Anne Coughlan

Caldieraro, Fabio and Anne Coughlan. 2007. Spiffed-Up Channels: The Role of Spiffs in Hierarchical Selling Organizations. Marketing Science. 26(1): 31-51.

We study a channel relationship in which manufacturer(s) use independent sales representatives (rep firms), which employ salespeople to do the actual selling. We show that commission-only payments by manufacturers to rep firms lead to suboptimal outcomes for the manufacturer, relative to those obtained under a vertically integrated channel. From the manufacturer's standpoint, these inefficiencies can be ameliorated through the use of sales incentives given to the rep firm's salespeople directly by the manufacturer (called "spiffs"). In a monopolistic environment, spiffs are shown to improve the manufacturer's profits in the face of contractual restrictions on the channel members' ability to set separate commission rates by product. For certain types of restrictions, spiffs may generate manufacturer outcomes close to the fully coordinated ones achieved under vertical integration even when compensating the rep firm through commission-only contracts. In a competitive environment, spiffs are shown to be used by a powerful manufacturer that shares a rep firm's sales efforts with the product of a weaker manufacturer (i.e., in the case of "common agency"). In this case, spiffs are used as a strategy to deter the weaker manufacturer from challenging the stronger manufacturer for the sales force's valuable selling effort.

Coughlan, Anne. 1992. Retail Pricing: Does Channel Length Matter. Managerial and Decision Economics. 13(3): 201-214.

The number of intermediary levels between a manufacturer and the final market in a distribution channel varies from industry to industry. In some cases, none are used (i.e. the distribution function is vertically integrated), while several middleman levels are used in other cases (e.g. the use of a wholesaler, a jobber, and a retailer in the distribution of meat). In this paper we examine the effect of competition on the profit-maximizing length of the distribution channel. We find that the optimal number of middleman levels increases with the substitutability of products in the market, but that there are institutional limits on the maximum number of levels in a channel. The analysis also suggests that differences in the objectives of channel members (e.g. the maximization of total channel profit versus the maximization of each member's individual profit) affect optimal channel length: a goal of total channel profit maximization produces a channel at least as long as one of individual (non-co-operative) member profit maximization. The work thus complements existing research focusing on intra-channel (e.g. cost-based) explanations of channel length, using a framework similar to those investigating competitive incentives for vertical integration in distribution.

Coughlan, Anne. 2016. Multi-Level Marketing Business Opportunities: Analyzing Net Economic Return and Avoidable Economic Loss to Distributors.

This paper analyzes the operation of multi-level marketing (MLM) distribution channels, with an eye toward analyzing Net Economic Return (NER), and the possibility of Avoidable Economic Losses (AEL), to individuals from joining as MLM distributors. The analysis takes account of possible ex ante and ex post information sets of distributor prospects and the MLM firm. Protecting prospective and incumbent distributors has been an issue of policy importance in the many cases brought by the FTC against firms accused of operating illegal pyramid schemes and/or misleading prospective and current distributors. Accordingly, the current work posits a definition of AEL that is based on both the elements of the NER from participating, and avoidable and unavoidable informational limitations on the parts of the distributor and the firm. The paper’s model allows investigation of distributors’ joining decisions, work behaviors, income, and MLM profitability under these various scenarios, and informs the question of when and whether an AEL can be argued to have occurred. The paper first examines one of the only other academic analytic modeling articles evaluating the MLM distribution channel and highlights an implicit, but crucial, assumption in this model that creates an unnecessarily aggressive criterion for distinguishing between a legitimate MLM and a suspected illegal pyramid scheme. It then develops a definition of distributor AEL that may be caused by participation as a distributor in an MLM enterprise, specifying that an AEL occurs when the MLM firm or an upline sponsor possesses information of use in evaluating the quality of the business opportunity that would cause prospects not to join the MLM, and purposefully conceals this information when it could have effectively revealed it to prospects, thus leading some to join who would otherwise not join, and resulting in their NER less than the opportunity cost of participating. An emended modeling structure is next presented, which examines MLM business opportunities when the implicit assumption of the prior article is relaxed. The model focuses on non-business-building distributors who are likely to be the most at risk to suffer an AEL. Analysis of several sub-models of the emended model structure provides a characterization of the difference between misapprehension or imperfect information (which need not imply an AEL) and purposeful misrepresentation of the nature of the MLM business opportunity to prospective distributors (which may, but does not always, imply an AEL). Among the results of the model are that it is economically rational for a person to join the MLM as a personal-consumption-only distributor; that distributors with full information do not suffer an AEL by joining an MLM, regardless of their type; that the MLM firm may reasonably target both low and high achieving distributors in a “pooling” strategy, or only high achievers in a “separating” strategy; that a pooling strategy generally grants high-achieving distributors economic rents relative to low-achievers but that an AEL does not universally accompany this difference; and that an AEL can – but may not always – result from purposeful over-stating of the quality of the business opportunity by the MLM firm. The paper concludes with implications for MLM firm information dissemination strategies and for emended criteria for assessment of possible pyramid scheme operation.

