1 00:00:02,070 --> 00:00:05,190 [Instructor] Hi there, welcome to the video lecture 2 00:00:05,190 --> 00:00:08,070 on the third P 3 00:00:08,070 --> 00:00:11,703 of the four P marketing mix, which is place. 4 00:00:15,720 --> 00:00:20,340 So in this section, first of all, we're gonna talk about 5 00:00:20,340 --> 00:00:22,980 channels and chains and basically, 6 00:00:22,980 --> 00:00:27,980 how do your goods get to the consumer? 7 00:00:28,140 --> 00:00:31,350 Do you use direct markets or do you use indirect? 8 00:00:31,350 --> 00:00:36,087 And it's much like we already talked about, B2B, B2C. 9 00:00:37,260 --> 00:00:41,700 Next we'll think about, where do you buy inputs? 10 00:00:41,700 --> 00:00:45,180 All businesses, organization buy 11 00:00:45,180 --> 00:00:48,450 or at least need certain inputs. 12 00:00:48,450 --> 00:00:53,413 And we'll talk about the drivers between the decision of, 13 00:00:54,570 --> 00:00:56,430 do you make it yourself, 14 00:00:56,430 --> 00:00:59,730 or do you buy it from somebody else? 15 00:00:59,730 --> 00:01:02,850 And then finally, because I'm imagining 16 00:01:02,850 --> 00:01:06,870 that a lot of you have service-based businesses, 17 00:01:06,870 --> 00:01:11,643 we will talk about place in that context. 18 00:01:15,180 --> 00:01:18,120 So the first thing that we're gonna talk about 19 00:01:18,120 --> 00:01:22,890 is how your good or service gets to the customer. 20 00:01:22,890 --> 00:01:26,520 So we're gonna be thinking about market channels, 21 00:01:26,520 --> 00:01:30,660 which is the organizations and individuals 22 00:01:30,660 --> 00:01:35,660 that get your product or service to customers. 23 00:01:35,910 --> 00:01:38,460 You can think about it as the pipeline, 24 00:01:38,460 --> 00:01:41,343 how does it get there from your door to their door? 25 00:01:44,940 --> 00:01:49,290 There are two main types, direct and indirect. 26 00:01:49,290 --> 00:01:53,970 And these, we've already touched a bit on the B2B, 27 00:01:53,970 --> 00:01:55,710 business to business, and B2C, 28 00:01:55,710 --> 00:01:58,980 business to consumer models. 29 00:01:58,980 --> 00:02:01,260 And basically, these are much the same. 30 00:02:01,260 --> 00:02:04,260 So direct, you're selling right to the consumer. 31 00:02:04,260 --> 00:02:07,260 Whereas indirect, you are selling to, 32 00:02:07,260 --> 00:02:10,833 or at least working with other businesses. 33 00:02:14,100 --> 00:02:15,810 The first one that we're gonna think about 34 00:02:15,810 --> 00:02:20,490 is direct markets, which is where you sell 35 00:02:20,490 --> 00:02:25,490 your product or service directly to the end customer. 36 00:02:25,890 --> 00:02:29,190 And in food, you're probably familiar with this, 37 00:02:29,190 --> 00:02:33,810 something like a farmer's market or farm stand 38 00:02:33,810 --> 00:02:36,060 where you're buying it right from the farmer. 39 00:02:37,950 --> 00:02:42,210 And in many cases, you may wish to start with this. 40 00:02:42,210 --> 00:02:46,380 And the reasons being that 41 00:02:46,380 --> 00:02:48,390 you have a lot of control. 42 00:02:48,390 --> 00:02:51,090 So you have complete control 43 00:02:51,090 --> 00:02:55,020 in what is said about your product, 44 00:02:55,020 --> 00:02:57,960 how it's presented, how it's packaged, 45 00:02:57,960 --> 00:03:00,210 where it goes on the shelf. 46 00:03:00,210 --> 00:03:03,900 All those things you have complete control over. 47 00:03:03,900 --> 00:03:08,900 Next, it gives you contact with your customers. 48 00:03:09,060 --> 00:03:11,430 So you can talk to them and hear from them, 49 00:03:11,430 --> 00:03:12,263 what do you like? 50 00:03:12,263 --> 00:03:15,090 What do you not like? What's working, what's not? 51 00:03:15,090 --> 00:03:19,080 Which allows you to improve 52 00:03:19,080 --> 00:03:21,843 both the product and its delivery. 53 00:03:23,070 --> 00:03:27,420 And again, it can be a learning experience. 54 00:03:27,420 --> 00:03:29,910 So actually being there, 55 00:03:29,910 --> 00:03:34,290 interacting with the the customers, 56 00:03:34,290 --> 00:03:37,530 lets you learn about your product 57 00:03:37,530 --> 00:03:40,923 and what consumers like and don't like about it. 58 00:03:45,960 --> 00:03:48,870 The features of direct markets 59 00:03:48,870 --> 00:03:53,460 is that you retain ownership all the way through. 60 00:03:53,460 --> 00:03:57,480 So until it gets into the hands, you own it. 61 00:03:57,480 --> 00:03:59,820 It's up to you to collect payment. 62 00:03:59,820 --> 00:04:03,480 It's up to you to provide any customer service, 63 00:04:03,480 --> 00:04:07,500 explain how it works, do any refunds, 64 00:04:07,500 --> 00:04:10,140 anything like that, that is all on you. 65 00:04:10,140 --> 00:04:12,840 So in a way, that may be a downside. 66 00:04:12,840 --> 00:04:16,530 That even though you have control, 67 00:04:16,530 --> 00:04:18,810 you also have all the responsibility 68 00:04:18,810 --> 00:04:22,080 and all the tasks of marketing fall on you, 69 00:04:22,080 --> 00:04:24,240 that you have to do it yourself. 70 00:04:24,240 --> 00:04:28,203 Your business has to do all of these tasks. 71 00:04:33,180 --> 00:04:35,880 So again, here are lots of examples. 72 00:04:35,880 --> 00:04:37,833 Being a food and ag guy, 73 00:04:39,120 --> 00:04:42,570 these are the ones that most readily come to mind. 74 00:04:42,570 --> 00:04:47,570 So farmer's market, CSA shares, farm stands, U-pick. 75 00:04:48,240 --> 00:04:53,240 So all these are ways in which farmers sell food 76 00:04:53,610 --> 00:04:58,203 directly to consumers, and don't use any intermediary. 77 00:05:02,430 --> 00:05:07,430 In contrast, indirect markets do use intermediaries. 78 00:05:07,680 --> 00:05:11,340 So here are a whole bunch of examples. 79 00:05:11,340 --> 00:05:15,210 So the first two, agents and brokers, 80 00:05:15,210 --> 00:05:18,990 don't actually take possession of the good. 81 00:05:18,990 --> 00:05:23,990 They just make a deal, and it's up to you to deliver it. 82 00:05:24,120 --> 00:05:26,610 But then folks like dealers to distributors, 83 00:05:26,610 --> 00:05:30,690 wholesalers and retailers, they do actually take 84 00:05:30,690 --> 00:05:34,080 physical custody of the good. 85 00:05:34,080 --> 00:05:38,260 And they eventually 86 00:05:41,265 --> 00:05:44,340 either sell it to or sell it to somebody else 87 00:05:44,340 --> 00:05:48,510 who then sells to the end consumer. 88 00:05:48,510 --> 00:05:50,430 So in every case here, 89 00:05:50,430 --> 00:05:53,910 there's an intermediary that is playing some role 90 00:05:53,910 --> 00:05:58,563 to help the good get to the final customer. 91 00:06:02,370 --> 00:06:05,940 So we're gonna talk about this in the discussion. 