Week 5 | Session 4: Channel Structures — Dual Channel Model

Course: Supply Chain Digitization — Module 2: Digital Business in SC

Session Agenda

How Platform Economy Disrupted Brick & Mortar — 4 Examples

Industry	Traditional B&M Model	Platform/Digital Disruptor	Nature of Disruption
Entertainment	Cinema theatre — viewer travels, watches in hall, buys food/beverages	OTT platforms (Netflix, Prime Video) — subscription or free, watch on any device	No physical space needed. Watch anytime, anywhere. Also disrupted cable TV. Content available globally.
Dining	Restaurant — customer visits, dines in, experiences ambience	Cloud kitchens + delivery apps — order from multiple cuisines, delivered to any location	No dine-in space needed. Multiple cuisine options on one platform. Delivery to home, office, or train.
Grocery / FMCG	Modern trade / kirana — customer visits store, picks items, pays at counter	App-based ordering + home delivery (D-Mart, Smart Bazaar, kirana delivery apps)	Grew massively during pandemic. Both modern trade and local kiranas adopted delivery. Pickup points added.
Education	Physical classroom — teacher present, real-time Q&A, in-person learning	EdTech platforms (NPTEL, Coursera, etc.) — online certifications, global faculty access	No geographic constraint. Learn from global faculty. Scalable to any number of students simultaneously.

Two Key Insights from These Examples

Real-time demand: Customers increasingly demand immediate, anytime, anywhere service delivery — enabled by handheld devices and digital penetration across income groups.
Multiple channels for same product: The same product/service can be sold through 2+ different channels simultaneously.
- Same movie: Theatre AND OTT
- Same food: Dine-in restaurant AND cloud kitchen delivery
- Same grocery: Visit store AND order on app
- Same course: Classroom AND NPTEL/online
With technological developments: business models get disrupted as well.
- Core business question: Which channel is better? Or should we use both?

Channel 1 — Online Direct: Manufacturer → Customer

Flow: Manufacturer produces → sells via online platform → delivers directly to customer’s location Popular with: Startups, D2C (Direct-to-Consumer) brands, manufacturers of standardised/easily described products

Benefits of Online Direct

Direct customer connection: Manufacturer engages directly — via chatbots, customer service, phone → understands customer needs, specs, preferences
Demand aggregation: Orders from many geographies pooled together → reduces variability → lowers warehousing and transportation cost per unit
Full margin capture: No retailer margin cut → manufacturer retains more of the selling price
Unlimited geographic reach: Any customer with internet + delivery address can be served — no physical store needed
Customer data: Manufacturer captures purchase history, browsing data, feedback → enables better product and demand planning

Challenges of Online Direct

No physical product experience: Customer cannot touch, try, or inspect before buying → harder to convert, especially for apparel, furniture, footwear. (Example: Buying a 300ml shampoo bottle — difficult to judge size, texture, freshness without seeing it)
Higher advertising cost: Must convince customers digitally without the help of in-person sales pitch → stronger digital marketing investment needed
Delivery delays: Customer may be far from manufacturer → long lead times. To cut delays, need faster/expensive transport modes (e.g. air + bike delivery vs. rail + tempo)
Higher warehousing cost: No intermediate buffer stock → manufacturer must hold large inventory to serve all demand → high holding cost
Last mile complexity: Individual deliveries to dispersed customers → high cost per delivery, especially in metro cities with congestion

Channel 2 — B&M Retail: Manufacturer → Retailer → Customer

Flow: Manufacturer produces → sends stock to retailer → customer visits retailer → purchases in person Assumption here: No intermediate warehousing shown (simplified) — product goes direct from manufacturer to retailer

Benefits of B&M Retail

Physical product experience: Customer sees, touches, tries → highest confidence at point of purchase → lower returns
Lower selling effort: Retailer salesperson converts in person → higher conversion rate than online → less advertising needed per sale
Immediate product access: Customer can take the product home same day — no delivery wait
Cross-selling: Retailer can upsell or cross-sell at the point of interaction → higher basket size
Retailer holds stock: Acts as buffer inventory close to customer → manufacturer doesn’t need to hold as much finished goods

Challenges of B&M Retail

Retailer investment: Space + layout + staff + billing + parking → high fixed cost → retailer marks up price (up to MRP) to recover margins
Retailer loyalty risk: Retailer may promote competitor brands if margins are better → manufacturer loses control over customer acquisition
Geographic limitation: Each store serves a limited catchment area → covering more geographies = more stores = more investment
Customer effort: Travel, parking, queuing — especially painful in congested metro cities → drives customers away from purchasing
Scaling cost: Each new store = full incremental fixed + variable cost. No economies of scale like a digital platform.

