How to Reduce Transaction Costs

Because the traditional pyramid-type channel model has a series of insurmountable inherent disadvantages, so that manufacturers operate, manage the channel transaction costs are increasing, so manufacturers began to shorten the length of the channel, reduce the channel hierarchy, so that the marketing channel flattening.

I. Definition of concepts and theoretical introduction

1. Channel flattening

Channel flattening, also known as channel sinking, is a channel operation mode that emerged in the mid- to late 1990s. This model simplifies the sales process, ensures efficient and lossless operation of the supply system from producers (manufacturers) to consumers, optimizes resource allocation, improves operational efficiency, ensures information communication, reduces sales costs, and allows companies to have a larger profit margin. However, flattening is not simply to reduce which specific sales link, but to optimize the original supply chain, eliminating the links in the supply chain without value-added, so that the supply chain to the value chain, so as to achieve sustainable development of enterprises.

2. Transaction Cost Theory

Ronald Coase (Ronald Coase) believes that the purpose of the marketing channel is to minimize the cost of trading with other enterprises or individuals, the marketing channel through the sharing of negotiation function, to promote the transaction and the information **** enjoyment, the realization of the manufacturers and the external organization of the entity of the interdependence between the manufacturer is conducive to the manufacturer to obtain resources from the outside. The establishment of "teamwork" with channel members greatly reduces the cost of searching for information, time and space distances, and bargaining to reach a deal between manufacturers and end consumers. By outsourcing certain functions or engaging in specific functions themselves, producers simplify inter-enterprise processes and speed up the supply chain's response to the market, thereby avoiding some or all of the costs associated with essential channel functions, which strongly reduces the transaction costs of manufacturers in the marketplace. This is the primary driver for establishing marketing channels.

Subsequently, many economists, such as Williams, have further developed and refined the transaction cost theory. Williams subdivided transaction costs into two categories: ex ante transaction costs and ex post transaction costs, the former includes the cost of drafting, negotiating, and implementing some kind of agreement, and the latter includes the costs incurred by the counterparty to deviate from the provisions of the contract, the costs incurred by the parties to discover that the pre-determined price is incorrect and needs to be adjusted, the costs incurred by the parties to solve the conflict between them through law or government, and the costs incurred by the parties to ensure the longevity, stability and continuity of the trading relationship.

Transaction cost theory is used to analyze the reasons for channel flattening

1. Increase in transaction costs in the corporate market

(1) The channel is too long and affects the speed of information dissemination

Because of the channel is too long, the vendor's control over the channel will be weakened, and the collection of information on the terminal will be in a passive position. Manufacturers do not have first-hand information and information about the market, including the files of users of the final product, terminal retailers and regional wholesalers, etc., which are the company's most important market resources, but also an important guarantee to reduce the risk of the market network, only when the company has built up a sufficiently large database of users and through the user database for market development, advertising experiments, the company's marketing is built on a A solid foundation. Market work is related to the depth of market development. Enterprises can only carry out channel management better on the basis of a perfect customer file. The potential risk of delayed information transfer and distortion of information then makes it more costly for producers to distribute their products through distributors, a hidden increase in market transaction costs.

(2) Multi-level Structure Affects Efficiency Improvement

Each change in the channel is designed to save transaction costs and yield more surplus value to the customer. For a long time, manufacturers have been using a multi-level structure of vertical regulation of the sales model, a product to reach the hands of consumers often have to go through the manufacturer - general distributor - secondary wholesalers - - third-level wholesalers - retailers -Third-level wholesalers - retailers - consumers and other levels, the increase in intermediate circulation links is undoubtedly reducing the efficiency of the channel, delaying the product to reach the hands of the consumer time, logistics costs are increasing, capital turnover The capital turnover cycle is lengthened, and profits are diluted. From the consumer's point of view, it is difficult to get the benefits of price. Multi-level structure makes manufacturers need to spend a lot of transaction costs for the coordination of inter-channel relations, balancing the rights of the channel, reduce channel conflict, which will inevitably lead to increased transaction costs.

(3) Limited Rationality and Opportunism of Channel Members

The framework of transaction cost analysis is based on social behavioral realization. Channel members are assumed to be finite rational beings, and at least some of the participants have a tendency to be opportunistic (i.e., there is a possibility of defrauding other participants) if given the opportunity. Incomplete information (or asymmetric information) can provide opportunistic channel members with exploitable opportunities to commit fraud. Due to incomplete information, channel members of the future situation and its changes can not be expected in advance, so that the uncertainty increases, in order to cope with contingencies and may be subject to the other side of the uncertainty of deception, channel members will appear opportunistic behavior, the manufacturer in order to prevent this kind of opportunistic behavior to their own losses, it is necessary to channel members of the behavior of the performance appraisal, both sides of the transaction to perform an effective behavior of supervision. Supervision. If the channel is too long, it is difficult for the manufacturer to effectively monitor the behavior of channel members, and it is difficult to know the behavior of the other party easily, even if it can be implemented through the monitoring process, the cost of information collection and processing is not to be underestimated. Inevitably, this will increase the cost of monitoring after the fact, which in turn will increase transaction costs.