92 00:06:05,940 --> 00:06:09,720 So there's sort of, again, for farm produce, 93 00:06:09,720 --> 00:06:13,620 there is a continuum here 94 00:06:13,620 --> 00:06:16,530 for first in direct markets 95 00:06:16,530 --> 00:06:21,450 where the consumer buys straight from you. 96 00:06:21,450 --> 00:06:26,450 There's direct to accounts where you take it right to, 97 00:06:26,550 --> 00:06:29,880 usually, some sort of food service operation, 98 00:06:29,880 --> 00:06:32,160 like a restaurant or a hospital 99 00:06:32,160 --> 00:06:35,403 or a school or maybe directly to a retailer. 100 00:06:36,600 --> 00:06:41,130 There are food hubs, which are specialty 101 00:06:41,130 --> 00:06:46,130 local food distributors that have a specific mission 102 00:06:46,830 --> 00:06:49,170 of supporting local farms 103 00:06:49,170 --> 00:06:52,560 and making local food more accessible. 104 00:06:52,560 --> 00:06:56,850 So in many cases, so they'll buy from many 105 00:06:56,850 --> 00:07:01,850 different farmers and then sell to many different buyers. 106 00:07:04,050 --> 00:07:08,760 And then there is a distributor who buys and sells, 107 00:07:08,760 --> 00:07:13,050 again, from many farms, but really don't have 108 00:07:13,050 --> 00:07:17,310 a specific mission about local food and local farms. 109 00:07:17,310 --> 00:07:21,270 And they basically sell it almost anywhere, 110 00:07:21,270 --> 00:07:25,470 so it might end up in the region or out of the region. 111 00:07:25,470 --> 00:07:30,360 And we're gonna explore this in our discussion about 112 00:07:30,360 --> 00:07:34,830 sort of the pros and cons and volumes and prices, 113 00:07:34,830 --> 00:07:39,360 and all kinds of, the features that each of these 114 00:07:39,360 --> 00:07:44,360 marketing channels provide. 115 00:07:48,750 --> 00:07:51,720 Now I'm going to talk about, 116 00:07:51,720 --> 00:07:55,320 what are the drivers which determine 117 00:07:55,320 --> 00:07:59,580 what is the right marketing channel for you? 118 00:07:59,580 --> 00:08:03,300 And you'll see that they have to do with these four things, 119 00:08:03,300 --> 00:08:07,560 customers, product, the environment in which they operate, 120 00:08:07,560 --> 00:08:09,123 and the nature of the business. 121 00:08:12,000 --> 00:08:13,350 So thinking back a few weeks 122 00:08:13,350 --> 00:08:17,610 when we thought about customers, and we wanna think about, 123 00:08:17,610 --> 00:08:20,940 where and when do they want to buy? 124 00:08:20,940 --> 00:08:24,540 So how much is convenience, 125 00:08:24,540 --> 00:08:27,930 and being able to buy it at the place 126 00:08:27,930 --> 00:08:29,877 where they want important? 127 00:08:34,290 --> 00:08:36,420 So if they want to be able 128 00:08:36,420 --> 00:08:41,420 to access it right nearby, 24/7, 129 00:08:42,570 --> 00:08:47,010 it may be that you wanna sell it through a store 130 00:08:47,010 --> 00:08:50,193 that is open at that time so they could just get it. 131 00:08:52,140 --> 00:08:55,140 Whereas if it's something 132 00:08:55,140 --> 00:08:59,010 that they're willing to wait for, 133 00:08:59,010 --> 00:09:01,140 to meet you when you're open, 134 00:09:01,140 --> 00:09:04,170 or when your farmer's market stand is open, 135 00:09:04,170 --> 00:09:07,980 or if they can order it online 136 00:09:07,980 --> 00:09:10,020 and have you deliver it, 137 00:09:10,020 --> 00:09:12,993 then the direct market might work better. 138 00:09:13,980 --> 00:09:18,930 In the same way, and I want you to think about this. 139 00:09:18,930 --> 00:09:23,250 usually if you have a relatively fewer 140 00:09:23,250 --> 00:09:28,250 number of customers, direct might work. 141 00:09:28,860 --> 00:09:31,980 But if you have many, many, many of them, 142 00:09:31,980 --> 00:09:35,490 you may need to change to indirect markets 143 00:09:35,490 --> 00:09:37,590 and use an intermediary. 144 00:09:37,590 --> 00:09:41,550 And I'll let you think about why that is so, 145 00:09:41,550 --> 00:09:45,903 and we'll discuss it in our class discussion. 146 00:09:49,380 --> 00:09:53,680 The nature of the product also determines 147 00:09:54,630 --> 00:09:58,110 what kind of market that you will use. 148 00:09:58,110 --> 00:10:00,810 So this is a general rule of thumb, 149 00:10:00,810 --> 00:10:03,090 it doesn't always apply, 150 00:10:03,090 --> 00:10:08,090 but if you have a highly differentiated product, 151 00:10:09,660 --> 00:10:14,100 odds are you're more likely to use a direct market. 152 00:10:14,100 --> 00:10:19,100 So if it is like highly nuanced, sophisticated, high value, 153 00:10:19,110 --> 00:10:24,110 sort of very unusual alternative, craft, artisanal, 154 00:10:26,460 --> 00:10:30,600 at least direct markets may be an option. 155 00:10:30,600 --> 00:10:33,210 Whereas if you have 156 00:10:33,210 --> 00:10:36,990 a very commoditized item, 157 00:10:36,990 --> 00:10:40,740 like corn, you know, number two corn, 158 00:10:40,740 --> 00:10:45,120 or milk in a gallon plastic jug 159 00:10:45,120 --> 00:10:46,653 with a red lid, 160 00:10:47,940 --> 00:10:51,930 usually you will sell those indirectly. 161 00:10:51,930 --> 00:10:55,413 And again, we'll think about why that is. 162 00:11:00,780 --> 00:11:04,200 A few weeks ago, we talked about the external environment 163 00:11:04,200 --> 00:11:09,200 and that is also a driver for what kind of market channel 164 00:11:09,570 --> 00:11:11,820 you will use, what place. 165 00:11:11,820 --> 00:11:16,710 So certainly, that we have seen 166 00:11:16,710 --> 00:11:19,080 with the advent of technology 167 00:11:19,080 --> 00:11:24,080 and the internet, that direct ordering and, 168 00:11:24,690 --> 00:11:29,690 you know, both buying from the manufacturer, 169 00:11:30,870 --> 00:11:35,640 maybe things like Etsy, where you're buying a craft 170 00:11:35,640 --> 00:11:40,440 or buying, you know, some sort of commodity, 171 00:11:40,440 --> 00:11:42,933 like through Amazon, say, 172 00:11:44,735 --> 00:11:47,010 certainly has an impact. 173 00:11:47,010 --> 00:11:49,860 What are you able to do? 174 00:11:49,860 --> 00:11:51,510 And if you are doing, 175 00:11:51,510 --> 00:11:54,810 and do you have the right infrastructure? 176 00:11:54,810 --> 00:11:58,230 So you can think about, what do you need to have in place 177 00:11:58,230 --> 00:12:00,330 if you are selling direct? 178 00:12:00,330 --> 00:12:02,220 And what do you need to have in place 179 00:12:02,220 --> 00:12:04,263 if you are selling indirect? 180 00:12:05,340 --> 00:12:10,340 So few examples, if you're selling direct, 181 00:12:12,959 --> 00:12:14,220 you know, a farmer's market, 182 00:12:14,220 --> 00:12:19,220 you're gonna need tables and boxes and signs and shelter 183 00:12:19,860 --> 00:12:21,120 and things like that. 184 00:12:21,120 --> 00:12:23,920 If you sell indirect, you're gonna need 185 00:12:26,160 --> 00:12:30,870 pallets, and, you know, large boxes, 186 00:12:30,870 --> 00:12:34,443 large case size boxes to put things on, 187 00:12:37,650 --> 00:12:39,043 et cetera. 