Disruptive Innovations Often Need Disruptive Channels

To disrupt a market may require a disruptive channel. A disruptive channel is:

• Not used by mainstream competitors;
• Serving initially a fringe segment of the market;
• Happy to take on your product or service because it is moving up-margin;
• Matches the skills, expertise and customers you are targetting;

As an example, Sony's entry into the transistor radio business in 1956 required the company to create a new channel. It couldn't sell transistor radios through the dominant channel of the consumer radio market because it didn't meet the business needs of the radio retailers: Transistor radios couldn't generate service revenue for established radio dealers because there were no tubes to be replaced. Also the transistor radio's price points were too low to attract established dealers.

So instead, Sony dealt with low-end discount stores like Woolworth, which had no service department and had been shut out of the high-end market for living-room style radio consoles. Woolworth was happy to take on transistor radios because it was effectivel moving up-margin and did not have an expensive service department to maintain.

We see some of the same dynamic with electric cars sold through conventional auto dealers: No tune-ups or oil changes to generate post-sales profit. Therefore to disrupt the auto market, electric cars may need a disruptive distribution channel with expertise (and a business model) that matches the needs of the new product.

As a result, electric car companies are experimenting with a variety of channel strategies, from Tesla Motors has direct sales, to Feel Good Cars' pragmatic approach, with some conventional auto dealers, electric specialists and some non-traditional auto dealers. Zap carries a broad range of products including new and used electric cars, electric bikes and conventional cars, but conventional cars account for the bulk of sales.

Harvard business prof. Kasturi Rangan has a new book that looks at channel strategy. He is critical of the auto industry channel, saying it lacks stewardship and serves neither manufacturers nor consumers:

"Manufacturers pit dealers against other nearby dealers. Dealers are pressured to accept more vehicles than they can sell and—unable to make money from new cars—turn to service and trade-ins to eke out margins. And at the bottom of the chain are customers trapped in high-pressure negotiations for a car that isn't the exact model they want."

Rangan is cautious, though about pinning too much hope on the Internet as channel, despite its much lower cost of about $5 per net interaction vs $150 for a direct sales call: "One should not jump to the conclusion that because the Internet appears cheaper it can solve a company's go-to-market problem. The solution has to match what customers want... Customers need more than just information. They need the logistics to get the physical product."

Unhappy customers. Unhappy dealers.  Auto dealer channels look ripe for a disruptive entry.