2. The development of other technologies is conducive to reducing transaction costs

The past channel business, completely on behalf of manufacturers in the market, in the distribution of "logistics, service, information" trinity, set the various functions of the channel in one, the enterprise must rely on multilevel channels to achieve the collection of information, product transportation, the transfer of value to achieve the function. The value of the transfer of functions to achieve savings in transaction costs, but with the development of the network, information, logistics and other manufacturing enterprises to outsource the original functions of the channel, transferred to professional logistics companies, information consulting firms and other enterprises, can reduce the channel level, effectively saving the transaction costs. (1) the development of the network reduces transaction costs

The new economic era is largely referred to by the information technology revolution, especially the high-speed development of the Internet brought about by the socio-economic changes in the marketing channel changes, the rapid development of information technology is not to be ignored external forces. With the development of information technology, modern network technology and powerful marketing management software can quickly process a large amount of information fed back by many dealers and can deliver all information to dealers at the same point in time. This greatly reduces transaction costs and promotes the development of the trend of sales channel flattening.

The emergence of the Internet allows consumers to contact manufacturers directly through the network to obtain information of interest, and enterprises can also be faster, more accurate and more comprehensive access to consumer-related information, so the advantages of the enterprise in the research on customer demand emerged. Enterprises can take over some of the research functions of distributors, and the emergence of e-commerce has led to increasing functions in promotion, approaching and negotiation, as well as speeding up the response to consumers. In this way, the information function of traditional channel members is greatly diminished or even discarded altogether, which again leads to a reduction in the number and hierarchy of channel members.

(2) The development of logistics reduces transaction costs

One of the key functions of intermediaries is the logistics function, where intermediaries help to physically transfer products from the firm to the consumer. Logistics costs in the cost structure of most products have a large proportion of the logistics industry has not yet matured before the producers alone to bear the cost of logistics function is very large, is not conducive to the development of enterprises, and very few companies can have the strength to build up their own logistics and distribution system. With the development of third-party logistics with a high degree of specialization, the cost of delivering goods directly to the final consumer is much lower than through the traditional channels layer by layer, at the same time, due to the trend of giant retail terminals, so that manufacturers do not have to supply a huge number of small-scale terminals, so that their transportation costs have fallen dramatically, saving the transaction costs of enterprises.

(3) The innovation of payment tools reduces transaction costs

The progress of science and technology makes the commodity trading transcend the limitation of time, but no matter how the commodity trading develops and how complicated the trading method is, the trading process is always accompanied by the payment and liquidation of debts and actual funds, and the flattening of the channels is also faced with the problem of how to settle the settlement of the enterprises with the numerous consumers who are distributed all over the world. The development of online banking and online payment business has brought great convenience to the enterprise settlement business, the post office, the bank's remittance, although it can also solve the problem of settlement, but, far from the online payment is fast and convenient, the innovation of the remote payment tool greatly reduces the cost of the enterprise market transactions, but also for the channel flattening has created the conditions.

The innovation of installment payment method has weakened the function of distributor financing. The cooperation of producers, banks and consumers can enable producers of large products to obtain timely access to the funds for the products sold, reducing the external transaction costs of producers.

Three, the implementation of some of the recommendations of the channel flattening

In the long run, the competition among enterprises is no longer a business alone, but the competition of the system and the progress of the whole system, so, for manufacturing enterprises, should be with the channel on the various links of the distributor to establish a win-win or win-win relationship, in order to achieve a competitive advantage. But at the same time, companies should also pay attention to the economics of the channel, grasp the length of the channel, reduce the non-value-added chain on the channel, change the supply chain into a value chain.

First, establish a response system between enterprises and lower-level distributors. On the basis of channel optimization and reduction of supply levels, enterprises and distributors establish **** the same information network to instantly monitor the inventory information in the hands of each distributor, in order to avoid a large amount of inventory backlog in the hands of distributors and not delivered to the customer. In this way, the enterprise can instantly monitor the inventory in the hands of each distributor to take appropriate measures to avoid distributors in the case of inventory backlogs still order, and sales of inventory in the hands of the distributor to penalize and reward, at the same time, pay attention to the end of the sale of goods, and customers to maintain regular communication.

Second, make full use of the network and the development of information technology, the establishment of online trading platform between the enterprise and the final customer, the enterprise can be faster, more accurate, more comprehensive access to consumer-related information, accelerate the response speed to consumers. This can reduce the reliance on multi-level channels to collect information function, so that the core enterprise (manufacturer) to take the initiative.

Thirdly, manufacturer companies can establish network organizations with distributors at all levels in the channel. Network organization is characterized by the transaction time is generally longer, the core enterprise (manufacturer) to determine the optimal level of the channel, selected distributors, and then rarely change, which greatly saves the transaction costs arising from repeated contracting, because the transaction is repeated, and the amount of each transaction is very large, so the cost of breach of contract or opportunistic behavior is very high, so that it can inhibit opportunistic behavior. behavior. Repeated transactions give both parties more opportunities in the future to correct inequalities in the transaction, thus reducing bargaining costs. In network organizations, the widely used informal contract can play a self-protective role for a long time, and the members of the network organization will build up a trust mechanism through long-term interaction from the ****same interests. The emergence of the trust mechanism reduces the contract implementation and behavioral supervision, thus reducing the performance cost of cooperation and appraisal costs.