specialized,
it's one of a kind.
I'm really fussy about what it has to look like,
that it really has to be suited
to my particular circumstances.
And so since it is highly specialized,
there's not going to be a whole lot of suppliers.
So it might be that I only want milk
that is organic, free range cows
fed a really special kind of hay.
Whoever milks that the cows has to sing to the cows,
it must be in a blue barn, dot, dot, dot, dot, dot,
lots and lots and lots of attributes, lots of information,
really highly differentiated.
And it might be, at an extreme end,
that this thing that I want is so obscure
that I have to make it myself.
So it might be that if I needed a laptop
that was incredibly, you know,
that is completely unique.
It has this bundle of attributes done in this way,
made in this way, that nobody makes it.
There's not a single firm on earth
that makes the specific kind of laptop that I need,
it might be that I just have to make it myself.
In the same way
that if you want to build
a loft bed for your apartment or your dorm room,
it might be that there's a bunch of 'em available
and you can just go buy one, sort of buy a kit.
But it might be that you want it to be really special,
that there's something about it,
that it's just not commonly available.
A specific kind of wood, a specific size, a specific design,
something that it does,
it has a coffee maker
attached onto it, something obscure like that.
That it may be that it's so obscure,
so unique, nobody makes this,
and you're gonna have to just make it yourself.
It's not available for sale.
And in this case, this first bullet here
that you are making it for yourself,
so you have complete control
over what the end product looks like.
The third example is strategic partnerships,
and this is in between make or buy.
So, this creates hopefully
win-win partnerships among firms.
So these are best when this sort
of vertical, hierarchical arrangements are outside
of your core competency.
So it might be that, you know, again,
I don't wanna have to have a dairy farm for all my milk.
I don't wanna have to make my own laptop.
That's not what I do best,
but nobody makes it exactly how I like it.
So these sort of arm length suppliers
aren't willing to invest in the equipment
or share the information needed.
So in the case
of my blue barn singing to the cows milk,
unless I can buy a whole lot of it,
they're not gonna go to the bother
to make this really obscure milk
to suit just my needs.
And in the same way,
the laptop maker isn't gonna do it.
So I have to find someone who can do it sort of well enough,
or to guarantee enough business
in the long-term that it's worthwhile for them
to make the investment and to meet my needs.
So a good example of this
is a food hub.
So they act as a strategic partner
between farmers and buyers.
Especially for the buyer,
they want fresh local produce
and they don't wanna have to run a farm,
so they don't wanna make it.
But the kind of fresh local produce may not be available
from the broad-line mainstream distributor,
so they enter into a partnership with the food hub
that helps 'em in that sort of in between space.
And I'm gonna give another example too.
Hopefully these are marked by a fair sharing
of risk and reward,
and being a able to keep the differentiation
of the product moving forward.
So one of the things that food hubs do extremely well
is identifying which farm it comes from and saying,
you know, "This is from Suzanne's farm
and she is known for having the best kale."
"This kale is from her farm
and these are all the things that she does
to make her kale so amazing."
And it works like that.
So I'm gonna give you an example,
which I hope will help
to really highlight these three options
and when they are used
and when each one is the best,
depending on what the business wants and does.
So here's the example.
This is a show, I think my daughter liked it.
I haven't ever seen it.
Maybe you have, and I don't know
any of the decisions that he actually makes.
But, here's our application.
Suppose that you own a hamburger stand.
So you are known for having the juiciest,
best cooked, most delicious burgers in town.
So there are some inputs
that obviously you are going to buy.
So it wouldn't really make sense for you
to make your own napkins,
or to make your own plates.
On the other hand, it doesn't make sense for you
to hire someone to make
and sell the burgers 'cause that's what you do.
But let's look at buns.
So it's reasonable that most people
are going to want their burger on a bun.
So obviously if you run a hamburger stand,
you will need some buns.
Now, basically any bun will do,
as long as it's the right size and it's of good quality,
just an ordinary bun,
you're not looking for anything special,
then certainly you would buy it.
You would probably just work
with your distributor, look at a list of buns
that they have, there will be a lot of options I imagine.
They're all basically the same, but look 'em over,
find the one that works best for you.
It might be the lowest
priced one, but if you want an ordinary bun,
widely available, you're gonna buy it.
However, maybe you want a really special bun.
So, again, just sort of adding attributes on.
So if an ordinary bun won't do,
you need a special bun,
whole grain, gluten-free, organic,
hand mixed, grains grown on a small farm
by a female owned farmer who sings
while she harvests them, dot, dot, dot, dot, dot, dot,
lots and lots and lots of attributes.
First of all, that bun is probably not going to be available
from your broad-line mainstream distributor.
And the more kind of obscure attributes
that you add on and require,
the number of suppliers who are ready, willing, and able
to do that will get smaller and smaller.
And it may be that the bun that you want is so obscure,
nobody makes it, in which case,
you will have to make those buns yourself.
So you will have to bake them,
and be the one at the make end so you can control it,
because think about transaction costs.