188 00:12:39,043 --> 00:12:42,873 If you sell like a craft, 189 00:12:43,800 --> 00:12:47,160 if you sell it direct, 190 00:12:47,160 --> 00:12:49,950 then you need to be able to, you know, have a website, 191 00:12:49,950 --> 00:12:52,980 have someone that can do all that work. 192 00:12:52,980 --> 00:12:56,070 If you sell it indirect, again, 193 00:12:56,070 --> 00:12:59,910 through somebody like Etsy, 194 00:12:59,910 --> 00:13:02,190 they can do the brokering. 195 00:13:02,190 --> 00:13:07,190 So think about, do you have the infrastructure 196 00:13:07,290 --> 00:13:10,050 and the equipment that you need? 197 00:13:10,050 --> 00:13:12,453 Which is a better fit for you? 198 00:13:15,000 --> 00:13:18,330 And speaking of what's a better fit for you, 199 00:13:18,330 --> 00:13:20,610 what resources do you have? 200 00:13:20,610 --> 00:13:23,430 What are the human, the technological, 201 00:13:23,430 --> 00:13:25,680 the equipment and infrastructure, 202 00:13:25,680 --> 00:13:30,060 as well as the entrepreneur's time? 203 00:13:30,060 --> 00:13:34,180 Because pretty much throughout 204 00:13:35,670 --> 00:13:38,040 the life cycle of any business, 205 00:13:38,040 --> 00:13:42,840 the entrepreneur's time is the scarcest resources. 206 00:13:42,840 --> 00:13:47,840 So to what extent does it make sense for you to, 207 00:13:47,940 --> 00:13:51,750 you know, in the beginning you may sell direct 208 00:13:51,750 --> 00:13:53,913 for all those reasons I said, 209 00:13:55,470 --> 00:14:00,470 but it may be that eventually that your time is better spent 210 00:14:01,530 --> 00:14:03,960 working through a distributor. 211 00:14:03,960 --> 00:14:08,130 Where instead of sort of waiting on the orders 212 00:14:08,130 --> 00:14:10,050 or waiting at the farmer's market, 213 00:14:10,050 --> 00:14:15,028 where you can just make one call, sell a whole load 214 00:14:15,028 --> 00:14:19,830 to a distributor and save 215 00:14:19,830 --> 00:14:20,970 a lot of time. 216 00:14:20,970 --> 00:14:23,280 So where is your time best spent? 217 00:14:23,280 --> 00:14:25,140 What use of your time 218 00:14:25,140 --> 00:14:29,550 brings the greatest return to your business? 219 00:14:29,550 --> 00:14:34,550 That's a decision and a question 220 00:14:34,710 --> 00:14:38,013 that you should be asking yourself all throughout. 221 00:14:46,200 --> 00:14:48,840 So you wanna think about, 222 00:14:48,840 --> 00:14:52,860 as you're choosing a strategy, what is effective? 223 00:14:52,860 --> 00:14:55,620 What will meet the customer's needs? 224 00:14:55,620 --> 00:14:57,540 Where do they wanna buy, and why? 225 00:14:57,540 --> 00:14:59,610 And how long will they wait? 226 00:14:59,610 --> 00:15:02,793 How hands on do you wanna be? 227 00:15:03,810 --> 00:15:06,300 Can the customer find you? 228 00:15:06,300 --> 00:15:08,910 What's the most efficient way? 229 00:15:08,910 --> 00:15:11,130 And so you really wanna think about, 230 00:15:11,130 --> 00:15:13,320 do I wanna do this all by myself? 231 00:15:13,320 --> 00:15:16,743 Or, do I wanna work with some kind of a partner? 232 00:15:20,610 --> 00:15:24,360 And note that there are a lot of costs here. 233 00:15:24,360 --> 00:15:27,960 There are many tasks, distribution, 234 00:15:27,960 --> 00:15:32,220 advertising, the actual sales, customer service, 235 00:15:32,220 --> 00:15:33,240 who should do this? 236 00:15:33,240 --> 00:15:36,210 Who will pay? Who do you wanna pay? 237 00:15:36,210 --> 00:15:38,850 Do you wanna pay yourself or, 238 00:15:38,850 --> 00:15:42,450 you know, not pay anybody else, but spend the time? 239 00:15:42,450 --> 00:15:45,480 Or do you want to save the time 240 00:15:45,480 --> 00:15:49,680 and pay somebody else to do this? 241 00:15:49,680 --> 00:15:53,400 So think about, who can provide these services 242 00:15:53,400 --> 00:15:58,400 at the greatest value, at the most efficient cost to you? 243 00:15:59,070 --> 00:16:03,990 And what use of your time brings the greatest return 244 00:16:03,990 --> 00:16:08,193 to your business or organization? 245 00:16:12,900 --> 00:16:17,900 So we'll talk in class about, when is it time to change? 246 00:16:18,030 --> 00:16:22,170 Many businesses, again, start direct 247 00:16:22,170 --> 00:16:25,080 for all the reasons I said, 248 00:16:25,080 --> 00:16:28,780 but then just find that the volume of business 249 00:16:30,150 --> 00:16:33,480 and just the use 250 00:16:33,480 --> 00:16:36,150 of the entrepreneur's time 251 00:16:36,150 --> 00:16:39,990 sometimes calls for changing and beginning 252 00:16:39,990 --> 00:16:42,333 to work through an intermediary. 253 00:16:46,170 --> 00:16:48,000 One thing I hear a lot 254 00:16:48,000 --> 00:16:52,290 in my research with food businesses 255 00:16:52,290 --> 00:16:56,130 is that they self-deliver, 256 00:16:56,130 --> 00:16:59,130 self-distribute at first. 257 00:16:59,130 --> 00:17:01,740 So, you know, you begin 258 00:17:01,740 --> 00:17:05,163 sort of selling to individual stores, 259 00:17:06,009 --> 00:17:09,167 or maybe if you're a craft brewer, 260 00:17:12,210 --> 00:17:15,150 selling kegs or cans 261 00:17:15,150 --> 00:17:19,200 to local stores, local bars. 262 00:17:19,200 --> 00:17:22,890 But then eventually, you know, again, you have enough volume 263 00:17:22,890 --> 00:17:27,210 that you're ready to not do all that work you yourself 264 00:17:27,210 --> 00:17:32,100 and work with somebody who does that very well, 265 00:17:32,100 --> 00:17:34,920 who already has relationships 266 00:17:34,920 --> 00:17:39,843 to lots of other restaurants, bars, or stores. 267 00:17:40,680 --> 00:17:45,680 And there's that point where you change from, 268 00:17:45,840 --> 00:17:48,037 they're sort of doing you a favor, 269 00:17:48,037 --> 00:17:51,960 "Please carry my product," 270 00:17:51,960 --> 00:17:55,717 to "I'm bringing you business." 271 00:17:55,717 --> 00:17:59,880 "There's lots of, lots of stores or bars or restaurants 272 00:17:59,880 --> 00:18:03,483 that you already work with who want my product." 273 00:18:04,957 --> 00:18:09,240 "I already have a customer base, 274 00:18:09,240 --> 00:18:12,570 they want to buy it, you already sell to 'em, 275 00:18:12,570 --> 00:18:15,720 it makes sense for you to start 276 00:18:15,720 --> 00:18:20,720 to carry my product." 277 00:18:21,000 --> 00:18:23,820 And in that way, you're bringing 278 00:18:23,820 --> 00:18:28,820 some leverage to the relationship. 279 00:18:29,190 --> 00:18:30,990 Going from, "Do me a favor," 280 00:18:30,990 --> 00:18:33,900 sort of groveling, "Please sell my thing," 281 00:18:33,900 --> 00:18:36,937 to "This works for you too." 282 00:18:36,937 --> 00:18:41,160 "This is a clear benefit, I can do it myself, 283 00:18:41,160 --> 00:18:45,897 but it's much more efficient if we work together." 