Caldieraro, Fabio and Anne Coughlan. 2009. State-Dependent Sales Force Compensation: The Case of Pharmaceutical Detailing.

This research investigates the compensation and incentive strategies of firms that employ a salesperson that does not sell products directly to end-users, but instead, works to influence another agent, the ultimate sales-driving agent, with whom the firm cannot legally contract. We develop a hierarchical game-theoretic model in which sales effort over time influences the state of goodwill perceived by this ultimate independent downstream agent; this goodwill, which can appreciate or depreciate over time, in turn influences the likelihood that the ultimate agent will drive sales. The dynamic evolution of the state of the system (agent goodwill) thus changes the likelihood of sales, and consequently endogenously affects the salesperson's motivation to continue (or not to continue) aggressive selling effort. One example of such a channel is a pharmaceutical firm employing a sales representative to detail physicians, who are the ultimate recommenders of a drug therapy to patients. Our results show that the salesperson's compensation optimally increases with the stock of detailing goodwill when the salesperson is very effective at promoting the drug, and detailing has a high level of endurance. In this case, the more the salesperson details, the more expensive it is for the firm to motivate the salesperson to exert further detailing effort; the optimal pattern of detailing in this situation comprises repetitive cycles of intensive detailing and cursory detailing periods. Conversely, the salesperson's compensation optimally decreases with the stock of detailing goodwill when the salesperson is less effective at training and the physician's perception about the drug is not enduring. In this case, the more the salesperson details, the more affordable it is for the firm to motivate the salesperson to exert further detailing effort. Thus, detailing in this case involves an all-or-nothing decision, where it is optimal either to intensively and continuously detail the physician, or never to conduct intensive detailing.

Coughlan, Anne and Benjamin Neuwirth. 2015. d.light Design: Marketing Channel Strategies in India. Case 5-214-255 (KEL876).

This case looks at a new start-up company, d.light Design, as it was seeking to go to market in India with its solar-powered LED lamps in 2009. Sam Goldman, founder and chief customer officer of d.light, was in New Delhi, India; his business-school friend and co-founder Ned Tozun was in China, the site of the company’s manufacturing plant.

One of the key decisions Goldman and Tozun needed to make was whether d.light should focus on just one distribution channel in India, or multiple channels. The startup had limited capital, so it needed to get the distribution question right to generate revenue quickly.

The case thus combines an entrepreneurial problem with an emerging-market, or bottom-of-the-pyramid, channel design challenge. This case does not focus on product design or manufacturing challenges but rather on questions of:

• The constraints d.light faced in creating an aligned distribution channel. These constraints can have legal, environmental, and/or managerial foundations
• Demand-side misalignments in the channel structure that will occur if d.light chooses one or another of the considered channels in the case, namely, (a) the RE (rural entrepreneur) channel, (b) the village retailer channel, or (c) the centralized shops channel
• What mix of channels―or what single channel―d.light should focus on in the Indian market
• The financial return possible based on d.light’s current cost structure and overhead expenditures in India

Coughlan, Anne and Erica Goldman. 2004. Mary Kay Corporation: Direct Selling and the Challenge of Online Channels. Case 5-104-009 (KEL034).

