“Question of the day #VI”
A value chain model does not show the real dynamics and tensions in the chain! The trick is to contemplate about the value chain from the functions and roles that are to be taken care off.
Last week I was asked by a friend working for a kiosk solutions provider to help him find a sensible payments solution for a web based kiosk. The kiosk – annex web shop with a product catalog and supporting fulfillment – is to be placed on premise of retailers by a wholesaler. The wholesaler sees a potential of 100 kiosks with its retailers.
The idea is to have two separate channels working side by side: the kiosk is considered a separate product flow and therefore a payments facility has to be in place for the kiosk.
Hence the question:
“We are looking for a practical and economical solution for payments for for a shop-in-the-shop web based kiosk”
As so often (9 out often 10?) the initial question or project assignments I get from my clients in my advisory practice – or in this case a befriended business consultant – is not at all the key question to be answered.
Caveat: in this case it has nothing to do with payment solutions at all.
Background of the case
Interestingly the two channels (retail vs web) will have to be operational for the same end user clients of the retailer in the same physical spot, at the same time, while charging the clients differently for products bought over the two channels.
The complexity with the combination of the two sales channels is that the customers of the retailer can either (1) buy the product to take home or get it delivered via the kiosk (i.e. “take away”) or (2) to consume the product on the spot (i.e. “consume”). (NB I consider this commercial approach as a precondition set by the wholesaler and want to solve the puzzle following this approach.)
For “take away” the retailer can use its own stock, for reasons of customer convenience larger containments or for products only available via the kiosk the fulfillment is provided by the wholesaler. The customer interacts with the kiosk / wholesaler directly – or is assisted by the retailer.
Consequently arrangements have to be made between retailer and wholesaler as to how to deal with registering what channel is used for specific sales, money flows, shared stock, commissions etc..
Understanding the value chain(s) at hand
The value chain we have at hand here is the most simplistic one I have encountered in my entire working career. We can recognize the following parties: suppliers, wholesaler, retailer and consumers.
Let us now plot the two distribution channels (web and retail) into the value chain and suddenly the intrinsic conflict of the two channels is becoming clear: both wholesaler and retailer are potentially delivering the same end users. (NB One channel can be considered B2B the other B2C from the perspective of the wholesaler. I have a natural reluctance to use these topologies see here )
Until the kiosk shop-in-the-shop initiative was considered the two channels were nicely divided: the end user was either at the retailers outlet and is historically used to buy the products to use directly or the end user was at home and would buy for home use. The two channels are nicely separated by location, channel characteristics and accepted pricing practices as they have been coexisting for decades on end and do not interfere at all. And even if by a statistical accident a particular customer would buy via both channels he would not be aware that the same product is delivered via the same wholesaler.
Now the wholesaler is going to complicate matters by removing the natural divide between the two channels and having the end user able to buy for “take away” at the same physical spot were he normally directly uses the very same product.
If the retailer charges its customer “on premiss” prices he will hardly ever sell for take away / home delivery. If he charges the end customer “take away” prices for direct use he will never be able to recoup his cost for facilitating the product to be used on premiss. To complicate matters the margins involved and the incremental cost for the retailer – as far as this type of cost allocation is understood in the first place by the retailer – are not the same either.
How are you going to manage a situation where you compete directly with your retailer on his own shop floor?Are you going to compete with the retailer, your current customer, in his own house? How can you make this a balanced (self correcting) proposition?
“How can we design a commercial strategy (i.e. business model) to combine the web shop with the brick and mortar environment of the retailer?”
A simple value chain cannot solve the challenge in front of us, that’s obvious.
A value chain is about functions and roles and who performs them
From a business economics perspective an economic value chain is traditionally seen as a simple line of subsequent type of parties parties – to create a certain product or service.
A value chain model – like the above – is almost always seen in isolation and discards all the other value chains the parties are also part of – and often interfere with – the value chain(s) considered. It does not show the real dynamics and tensions in the chain!
The trick is to contemplate about the value chain from the functions and roles that are to be taken care off. In a next step you have to consider how these functions are grouped over the parties (potentially) in play.
Understanding the interaction and the distribution of these functions over the parties is key to understanding what is crucial to maintain the present dynamic balance in the value chain and the tensions between the parties in executing the primary functions. It also creates a basis to understand how the changes foreseen will create a new balance (or even a disruption) in the value chain. By playing with the various functions and roles over the parties a business strategy can be designed.
In the simple case at hand we can distinguish a flotilla of functions which are all to be considered in conjunction (a short list based on above description) :
- Customer interaction
- Payment collection
- Debtor (credit) risk
- End user Pricing (in this case Different pricing is core to the success of the formula)
- Transfer pricing between Wholesaler and Retailer
- Stock (financing and risks)
- Stock (warehousing, order picking, distribution, etc.)
- Kiosk operations
- Distribution and fulfillment
- Financial and administrative flows
- Risk distribution
- Administration and accountability
- Assortment composition (depth, width)
- Supplier management
- etc. etc.
Looking at it from the roles and functions that are involved and how these functions can be attributed to the parties involved I concluded that it was not a payments issue to be resolved in the first place. It rather is about creating a coherent multi channel strategy with deliberate channel interferences.
The approach has to be commercially logical/simple and beneficial to both retailer and wholesaler preventing incentives for the retailer to cross use the channels to the disadvantage of the wholesaler. The various functions that HAVE TO BE executed have to be distributed over the parties involved in a coherent and logical way, making commercial sense to the parties and – last but certainly not least – is creating an appreciated value proposition for the customer.
To me the answer for the wholesaler in this case can be found in answering:
“Who is your (primary) customer in the retail channel?”
To me the answer is pretty obvious: the wholesaler is selling the functionality of the webshop – with the possibility of an on premise kiosk – to the retailer, not the product to the end customer. All the rest follows this principle logically.
„And what about the payments?”
In the proposed setup the retailer will use the payments infrastructure in place already for its retail activities, even including cash. If the kiosk could be used as a webshop as well – allowing the customer to buy online „via his own retailer” – the obvious web payment methods could be used already available in the webshop.
„And what about the new value chain created?”
The kiosk combined with a white label web shop would further blur and complicate the value chain topology: the wholesaler is now in two business: (1) the commercial distribution of the product (2) web shop provider including product and fulfillment. The retailer now also is in two business he now owns two channels with two very distinct customer use cases: (1) brick and mortar and a (2) web shop. Now the not only the wholesaler gets on the retailers turf with the on premiss kiosk but the retailer on his turn will come at the turf of the wholesaler selling the product online.
As the wholesaler does insource the web shop himself new parties and dynamics become part of the kiosk value chain with overlap on many aspects and interference between the various channels. It becomes rather messy quickly especially by the overlapping channels.
Only a clear cut proposition with all the functions, roles and obvious dispersion of them over the parties involved coherently will be able to create a balanced commercial relation between wholesaler and the retailers involved in the new setup.
Mistakes, leading to failure, are easily made when not having the right perspective on functions and roles.
Disclaimer: I left out additional details for simplicity and for intentionally obscuring the current and proposed business proposition of the wholesaler.