284 00:18:51,900 --> 00:18:54,510 So now we're going to talk about, 285 00:18:54,510 --> 00:18:57,540 how do you get the inputs that you need? 286 00:18:57,540 --> 00:19:00,750 How do you get the materials 287 00:19:00,750 --> 00:19:05,133 and the services that your business needs? 288 00:19:06,060 --> 00:19:11,060 So all businesses, I would say, need inputs of some kind. 289 00:19:12,600 --> 00:19:16,890 They buy things from somewhere or, in some cases, 290 00:19:16,890 --> 00:19:20,490 they make it themselves and they do some sort 291 00:19:20,490 --> 00:19:25,177 of transformation of it, and then they sell 292 00:19:26,280 --> 00:19:31,280 this transformed product. 293 00:19:31,830 --> 00:19:36,750 So this photo that you see here 294 00:19:36,750 --> 00:19:40,200 is a man named Ronald Coase 295 00:19:40,200 --> 00:19:45,150 who was a Nobel Prize winning economist, 296 00:19:45,150 --> 00:19:48,600 and one of his landmark work 297 00:19:48,600 --> 00:19:51,930 is on transaction costs. 298 00:19:51,930 --> 00:19:54,430 And we'll talk a little bit about 299 00:19:57,150 --> 00:20:01,110 transaction costs and, specifically, 300 00:20:01,110 --> 00:20:06,097 he applied it to what he called the theory of the firm 301 00:20:07,440 --> 00:20:11,370 and the make or buy decision. 302 00:20:11,370 --> 00:20:15,840 So a firm needs some kind of input. 303 00:20:15,840 --> 00:20:20,490 So I am a professor, say, 304 00:20:20,490 --> 00:20:24,123 there are certain inputs that I need. 305 00:20:25,020 --> 00:20:29,220 Do I make them myself or do I buy them? 306 00:20:29,220 --> 00:20:32,460 So an example is a laptop. 307 00:20:32,460 --> 00:20:37,460 Right now I am talking to a laptop, it is recording. 308 00:20:37,860 --> 00:20:41,250 It really doesn't make sense for me 309 00:20:41,250 --> 00:20:45,990 to make my own laptop. 310 00:20:45,990 --> 00:20:49,380 I don't really how to do it, 311 00:20:49,380 --> 00:20:51,240 there's a lot of 'em available, 312 00:20:51,240 --> 00:20:53,733 I can just buy it and use it. 313 00:20:54,570 --> 00:20:57,540 On the other hand, it doesn't make sense for me 314 00:20:57,540 --> 00:21:01,533 to pay someone to teach the class for me. 315 00:21:02,850 --> 00:21:07,470 I feel like I do that well, it's something I enjoy. 316 00:21:07,470 --> 00:21:10,680 I don't wanna have to pay somebody to do it. 317 00:21:10,680 --> 00:21:15,680 I wanna keep my whole paycheck for myself, 318 00:21:16,560 --> 00:21:20,043 so the instruction part I make. 319 00:21:21,300 --> 00:21:26,250 And Coase argued that this 320 00:21:26,250 --> 00:21:30,180 is determined by transaction costs. 321 00:21:30,180 --> 00:21:35,180 And he talked about how this helps to determine 322 00:21:35,880 --> 00:21:39,150 that the make or buy decision 323 00:21:39,150 --> 00:21:43,558 is determined by transaction costs, 324 00:21:43,558 --> 00:21:45,900 and that the make or buy decision 325 00:21:45,900 --> 00:21:49,230 helps to outline the boundary of the firm. 326 00:21:49,230 --> 00:21:51,930 What do I do? What do I not do? 327 00:21:51,930 --> 00:21:56,190 So for me, the boundary of my firm is, 328 00:21:56,190 --> 00:22:00,930 I deliver the material, 329 00:22:00,930 --> 00:22:04,620 I develop it and deliver it myself, 330 00:22:04,620 --> 00:22:07,320 but I don't make computers. 331 00:22:07,320 --> 00:22:11,103 And hopefully, this will make more sense as we move forward. 332 00:22:12,120 --> 00:22:15,360 So anyway, Coase talks about 333 00:22:15,360 --> 00:22:19,920 that there are three kinds of transaction costs. 334 00:22:19,920 --> 00:22:24,920 Transaction cost is the cost of doing business, 335 00:22:25,979 --> 00:22:28,803 the cost of sellers and buyers 336 00:22:31,230 --> 00:22:34,980 finding each other and reaching 337 00:22:34,980 --> 00:22:37,770 an agreement that works for both. 338 00:22:37,770 --> 00:22:41,490 So from the buyer's standpoint, I have three types. 339 00:22:41,490 --> 00:22:45,720 First is search, so who has this thing? 340 00:22:45,720 --> 00:22:47,130 Who has it for sale? 341 00:22:47,130 --> 00:22:51,660 Who's out there that has the thing that I want? 342 00:22:51,660 --> 00:22:55,020 So in the case of a laptop, 343 00:22:55,020 --> 00:22:58,710 there's Apple, there's Dell, there's lots of 'em out there. 344 00:22:58,710 --> 00:23:01,413 Next is, how much do I pay? 345 00:23:05,070 --> 00:23:08,083 You know, there's a clear market 346 00:23:08,083 --> 00:23:10,307 for laptops, I can go online, 347 00:23:13,770 --> 00:23:18,453 I can go to a store, it has a fairly well-established price. 348 00:23:19,350 --> 00:23:22,440 And finally, how do I ensure 349 00:23:22,440 --> 00:23:25,830 that what I want is what I am getting? 350 00:23:25,830 --> 00:23:30,830 So in this case, you know, again, 351 00:23:30,990 --> 00:23:35,070 a laptop has fairly clear specifications 352 00:23:35,070 --> 00:23:40,070 and it should perform in ways that I hope it does. 353 00:23:42,210 --> 00:23:46,530 So in the case of me finding someone 354 00:23:46,530 --> 00:23:51,060 to deliver it, this is a much more unusual thing. 355 00:23:51,060 --> 00:23:54,840 So first, I would have to find somebody 356 00:23:54,840 --> 00:23:59,490 who has enough expertise. 357 00:23:59,490 --> 00:24:02,080 I would have to figure out 358 00:24:03,480 --> 00:24:06,360 how much I would have to pay this person. 359 00:24:06,360 --> 00:24:10,710 And last, I would have to monitor him and make sure 360 00:24:10,710 --> 00:24:15,710 that he is delivering the material 361 00:24:15,720 --> 00:24:18,300 in a way that works 362 00:24:18,300 --> 00:24:21,333 and is effective and that, you know, 363 00:24:22,530 --> 00:24:27,530 gives students the value that they deserve. 364 00:24:29,040 --> 00:24:33,600 So what I'm arguing here and what Coase argued 365 00:24:33,600 --> 00:24:38,043 is the more differentiated a product is, 366 00:24:39,270 --> 00:24:42,000 the higher the transaction costs, 367 00:24:42,000 --> 00:24:45,360 and the more common it is, the lower. 368 00:24:45,360 --> 00:24:48,720 So let's think about a true commodity, 369 00:24:48,720 --> 00:24:52,770 such as that gallon of white milk 370 00:24:52,770 --> 00:24:56,460 with the red cap in the plastic jug. 371 00:24:56,460 --> 00:24:58,290 So search, who has it? 372 00:24:58,290 --> 00:25:01,170 Lots of stores have it, grocery stores have it, 373 00:25:01,170 --> 00:25:02,580 gas stations have it, 374 00:25:02,580 --> 00:25:05,703 convenience stores has it, broadly available. 375 00:25:06,600 --> 00:25:09,330 What do I pay? 376 00:25:09,330 --> 00:25:12,930 Well, there's a very well-established price. 377 00:25:12,930 --> 00:25:14,700 Going from store to store, 378 00:25:14,700 --> 00:25:18,360 the price for that gallon of milk is probably 379 00:25:18,360 --> 00:25:20,640 gonna be pretty close. 