Who makes it? Hmm, nobody.
How much does it cost?
Well, we know how much a mainstream bun costs,
but something so obscure,
there really isn't an established market,
so it's going to take a lot of time.
Like, what's a good price?
And then last, how do you know that it came from local farm
and that the farmer sings when she's harvesting
the grains and dot, dot, dot, dot?
So having really obscure,
specific specifications adds to the transaction costs.
And eventually, you may just need to do it yourself.
Now there may be a middle ground,
that the ordinary bun from the distributor doesn't work.
You really don't wanna have to set up a bakery
because what you do is burgers,
that's what you love, that's what you do best.
So you might form a partnership with a bakery,
find one that's willing to work with you.
You may have to invest,
you may have to put some skin in the game,
you may have to commit
to some sort of quantity or time, so it's worth their while.
If there's a specific kind of oven or a mixer,
you might have to buy that for them.
But you can form a partnership, such that they are willing
to bake it for you in exactly
or very close to the way that you want it,
but you don't have to do it yourself.
So hopefully, through that
example, that works.
When you think about to go back to supply chains
and how does it get to the customer, in a way,
B2C is you make marketing.
So if you're a farmer and you're going to a farmer's market,
that you're making all of the marketing.
You're showing up at that place,
you sell it, you take the money, you describe it,
you do the layout, you do the packaging,
you're making all of those marketing services.
If you are in a B2B model,
you are sort of buying the marketing.
So if you sell to a distributor,
they find the customers,
they figure out what the order is,
they distribute it, they bill, they collect money.
They do a lot of those marketing services,
and then they pay you for the product.
So in B2C, the marketing effort
goes all the way to the customer, you are making it.
And in B2B, basically the marketing ends
at the end of your loading dock, say.
And everything from then on,
you're buying the marketing services from the distributor.
So hopefully that makes sense.
The last topic of the day is how to address place
in a service-based business.
I'm imagining a lot of you will.
So one thing to think about is, will you have a storefront?
Will you have an actual place?
Or will it have a virtual place?
What attributes should it have?
And what are some of the trade offs that you will face?
So an obvious one is if you actually have a place,
that is a lot of an upfront cost,
you have to buy the building or pay rent.
Whereas if you have a virtual place,
then not, such as a website.
So if you have a car repair place,
like you will have to have a place there,
but others things not.
And as far as location goes,
so usually some place that has a lot of foot traffic
that will sort of naturally bring business in,
like Church Street, will have much higher rent
or higher cost than somewhere that's more out of the way.
And we'll talk about this more when we discuss it.
So we talked about the four P's,
but there's three additional P's in service.
First is people,
who interacts with the customers?
Who performs the tasks?
So if it's car repair, who makes the appointments?
Who actually fixes the cars?
There is process, so how do you do it?
How do you fix the car?
What is it about you that gives you an advantage?
You know, if you're a cleaning service,
if you're a dog walking service, what is it about,
well, what do you do great?
What's great about you?
What are the attributes about your process?
What is it? Are you fast, are you better?
Are you consistent? Are you convenient?
Hopefully you'll be good at all of those
and really great at, at least one.
Finally, in many cases, you have to look like a business,
that there's physical evidence.
So we'll talk about, what does a classroom look like?
I know that we're not actually in a classroom
for fall of 2020.
But what is it that you know
that you're in a classroom when you walk into it?
What does every hotel have?
What does every restaurant have?
And then finally, what's the physical evidence
for a virtual business?
What makes you know, like, yeah, this is a real thing,
this is not a scam?
So we can discuss that.
A few other things here
is that a service is fairly intangible.
That it cannot be held, seen, or touched.
That a car repair or dog walk is not a thing,
it's an activity.
It tends to be heterogenous,
that every car needs its own kind of repairs,
and every house needs its own kind of watching,
and maybe every dog needs its own kind of walk.
So it may not be exactly the same every time.
It cannot be consumed later.
It's not like I can call you
to walk my dog now,
and my dog will get a walk in three weeks.
And since the provider is the product,
and it's delivered and consumed at the same time,
it's inseparable and simultaneous.
So I'm gonna talk to you
in the next slide about what really,
the big take away point.
So there's two, first of all, you are the product,
that you have to establish trust
because the best kind of promotion is word of mouth.
The most credible thing is another customer saying,
"This business does it right, they treat me right."
And finally, customer retention is so important.
It's so much easier and more efficient
to keep an old one than to acquire a new one,
so treat them right.
And as you get to know them better,
you are better able to customize your service
to best meet one.
So if you're a dog walker and you know that there's certain
things that this dog loves, a certain kind of treat,
a certain scratch, a certain place they love to go,
or you know that they have special medical needs
and that their owner can come to rely on you,
that you're gonna make sure
you really take good care of that dog.
In that way, keeping customers and building trust with them
is the most important thing that you can do in a service.
I would like you to watch this,
and we're gonna talk about
where and how does this farmer,
what kind of marketing does he make and what does he buy?
And also, what is the most,
what does he prioritize and why?