Channel 1 vs. Channel 2 — Side-by-Side Comparison

Dimension	Channel 1: Online Direct (Manufacturer → Customer)	Channel 2: B&M Retail (Manufacturer → Retailer → Customer)
Customer journey	Customer stays at home → orders online → product delivered	Customer travels to retailer → views product → purchases → takes home or gets delivered
Product experience	No physical experience before purchase → relies on images, reviews, specs	Full physical experience — touch, try, see in person → informed purchase
Customer convenience	Very high — no travel, 24/7 ordering, delivered to door	Lower — travel effort + time + queuing required
Purchase speed	Fast ordering but delivery lead time (1–5 days typically)	Can take product immediately upon purchase if in stock
Demand aggregation	Manufacturer can aggregate demand across geographies → reduce variability → lower costs	Each retailer serves local demand only → less aggregation benefit
Manufacturer reach	Direct customer relationship → captures feedback, behaviour data	Retailer is intermediary → manufacturer less connected to end customer
Advertising / selling effort	Higher — must convince customer to buy without physical experience. Needs strong digital marketing.	Lower conversion effort — retailer salesperson converts in-person. Cross-sell possible.
Transportation cost	High — individual deliveries to each customer location. Expediting costs if fast delivery required.	Bulk delivery to retailer → lower per-unit transport cost to point of retail
Warehousing	Manufacturer holds more inventory (no intermediate buffer) → higher warehousing cost	Retailer holds stock close to customer → manufacturer can produce in batches
Retailer margin / MRP conflict	No retailer involved → manufacturer captures full margin	Retailer marks up price (up to MRP). May shift loyalty to competing brands for better margin.
Geographic reach	Unlimited — reach any customer with an internet connection and delivery network	Limited by number and location of retail stores → scaling requires investment

Dual Channel — Definition & Structure

Definition: A distribution strategy where the manufacturer simultaneously uses BOTH a direct online channel AND a B&M retail channel to reach the same customer base
Structure:
- Channel 1 (Online): Manufacturer → Customer (direct, with home delivery)
- Channel 2 (B&M): Manufacturer → Retailer → Customer (in-store purchase)
Customer choice: Can purchase online (convenience) OR visit retailer (experience) — manufacturer offers both
Manufacturer’s role: Must actively manage both channels and ensure they complement rather than conflict with each other

Dual Channel — Strategy Elements

Strategy Element	What It Means	Why It Matters
Demand allocation	Decide what proportion of demand goes through online vs. retail channel	Prevents one channel from cannibalising the other. Maximises combined reach.
Product mix mapping	Assign different products or SKUs to different channels based on fit	Some products suit online (standard, easily described). Others need B&M (fitted, tactile, high-value).
Channel spillover	If one channel underperforms, redirect demand to the other	Provides resilience. E.g. if delivery delays spike, push customers to collect from retail store.
Contracts with intermediaries	Set terms with retailers so they don’t undercut online channel or abandon manufacturer’s products	Prevents retailer from promoting competitor brands. Maintains channel balance.

Why Channel Conflict Happens

Price conflict: If manufacturer sells online at a lower price than MRP → retailer loses customers → retailer unhappy → may drop manufacturer’s brand
Brand conflict: Retailer stocks competing brands alongside the manufacturer’s product → customer might switch
Volume conflict: If online channel grows fast, retailer sees lower footfall → retailer threatens to reduce shelf space for that brand
Fix via contracts: Price floors | Exclusive online SKUs | Channel-specific products | Revenue sharing with retailers for online-attributed sales

Which Products Suit Which Channel?

Online channel suits: Standard, easily described products | Repeat purchases (customer already knows the product) | Low-touch items (books, electronics accessories, FMCG staples)
B&M channel suits: High-touch products needing trial (apparel, shoes, furniture, eyewear) | High-value items where customer wants inspection | Products requiring expert advice
Dual channel ideal for: Products with a mixed customer base — some prefer convenience (online), some prefer experience (B&M) | Same product, different purchase occasions
- Example: Apparel — new customer visits store to try; repeat customer reorders same size online

Demand Aggregation — A Key Online Advantage Worth Noting

In online direct channel: Manufacturer receives orders from many geographically dispersed customers
Benefit: Demand variability from individual markets partially cancels out at the aggregate level (statistical pooling) → manufacturer can produce and stock more efficiently
B&M limitation: Each retailer serves only their local area → variability is high at each individual retail point → harder to balance stock
Dual channel advantage: Online orders provide the aggregation benefit; retail store captures last-mile in high-footfall areas where delivery cost would be high

What Comes Next — Multi-Channel & Omni-Channel

Dual channel: 2 channels — online direct + B&M. Managed somewhat independently.
Multi-channel: Several channels (online, B&M, catalogue, phone orders etc.) — each channel still largely separate
Omni-channel: All channels fully integrated — seamless customer experience across online and offline. Customer switches channels mid-journey without friction.
Connection to platform economy: Platforms are the enabler of omni-channel — they aggregate all channels, sellers, and customer interactions on one interface

Session Summary

B&M disruption: Platform economy disrupted entertainment, dining, grocery, and education → same product now sold via 2+ channels
Two insights: (1) Customers demand real-time service. (2) Same product can be sold through multiple channels simultaneously.
Online direct benefits: Direct customer link | Demand aggregation | Full margin | Unlimited reach
Online direct challenges: No physical experience | High advertising + delivery + warehousing cost
B&M benefits: Physical experience | Immediate availability | Lower conversion effort | Buffer stock
B&M challenges: Retailer investment | Margin markup | Retailer loyalty risk | Geographic limit | High scaling cost
Dual channel: Combine both channels → capture benefits of each. Manage via demand allocation, product mix mapping, spillover, and contracts.
Channel conflict risk: Price and volume competition between online and B&M channels → resolve via contracts and pricing strategy
Next: Multi-channel and Omni-channel + real-world examples in platform economy context