380 00:25:20,640 --> 00:25:24,570 And how do I know I'm getting it? 381 00:25:24,570 --> 00:25:28,080 Well, because it's so homogeneous, 382 00:25:28,080 --> 00:25:30,420 it's a one-size-fits-all, 383 00:25:30,420 --> 00:25:34,860 basically every one is the same. 384 00:25:34,860 --> 00:25:37,800 There's not a lot of information there. 385 00:25:37,800 --> 00:25:42,800 And if I want this gallon 386 00:25:42,990 --> 00:25:46,710 of white milk, really they're all the same, 387 00:25:46,710 --> 00:25:51,330 and I really don't have to go to a lot of bother 388 00:25:51,330 --> 00:25:56,223 to make sure that it's exactly what I want. 389 00:25:57,180 --> 00:25:59,640 And the last point on this slide 390 00:25:59,640 --> 00:26:03,180 is that there are three options, spot markets, 391 00:26:03,180 --> 00:26:06,810 vertical integration, and strategic partnerships. 392 00:26:06,810 --> 00:26:08,793 And I am going to talk about each one. 393 00:26:12,600 --> 00:26:17,010 The first kind of market, 394 00:26:17,010 --> 00:26:20,910 or the first option, is spot markets. 395 00:26:20,910 --> 00:26:23,400 Spot markets are all the way 396 00:26:23,400 --> 00:26:28,020 at the buy and of the continuum. 397 00:26:28,020 --> 00:26:31,950 So this is best for inputs 398 00:26:31,950 --> 00:26:35,520 that are sort of at the commodity end, 399 00:26:35,520 --> 00:26:37,890 that are broadly available. 400 00:26:37,890 --> 00:26:40,380 They're routinely bought and sold, 401 00:26:40,380 --> 00:26:45,380 they tend to be very homogeneous and routine in quality. 402 00:26:45,510 --> 00:26:49,410 There are many vendors, there are many options. 403 00:26:49,410 --> 00:26:54,000 And in many cases, the buyer should just 404 00:26:54,000 --> 00:26:56,430 select one that works for them, 405 00:26:56,430 --> 00:26:59,170 in many case, the lowest 406 00:27:01,290 --> 00:27:05,343 priced one or maybe the most convenient one. 407 00:27:06,180 --> 00:27:09,803 So again, if you are buying 408 00:27:11,520 --> 00:27:15,630 a gallon of milk, it doesn't make sense for you 409 00:27:15,630 --> 00:27:19,260 to make the milk yourself, to have a dairy farm, 410 00:27:19,260 --> 00:27:22,380 and to do all that work yourself, 411 00:27:22,380 --> 00:27:25,170 it makes much more sense to buy it. 412 00:27:25,170 --> 00:27:30,170 As a professor, it makes more sense for me to buy a laptop. 413 00:27:30,570 --> 00:27:32,940 I don't know how to make them, 414 00:27:32,940 --> 00:27:35,100 there are many of 'em available. 415 00:27:35,100 --> 00:27:39,003 I can go online, I could go to a store, 416 00:27:39,840 --> 00:27:43,323 and I just go and pick the one that's best for me. 417 00:27:44,340 --> 00:27:48,420 So inputs that are broadly available, 418 00:27:48,420 --> 00:27:51,360 that are routinely bought and sold, 419 00:27:51,360 --> 00:27:54,210 those are the ones that you would use 420 00:27:54,210 --> 00:27:56,643 a spot market and buy them. 421 00:27:57,633 --> 00:27:58,500 And these tend to be fairly 422 00:27:58,500 --> 00:28:02,793 arms length and anonymous relationships. 423 00:28:05,463 --> 00:28:08,070 I might go buy the milk, 424 00:28:08,070 --> 00:28:12,810 the gallon of milk, from Hannafords one day 425 00:28:12,810 --> 00:28:15,840 because I'm doing some grocery shopping, 426 00:28:15,840 --> 00:28:18,420 but it might be that I just need to, 427 00:28:18,420 --> 00:28:22,110 I'm already at the drugstore 428 00:28:22,110 --> 00:28:24,720 to pick up a prescription 429 00:28:24,720 --> 00:28:29,220 and I remember that I need milk too. 430 00:28:29,220 --> 00:28:33,060 So I really don't, you know, 431 00:28:33,060 --> 00:28:38,060 I don't work with the same person all the time. 432 00:28:38,760 --> 00:28:42,060 I don't tell them how to make that milk, 433 00:28:42,060 --> 00:28:45,570 I don't know what farm that it comes from. 434 00:28:45,570 --> 00:28:47,760 There's just like lots of it available, 435 00:28:47,760 --> 00:28:51,603 I just go and pick the one that works best for me. 436 00:28:52,950 --> 00:28:55,920 And I'm gonna say a bit more, 437 00:28:55,920 --> 00:29:00,090 I'm gonna give you a more concrete example 438 00:29:00,090 --> 00:29:03,753 for a specific business for each of these. 439 00:29:07,410 --> 00:29:11,370 At the other end is the make. 440 00:29:11,370 --> 00:29:16,020 So this is when something is highly specialized, 441 00:29:16,020 --> 00:29:17,550 it's one of a kind. 442 00:29:17,550 --> 00:29:22,350 I'm really fussy about what it has to look like, 443 00:29:22,350 --> 00:29:25,770 that it really has to be suited 444 00:29:25,770 --> 00:29:29,043 to my particular circumstances. 445 00:29:30,090 --> 00:29:33,933 And so since it is highly specialized, 446 00:29:35,703 --> 00:29:40,470 there's not going to be a whole lot of suppliers. 447 00:29:40,470 --> 00:29:45,470 So it might be that I only want milk 448 00:29:46,470 --> 00:29:51,180 that is organic, free range cows 449 00:29:51,180 --> 00:29:55,833 fed a really special kind of hay. 450 00:29:56,820 --> 00:30:01,820 Whoever milks that the cows has to sing to the cows, 451 00:30:02,010 --> 00:30:05,610 it must be in a blue barn, dot, dot, dot, dot, dot, 452 00:30:05,610 --> 00:30:09,870 lots and lots and lots of attributes, lots of information, 453 00:30:09,870 --> 00:30:14,580 really highly differentiated. 454 00:30:14,580 --> 00:30:17,520 And it might be, at an extreme end, 455 00:30:17,520 --> 00:30:21,490 that this thing that I want is so obscure 456 00:30:22,710 --> 00:30:26,010 that I have to make it myself. 457 00:30:26,010 --> 00:30:31,010 So it might be that if I needed a laptop 458 00:30:31,800 --> 00:30:34,470 that was incredibly, you know, 459 00:30:34,470 --> 00:30:37,053 that is completely unique. 460 00:30:38,153 --> 00:30:40,920 It has this bundle of attributes done in this way, 461 00:30:40,920 --> 00:30:44,370 made in this way, that nobody makes it. 462 00:30:44,370 --> 00:30:47,280 There's not a single firm on earth 463 00:30:47,280 --> 00:30:51,690 that makes the specific kind of laptop that I need, 464 00:30:51,690 --> 00:30:55,083 it might be that I just have to make it myself. 465 00:30:57,030 --> 00:30:58,930 In the same way 466 00:30:59,854 --> 00:31:03,270 that if you want to build 467 00:31:03,270 --> 00:31:07,710 a loft bed for your apartment or your dorm room, 468 00:31:07,710 --> 00:31:10,590 it might be that there's a bunch of 'em available 469 00:31:10,590 --> 00:31:14,220 and you can just go buy one, sort of buy a kit. 470 00:31:14,220 --> 00:31:17,370 But it might be that you want it to be really special, 471 00:31:17,370 --> 00:31:19,050 that there's something about it, 472 00:31:19,050 --> 00:31:22,320 that it's just not commonly available. 