Mary Kay is one of the best-known direct sellers of women's cosmetics in the world. Its channel strategy is to use Independent Beauty Consultants, whoa re independent distributors, to sell directly to consumers. Its compensation plan is mult-level, providing commissions to distributors on their own sales as well as the sales of the distributors they recruit. At the time of the case, the company is grappling with a well-established change in consumer behavior - the decline of the stay-at-home mom as she returns to the workforce - combined with the opportunities offered by Internet selling. The case focuses on the company's efforts to move with consumer demand and behavior, while remaining true to its core goal of "Improving Women's Lives." It discusses ways Internet technology can be used throughout the company's channel and supply chain structure, noot just as a route to market.

Coughlan, Anne. 2001. Verklar Austria. Case 5-104-007 (KEL037).

Verklar is the leading maker of roof windows, based in Europe. In its Austrian subsidiary, it has historically dominated the Austrian market through its country-based subsidiary, with about 85 percent market share. However, at the time of the case, its market share has dropped to about 75 percent, and many of its dealers have either dropped the line entirely or are buying not from the company, but from the few remaining large dealers who still buy directly from Verklar. This has prompted Mr. Nickel, the president of the subsidiary, to devise a new way to run the distribution channel in the country in order to improve performance, called the Quota System. The case calls on the reader to examine the sources of market share decline and whether the proposed Quota System solves the channel's problems.

Coughlan, Anne, Julie Hennessy and Andrei Najjar. 2004. Invisalign: Orthodontics Unwired. Case 5-104-008 (KEL032).

Align Inc. is a start-up company with a revolutionary, patent-protected new technology for straightening teeth, called Invisalign. Invisalign is a set of invisible plastic aligners, made to each patient's specific needs, that substitutes for metal or ceramic braces in adults (it is not sold for children's orthodontic needs). The company has created tremendous consumer awareness and affect for its product, yet sales results are dismal. The case requires the reader to analyze why sales are so poor and what should be done to remedy the problem. While the case is oriented toward distribution channel issues, it can also be used to examine the marketing mix for a new product introduction situation as well.

Spanish translation available.

Coughlan, Anne and Lindsay M Plegza. 2004. Michael's Craft Stores: Integrated Channel Management and Vendor-Retailer Relations. Case 5-104-010 (KEL036).

Michaels Craft Stores is the largest arts and crafts retailer in the United States and in the world. Its CEO, Michael Rouleau, wants to expand the chain to 1,000 stores by 2006. The key constraint is the lack of sophistication among Michaels' supplier base, which is made up of over 1,000 suppliers, many of which are small, creative companies with little computer or logistics knowledge. This results in high costs of running Michaels' supply chain. The case describes the company's efforts to build the sophistication of its suppliers through educational "Vendor Flow Training" courses that teach suppliers how to adopt state-of-the-art practices for improved efficiency in supplying their channel.

Caldieraro, Fabio and Anne Coughlan. 2007. Spiffed-Up Channels: The Role of Spiffs in Hierarchical Selling Organizations. Marketing Science. 26(1): 31-51.

We study a channel relationship in which manufacturer(s) use independent sales representatives (rep firms), which employ salespeople to do the actual selling. We show that commission-only payments by manufacturers to rep firms lead to suboptimal outcomes for the manufacturer, relative to those obtained under a vertically integrated channel. From the manufacturer's standpoint, these inefficiencies can be ameliorated through the use of sales incentives given to the rep firm's salespeople directly by the manufacturer (called "spiffs"). In a monopolistic environment, spiffs are shown to improve the manufacturer's profits in the face of contractual restrictions on the channel members' ability to set separate commission rates by product. For certain types of restrictions, spiffs may generate manufacturer outcomes close to the fully coordinated ones achieved under vertical integration even when compensating the rep firm through commission-only contracts. In a competitive environment, spiffs are shown to be used by a powerful manufacturer that shares a rep firm's sales efforts with the product of a weaker manufacturer (i.e., in the case of "common agency"). In this case, spiffs are used as a strategy to deter the weaker manufacturer from challenging the stronger manufacturer for the sales force's valuable selling effort.

Coughlan, Anne. 1992. Retail Pricing: Does Channel Length Matter. Managerial and Decision Economics. 13(3): 201-214.

