Question

X must decide which of the following two channel designs to adopt:

Alternative 1:

Sell directly to final consumers.

The firm will rely on its own ecommerce website, and on extensive promotions through PPC (pay-per-click) advertising, to sell its products. It is expected that the average CPC (cost-per-click) is $1.5. The average CTR (click-through rate; the % of people who saw the ad and clicked the link to go to the firm’s ecommerce website) is 1.9 %, and the average CR (conversion rate; the % of people who clicked the firm’s website and made a purchase) is 2.35%. Furthermore, it is estimated that the average number of units purchased per customer is 4 units and monthly sales revenue is expected to be $1,000,000. The monthly expenses associated with maintaining the ecommerce website cost $30,000.

Alternative 2:

Sell through distributors then retailers and finally consumers.

It is known that a distributor’s margin is about 25% of its cost, while a retailer’s margin is about 20% of the retail price. Mr. X intends to spend $100,000 monthly on traditional newspaper ads to promote the product. Given the vast number of distributors and retailers, Mr. X expects retail sales of $1,750,000 per month. Retail price per unit will be the same under both channel designs: $10. Unit product cost: $2 Which alternative channel design is more profitable for Mr. X to implement? (10 points; Show all your calculations)

Answer 1