473 00:31:22,320 --> 00:31:27,320 A specific kind of wood, a specific size, a specific design, 474 00:31:27,600 --> 00:31:29,643 something that it does, 475 00:31:30,600 --> 00:31:34,770 it has a coffee maker 476 00:31:34,770 --> 00:31:38,790 attached onto it, something obscure like that. 477 00:31:38,790 --> 00:31:42,690 That it may be that it's so obscure, 478 00:31:42,690 --> 00:31:45,603 so unique, nobody makes this, 479 00:31:47,787 --> 00:31:50,160 and you're gonna have to just make it yourself. 480 00:31:50,160 --> 00:31:52,800 It's not available for sale. 481 00:31:52,800 --> 00:31:56,910 And in this case, this first bullet here 482 00:31:56,910 --> 00:31:59,670 that you are making it for yourself, 483 00:31:59,670 --> 00:32:02,580 so you have complete control 484 00:32:02,580 --> 00:32:05,343 over what the end product looks like. 485 00:32:12,809 --> 00:32:16,210 The third example is strategic partnerships, 486 00:32:17,520 --> 00:32:22,320 and this is in between make or buy. 487 00:32:22,320 --> 00:32:27,150 So, this creates hopefully 488 00:32:27,150 --> 00:32:30,810 win-win partnerships among firms. 489 00:32:30,810 --> 00:32:34,650 So these are best when this sort 490 00:32:34,650 --> 00:32:39,480 of vertical, hierarchical arrangements are outside 491 00:32:39,480 --> 00:32:43,890 of your core competency. 492 00:32:43,890 --> 00:32:47,130 So it might be that, you know, again, 493 00:32:47,130 --> 00:32:50,640 I don't wanna have to have a dairy farm for all my milk. 494 00:32:50,640 --> 00:32:53,223 I don't wanna have to make my own laptop. 495 00:32:54,240 --> 00:32:56,730 That's not what I do best, 496 00:32:56,730 --> 00:33:00,780 but nobody makes it exactly how I like it. 497 00:33:00,780 --> 00:33:03,990 So these sort of arm length suppliers 498 00:33:03,990 --> 00:33:08,400 aren't willing to invest in the equipment 499 00:33:08,400 --> 00:33:11,130 or share the information needed. 500 00:33:11,130 --> 00:33:14,610 So in the case 501 00:33:14,610 --> 00:33:18,663 of my blue barn singing to the cows milk, 502 00:33:19,620 --> 00:33:22,680 unless I can buy a whole lot of it, 503 00:33:22,680 --> 00:33:25,440 they're not gonna go to the bother 504 00:33:25,440 --> 00:33:28,650 to make this really obscure milk 505 00:33:28,650 --> 00:33:30,543 to suit just my needs. 506 00:33:31,710 --> 00:33:34,290 And in the same way, 507 00:33:34,290 --> 00:33:38,460 the laptop maker isn't gonna do it. 508 00:33:38,460 --> 00:33:43,460 So I have to find someone who can do it sort of well enough, 509 00:33:44,730 --> 00:33:49,730 or to guarantee enough business 510 00:33:50,580 --> 00:33:54,990 in the long-term that it's worthwhile for them 511 00:33:54,990 --> 00:33:59,553 to make the investment and to meet my needs. 512 00:34:00,690 --> 00:34:03,760 So a good example of this 513 00:34:05,940 --> 00:34:07,440 is a food hub. 514 00:34:07,440 --> 00:34:11,370 So they act as a strategic partner 515 00:34:11,370 --> 00:34:14,643 between farmers and buyers. 516 00:34:18,420 --> 00:34:21,360 Especially for the buyer, 517 00:34:21,360 --> 00:34:24,780 they want fresh local produce 518 00:34:24,780 --> 00:34:28,950 and they don't wanna have to run a farm, 519 00:34:28,950 --> 00:34:31,140 so they don't wanna make it. 520 00:34:31,140 --> 00:34:36,140 But the kind of fresh local produce may not be available 521 00:34:36,330 --> 00:34:40,380 from the broad-line mainstream distributor, 522 00:34:40,380 --> 00:34:44,820 so they enter into a partnership with the food hub 523 00:34:44,820 --> 00:34:47,970 that helps 'em in that sort of in between space. 524 00:34:47,970 --> 00:34:50,430 And I'm gonna give another example too. 525 00:34:50,430 --> 00:34:54,030 Hopefully these are marked by a fair sharing 526 00:34:54,030 --> 00:34:55,920 of risk and reward, 527 00:34:55,920 --> 00:35:00,810 and being a able to keep the differentiation 528 00:35:00,810 --> 00:35:03,150 of the product moving forward. 529 00:35:03,150 --> 00:35:06,960 So one of the things that food hubs do extremely well 530 00:35:06,960 --> 00:35:11,370 is identifying which farm it comes from and saying, 531 00:35:11,370 --> 00:35:15,870 you know, "This is from Suzanne's farm 532 00:35:15,870 --> 00:35:19,237 and she is known for having the best kale." 533 00:35:19,237 --> 00:35:21,510 "This kale is from her farm 534 00:35:21,510 --> 00:35:23,670 and these are all the things that she does 535 00:35:23,670 --> 00:35:25,797 to make her kale so amazing." 536 00:35:26,970 --> 00:35:28,740 And it works like that. 537 00:35:28,740 --> 00:35:32,940 So I'm gonna give you an example, 538 00:35:32,940 --> 00:35:35,310 which I hope will help 539 00:35:35,310 --> 00:35:40,310 to really highlight these three options 540 00:35:41,070 --> 00:35:42,960 and when they are used 541 00:35:42,960 --> 00:35:47,940 and when each one is the best, 542 00:35:47,940 --> 00:35:51,633 depending on what the business wants and does. 543 00:35:54,540 --> 00:35:55,773 So here's the example. 544 00:35:57,060 --> 00:35:59,310 This is a show, I think my daughter liked it. 545 00:35:59,310 --> 00:36:00,450 I haven't ever seen it. 546 00:36:00,450 --> 00:36:04,110 Maybe you have, and I don't know 547 00:36:04,110 --> 00:36:06,480 any of the decisions that he actually makes. 548 00:36:06,480 --> 00:36:11,190 But, here's our application. 549 00:36:11,190 --> 00:36:14,643 Suppose that you own a hamburger stand. 550 00:36:15,690 --> 00:36:19,410 So you are known for having the juiciest, 551 00:36:19,410 --> 00:36:23,643 best cooked, most delicious burgers in town. 552 00:36:24,690 --> 00:36:27,840 So there are some inputs 553 00:36:27,840 --> 00:36:31,590 that obviously you are going to buy. 554 00:36:31,590 --> 00:36:34,710 So it wouldn't really make sense for you 555 00:36:34,710 --> 00:36:37,350 to make your own napkins, 556 00:36:37,350 --> 00:36:41,193 or to make your own plates. 557 00:36:43,200 --> 00:36:46,320 On the other hand, it doesn't make sense for you 558 00:36:46,320 --> 00:36:50,250 to hire someone to make 559 00:36:50,250 --> 00:36:52,863 and sell the burgers 'cause that's what you do. 560 00:36:53,820 --> 00:36:57,090 But let's look at buns. 561 00:36:57,090 --> 00:37:01,860 So it's reasonable that most people 562 00:37:01,860 --> 00:37:04,620 are going to want their burger on a bun. 563 00:37:04,620 --> 00:37:07,170 So obviously if you run a hamburger stand, 564 00:37:07,170 --> 00:37:08,493 you will need some buns. 565 00:37:09,690 --> 00:37:14,343 Now, basically any bun will do, 566 00:37:15,360 --> 00:37:19,770 as long as it's the right size and it's of good quality, 567 00:37:19,770 --> 00:37:21,690 just an ordinary bun, 568 00:37:21,690 --> 00:37:24,510 you're not looking for anything special, 569 00:37:24,510 --> 00:37:27,210 then certainly you would buy it. 570 00:37:27,210 --> 00:37:31,350 You would probably just work 571 00:37:31,350 --> 00:37:35,190 with your distributor, look at a list of buns 572 00:37:35,190 --> 00:37:39,870 that they have, there will be a lot of options I imagine. 