The number of intermediary levels between a manufacturer and the final market in a distribution channel varies from industry to industry. In some cases, none are used (i.e. the distribution function is vertically integrated), while several middleman levels are used in other cases (e.g. the use of a wholesaler, a jobber, and a retailer in the distribution of meat). In this paper we examine the effect of competition on the profit-maximizing length of the distribution channel. We find that the optimal number of middleman levels increases with the substitutability of products in the market, but that there are institutional limits on the maximum number of levels in a channel. The analysis also suggests that differences in the objectives of channel members (e.g. the maximization of total channel profit versus the maximization of each member's individual profit) affect optimal channel length: a goal of total channel profit maximization produces a channel at least as long as one of individual (non-co-operative) member profit maximization. The work thus complements existing research focusing on intra-channel (e.g. cost-based) explanations of channel length, using a framework similar to those investigating competitive incentives for vertical integration in distribution.

Coughlan, Anne. 2016. Multi-Level Marketing Business Opportunities: Analyzing Net Economic Return and Avoidable Economic Loss to Distributors.

This paper analyzes the operation of multi-level marketing (MLM) distribution channels, with an eye toward analyzing Net Economic Return (NER), and the possibility of Avoidable Economic Losses (AEL), to individuals from joining as MLM distributors. The analysis takes account of possible ex ante and ex post information sets of distributor prospects and the MLM firm. Protecting prospective and incumbent distributors has been an issue of policy importance in the many cases brought by the FTC against firms accused of operating illegal pyramid schemes and/or misleading prospective and current distributors. Accordingly, the current work posits a definition of AEL that is based on both the elements of the NER from participating, and avoidable and unavoidable informational limitations on the parts of the distributor and the firm. The paper’s model allows investigation of distributors’ joining decisions, work behaviors, income, and MLM profitability under these various scenarios, and informs the question of when and whether an AEL can be argued to have occurred. The paper first examines one of the only other academic analytic modeling articles evaluating the MLM distribution channel and highlights an implicit, but crucial, assumption in this model that creates an unnecessarily aggressive criterion for distinguishing between a legitimate MLM and a suspected illegal pyramid scheme. It then develops a definition of distributor AEL that may be caused by participation as a distributor in an MLM enterprise, specifying that an AEL occurs when the MLM firm or an upline sponsor possesses information of use in evaluating the quality of the business opportunity that would cause prospects not to join the MLM, and purposefully conceals this information when it could have effectively revealed it to prospects, thus leading some to join who would otherwise not join, and resulting in their NER less than the opportunity cost of participating. An emended modeling structure is next presented, which examines MLM business opportunities when the implicit assumption of the prior article is relaxed. The model focuses on non-business-building distributors who are likely to be the most at risk to suffer an AEL. Analysis of several sub-models of the emended model structure provides a characterization of the difference between misapprehension or imperfect information (which need not imply an AEL) and purposeful misrepresentation of the nature of the MLM business opportunity to prospective distributors (which may, but does not always, imply an AEL). Among the results of the model are that it is economically rational for a person to join the MLM as a personal-consumption-only distributor; that distributors with full information do not suffer an AEL by joining an MLM, regardless of their type; that the MLM firm may reasonably target both low and high achieving distributors in a “pooling” strategy, or only high achievers in a “separating” strategy; that a pooling strategy generally grants high-achieving distributors economic rents relative to low-achievers but that an AEL does not universally accompany this difference; and that an AEL can – but may not always – result from purposeful over-stating of the quality of the business opportunity by the MLM firm. The paper concludes with implications for MLM firm information dissemination strategies and for emended criteria for assessment of possible pyramid scheme operation.

Caldieraro, Fabio and Anne Coughlan. 2009. State-Dependent Sales Force Compensation: The Case of Pharmaceutical Detailing.