573 00:37:39,870 --> 00:37:44,220 They're all basically the same, but look 'em over, 574 00:37:44,220 --> 00:37:46,710 find the one that works best for you. 575 00:37:46,710 --> 00:37:49,330 It might be the lowest 576 00:37:51,900 --> 00:37:55,380 priced one, but if you want an ordinary bun, 577 00:37:55,380 --> 00:37:58,560 widely available, you're gonna buy it. 578 00:37:58,560 --> 00:38:03,560 However, maybe you want a really special bun. 579 00:38:04,380 --> 00:38:07,320 So, again, just sort of adding attributes on. 580 00:38:07,320 --> 00:38:10,383 So if an ordinary bun won't do, 581 00:38:11,250 --> 00:38:13,173 you need a special bun, 582 00:38:14,190 --> 00:38:18,480 whole grain, gluten-free, organic, 583 00:38:18,480 --> 00:38:23,480 hand mixed, grains grown on a small farm 584 00:38:24,840 --> 00:38:28,500 by a female owned farmer who sings 585 00:38:28,500 --> 00:38:31,710 while she harvests them, dot, dot, dot, dot, dot, dot, 586 00:38:31,710 --> 00:38:33,843 lots and lots and lots of attributes. 587 00:38:34,770 --> 00:38:39,150 First of all, that bun is probably not going to be available 588 00:38:39,150 --> 00:38:43,950 from your broad-line mainstream distributor. 589 00:38:43,950 --> 00:38:48,660 And the more kind of obscure attributes 590 00:38:48,660 --> 00:38:52,740 that you add on and require, 591 00:38:52,740 --> 00:38:56,550 the number of suppliers who are ready, willing, and able 592 00:38:56,550 --> 00:38:59,370 to do that will get smaller and smaller. 593 00:38:59,370 --> 00:39:04,370 And it may be that the bun that you want is so obscure, 594 00:39:04,650 --> 00:39:06,930 nobody makes it, in which case, 595 00:39:06,930 --> 00:39:09,570 you will have to make those buns yourself. 596 00:39:09,570 --> 00:39:11,920 So you will have to bake them, 597 00:39:11,920 --> 00:39:15,660 and be the one at the make end so you can control it, 598 00:39:15,660 --> 00:39:19,500 because think about transaction costs. 599 00:39:19,500 --> 00:39:22,113 Who makes it? Hmm, nobody. 600 00:39:23,040 --> 00:39:24,690 How much does it cost? 601 00:39:24,690 --> 00:39:27,390 Well, we know how much a mainstream bun costs, 602 00:39:27,390 --> 00:39:29,430 but something so obscure, 603 00:39:29,430 --> 00:39:31,560 there really isn't an established market, 604 00:39:31,560 --> 00:39:33,330 so it's going to take a lot of time. 605 00:39:33,330 --> 00:39:35,940 Like, what's a good price? 606 00:39:35,940 --> 00:39:40,940 And then last, how do you know that it came from local farm 607 00:39:41,700 --> 00:39:45,300 and that the farmer sings when she's harvesting 608 00:39:45,300 --> 00:39:48,780 the grains and dot, dot, dot, dot? 609 00:39:48,780 --> 00:39:53,280 So having really obscure, 610 00:39:53,280 --> 00:39:58,280 specific specifications adds to the transaction costs. 611 00:39:58,770 --> 00:40:02,193 And eventually, you may just need to do it yourself. 612 00:40:03,390 --> 00:40:06,930 Now there may be a middle ground, 613 00:40:06,930 --> 00:40:11,930 that the ordinary bun from the distributor doesn't work. 614 00:40:12,030 --> 00:40:15,270 You really don't wanna have to set up a bakery 615 00:40:15,270 --> 00:40:17,280 because what you do is burgers, 616 00:40:17,280 --> 00:40:19,740 that's what you love, that's what you do best. 617 00:40:19,740 --> 00:40:23,880 So you might form a partnership with a bakery, 618 00:40:23,880 --> 00:40:27,810 find one that's willing to work with you. 619 00:40:27,810 --> 00:40:29,640 You may have to invest, 620 00:40:29,640 --> 00:40:33,510 you may have to put some skin in the game, 621 00:40:33,510 --> 00:40:35,430 you may have to commit 622 00:40:35,430 --> 00:40:40,430 to some sort of quantity or time, so it's worth their while. 623 00:40:41,820 --> 00:40:46,410 If there's a specific kind of oven or a mixer, 624 00:40:46,410 --> 00:40:49,590 you might have to buy that for them. 625 00:40:49,590 --> 00:40:54,590 But you can form a partnership, such that they are willing 626 00:40:55,380 --> 00:40:59,070 to bake it for you in exactly 627 00:40:59,070 --> 00:41:01,680 or very close to the way that you want it, 628 00:41:01,680 --> 00:41:04,323 but you don't have to do it yourself. 629 00:41:05,610 --> 00:41:07,920 So hopefully, through that 630 00:41:07,920 --> 00:41:11,703 example, that works. 631 00:41:17,820 --> 00:41:22,260 When you think about to go back to supply chains 632 00:41:22,260 --> 00:41:27,260 and how does it get to the customer, in a way, 633 00:41:27,810 --> 00:41:32,810 B2C is you make marketing. 634 00:41:32,910 --> 00:41:37,440 So if you're a farmer and you're going to a farmer's market, 635 00:41:37,440 --> 00:41:40,110 that you're making all of the marketing. 636 00:41:40,110 --> 00:41:43,200 You're showing up at that place, 637 00:41:43,200 --> 00:41:46,560 you sell it, you take the money, you describe it, 638 00:41:46,560 --> 00:41:49,500 you do the layout, you do the packaging, 639 00:41:49,500 --> 00:41:54,500 you're making all of those marketing services. 640 00:41:55,530 --> 00:41:58,290 If you are in a B2B model, 641 00:41:58,290 --> 00:42:01,680 you are sort of buying the marketing. 642 00:42:01,680 --> 00:42:04,203 So if you sell to a distributor, 643 00:42:05,070 --> 00:42:07,890 they find the customers, 644 00:42:07,890 --> 00:42:10,500 they figure out what the order is, 645 00:42:10,500 --> 00:42:15,500 they distribute it, they bill, they collect money. 646 00:42:15,930 --> 00:42:18,900 They do a lot of those marketing services, 647 00:42:18,900 --> 00:42:22,390 and then they pay you for the product. 648 00:42:25,110 --> 00:42:30,110 So in B2C, the marketing effort 649 00:42:30,240 --> 00:42:34,470 goes all the way to the customer, you are making it. 650 00:42:34,470 --> 00:42:38,730 And in B2B, basically the marketing ends 651 00:42:38,730 --> 00:42:42,720 at the end of your loading dock, say. 652 00:42:42,720 --> 00:42:45,780 And everything from then on, 653 00:42:45,780 --> 00:42:50,550 you're buying the marketing services from the distributor. 654 00:42:50,550 --> 00:42:52,623 So hopefully that makes sense. 655 00:42:57,960 --> 00:43:02,250 The last topic of the day is how to address place 656 00:43:02,250 --> 00:43:05,070 in a service-based business. 657 00:43:05,070 --> 00:43:07,143 I'm imagining a lot of you will. 658 00:43:08,250 --> 00:43:12,453 So one thing to think about is, will you have a storefront? 659 00:43:12,453 --> 00:43:13,800 Will you have an actual place? 660 00:43:13,800 --> 00:43:16,650 Or will it have a virtual place? 661 00:43:16,650 --> 00:43:19,770 What attributes should it have? 662 00:43:19,770 --> 00:43:23,490 And what are some of the trade offs that you will face? 663 00:43:23,490 --> 00:43:28,490 So an obvious one is if you actually have a place, 664 00:43:28,710 --> 00:43:31,290 that is a lot of an upfront cost, 665 00:43:31,290 --> 00:43:34,083 you have to buy the building or pay rent. 666 00:43:35,160 --> 00:43:39,120 Whereas if you have a virtual place, 667 00:43:39,120 --> 00:43:41,883 then not, such as a website. 668 00:43:42,900 --> 00:43:46,470 So if you have a car repair place, 669 00:43:46,470 --> 00:43:48,693 like you will have to have a place there, 670 00:43:49,710 --> 00:43:50,760 but others things not. 671 00:43:50,760 --> 00:43:53,850 And as far as location goes, 672 00:43:53,850 --> 00:43:58,850 so usually some place that has a lot of foot traffic 673 00:43:58,950 --> 00:44:01,860 that will sort of naturally bring business in, 674 00:44:01,860 --> 00:44:05,940 like Church Street, will have much higher rent 675 00:44:05,940 --> 00:44:10,593 or higher cost than somewhere that's more out of the way. 676 00:44:11,940 --> 00:44:14,883 And we'll talk about this more when we discuss it. 677 00:44:18,030 --> 00:44:20,280 So we talked about the four P's, 678 00:44:20,280 --> 00:44:23,850 but there's three additional P's in service. 679 00:44:23,850 --> 00:44:26,250 First is people, 680 00:44:26,250 --> 00:44:31,200 who interacts with the customers? 681 00:44:31,200 --> 00:44:34,320 Who performs the tasks? 682 00:44:34,320 --> 00:44:39,320 So if it's car repair, who makes the appointments? 683 00:44:39,330 --> 00:44:41,970 Who actually fixes the cars? 684 00:44:41,970 --> 00:44:46,110 There is process, so how do you do it? 685 00:44:46,110 --> 00:44:47,040 How do you fix the car? 686 00:44:47,040 --> 00:44:51,120 What is it about you that gives you an advantage? 687 00:44:51,120 --> 00:44:53,700 You know, if you're a cleaning service, 688 00:44:53,700 --> 00:44:58,380 if you're a dog walking service, what is it about, 689 00:44:58,380 --> 00:45:00,000 well, what do you do great? 690 00:45:00,000 --> 00:45:01,290 What's great about you? 691 00:45:01,290 --> 00:45:05,520 What are the attributes about your process? 692 00:45:05,520 --> 00:45:09,360 What is it? Are you fast, are you better? 693 00:45:09,360 --> 00:45:12,720 Are you consistent? Are you convenient? 694 00:45:12,720 --> 00:45:16,290 Hopefully you'll be good at all of those 695 00:45:16,290 --> 00:45:19,443 and really great at, at least one. 696 00:45:21,240 --> 00:45:25,320 Finally, in many cases, you have to look like a business, 697 00:45:25,320 --> 00:45:30,320 that there's physical evidence. 698 00:45:30,450 --> 00:45:34,890 So we'll talk about, what does a classroom look like? 699 00:45:34,890 --> 00:45:37,620 I know that we're not actually in a classroom 700 00:45:37,620 --> 00:45:42,620 for fall of 2020. 701 00:45:42,630 --> 00:45:45,540 But what is it that you know 702 00:45:45,540 --> 00:45:49,173 that you're in a classroom when you walk into it? 703 00:45:53,290 --> 00:45:54,210 What does every hotel have? 704 00:45:54,210 --> 00:45:56,460 What does every restaurant have? 705 00:45:56,460 --> 00:46:00,480 And then finally, what's the physical evidence 706 00:46:00,480 --> 00:46:02,070 for a virtual business? 707 00:46:02,070 --> 00:46:06,270 What makes you know, like, yeah, this is a real thing, 708 00:46:06,270 --> 00:46:07,830 this is not a scam? 709 00:46:07,830 --> 00:46:09,423 So we can discuss that. 710 00:46:14,130 --> 00:46:15,660 A few other things here 711 00:46:15,660 --> 00:46:19,710 is that a service is fairly intangible. 712 00:46:19,710 --> 00:46:22,860 That it cannot be held, seen, or touched. 713 00:46:22,860 --> 00:46:26,943 That a car repair or dog walk is not a thing, 714 00:46:28,020 --> 00:46:29,283 it's an activity. 715 00:46:30,510 --> 00:46:34,170 It tends to be heterogenous, 716 00:46:34,170 --> 00:46:37,500 that every car needs its own kind of repairs, 717 00:46:37,500 --> 00:46:40,290 and every house needs its own kind of watching, 718 00:46:40,290 --> 00:46:43,230 and maybe every dog needs its own kind of walk. 719 00:46:43,230 --> 00:46:46,800 So it may not be exactly the same every time. 720 00:46:46,800 --> 00:46:49,890 It cannot be consumed later. 721 00:46:49,890 --> 00:46:53,460 It's not like I can call you 722 00:46:53,460 --> 00:46:55,800 to walk my dog now, 723 00:46:55,800 --> 00:47:00,210 and my dog will get a walk in three weeks. 724 00:47:00,210 --> 00:47:04,320 And since the provider is the product, 725 00:47:04,320 --> 00:47:07,800 and it's delivered and consumed at the same time, 726 00:47:07,800 --> 00:47:10,500 it's inseparable and simultaneous. 727 00:47:10,500 --> 00:47:12,304 So I'm gonna talk to you 728 00:47:12,304 --> 00:47:14,460 in the next slide about what really, 729 00:47:14,460 --> 00:47:17,613 the big take away point. 730 00:47:19,350 --> 00:47:23,490 So there's two, first of all, you are the product, 731 00:47:23,490 --> 00:47:26,730 that you have to establish trust 732 00:47:26,730 --> 00:47:31,440 because the best kind of promotion is word of mouth. 733 00:47:31,440 --> 00:47:35,467 The most credible thing is another customer saying, 734 00:47:35,467 --> 00:47:39,120 "This business does it right, they treat me right." 735 00:47:39,120 --> 00:47:43,530 And finally, customer retention is so important. 736 00:47:43,530 --> 00:47:46,590 It's so much easier and more efficient 737 00:47:46,590 --> 00:47:49,920 to keep an old one than to acquire a new one, 738 00:47:49,920 --> 00:47:51,900 so treat them right. 739 00:47:51,900 --> 00:47:55,290 And as you get to know them better, 740 00:47:55,290 --> 00:47:59,610 you are better able to customize your service 741 00:47:59,610 --> 00:48:00,780 to best meet one. 742 00:48:00,780 --> 00:48:05,160 So if you're a dog walker and you know that there's certain 743 00:48:05,160 --> 00:48:07,770 things that this dog loves, a certain kind of treat, 744 00:48:07,770 --> 00:48:10,833 a certain scratch, a certain place they love to go, 745 00:48:11,850 --> 00:48:16,020 or you know that they have special medical needs 746 00:48:16,020 --> 00:48:19,290 and that their owner can come to rely on you, 747 00:48:19,290 --> 00:48:20,400 that you're gonna make sure 748 00:48:20,400 --> 00:48:24,213 you really take good care of that dog. 749 00:48:27,136 --> 00:48:32,070 In that way, keeping customers and building trust with them 750 00:48:32,070 --> 00:48:36,363 is the most important thing that you can do in a service. 751 00:48:39,780 --> 00:48:42,870 I would like you to watch this, 752 00:48:42,870 --> 00:48:45,750 and we're gonna talk about 753 00:48:45,750 --> 00:48:49,233 where and how does this farmer, 754 00:48:50,140 --> 00:48:53,700 what kind of marketing does he make and what does he buy? 755 00:48:53,700 --> 00:48:55,683 And also, what is the most, 756 00:48:56,790 --> 00:49:00,813 what does he prioritize and why?