This research investigates the compensation and incentive strategies of firms that employ a salesperson that does not sell products directly to end-users, but instead, works to influence another agent, the ultimate sales-driving agent, with whom the firm cannot legally contract. We develop a hierarchical game-theoretic model in which sales effort over time influences the state of goodwill perceived by this ultimate independent downstream agent; this goodwill, which can appreciate or depreciate over time, in turn influences the likelihood that the ultimate agent will drive sales. The dynamic evolution of the state of the system (agent goodwill) thus changes the likelihood of sales, and consequently endogenously affects the salesperson's motivation to continue (or not to continue) aggressive selling effort. One example of such a channel is a pharmaceutical firm employing a sales representative to detail physicians, who are the ultimate recommenders of a drug therapy to patients. Our results show that the salesperson's compensation optimally increases with the stock of detailing goodwill when the salesperson is very effective at promoting the drug, and detailing has a high level of endurance. In this case, the more the salesperson details, the more expensive it is for the firm to motivate the salesperson to exert further detailing effort; the optimal pattern of detailing in this situation comprises repetitive cycles of intensive detailing and cursory detailing periods. Conversely, the salesperson's compensation optimally decreases with the stock of detailing goodwill when the salesperson is less effective at training and the physician's perception about the drug is not enduring. In this case, the more the salesperson details, the more affordable it is for the firm to motivate the salesperson to exert further detailing effort. Thus, detailing in this case involves an all-or-nothing decision, where it is optimal either to intensively and continuously detail the physician, or never to conduct intensive detailing.

Coughlan, Anne and Benjamin Neuwirth. 2015. d.light Design: Marketing Channel Strategies in India. Case 5-214-255 (KEL876).

This case looks at a new start-up company, d.light Design, as it was seeking to go to market in India with its solar-powered LED lamps in 2009. Sam Goldman, founder and chief customer officer of d.light, was in New Delhi, India; his business-school friend and co-founder Ned Tozun was in China, the site of the company’s manufacturing plant.

One of the key decisions Goldman and Tozun needed to make was whether d.light should focus on just one distribution channel in India, or multiple channels. The startup had limited capital, so it needed to get the distribution question right to generate revenue quickly.

The case thus combines an entrepreneurial problem with an emerging-market, or bottom-of-the-pyramid, channel design challenge. This case does not focus on product design or manufacturing challenges but rather on questions of:

• The constraints d.light faced in creating an aligned distribution channel. These constraints can have legal, environmental, and/or managerial foundations
• Demand-side misalignments in the channel structure that will occur if d.light chooses one or another of the considered channels in the case, namely, (a) the RE (rural entrepreneur) channel, (b) the village retailer channel, or (c) the centralized shops channel
• What mix of channels―or what single channel―d.light should focus on in the Indian market
• The financial return possible based on d.light’s current cost structure and overhead expenditures in India

Coughlan, Anne and Erica Goldman. 2004. Mary Kay Corporation: Direct Selling and the Challenge of Online Channels. Case 5-104-009 (KEL034).

Mary Kay is one of the best-known direct sellers of women's cosmetics in the world. Its channel strategy is to use Independent Beauty Consultants, whoa re independent distributors, to sell directly to consumers. Its compensation plan is mult-level, providing commissions to distributors on their own sales as well as the sales of the distributors they recruit. At the time of the case, the company is grappling with a well-established change in consumer behavior - the decline of the stay-at-home mom as she returns to the workforce - combined with the opportunities offered by Internet selling. The case focuses on the company's efforts to move with consumer demand and behavior, while remaining true to its core goal of "Improving Women's Lives." It discusses ways Internet technology can be used throughout the company's channel and supply chain structure, noot just as a route to market.

Coughlan, Anne. 2001. Verklar Austria. Case 5-104-007 (KEL037).

Verklar is the leading maker of roof windows, based in Europe. In its Austrian subsidiary, it has historically dominated the Austrian market through its country-based subsidiary, with about 85 percent market share. However, at the time of the case, its market share has dropped to about 75 percent, and many of its dealers have either dropped the line entirely or are buying not from the company, but from the few remaining large dealers who still buy directly from Verklar. This has prompted Mr. Nickel, the president of the subsidiary, to devise a new way to run the distribution channel in the country in order to improve performance, called the Quota System. The case calls on the reader to examine the sources of market share decline and whether the proposed Quota System solves the channel's problems.

Coughlan, Anne, Julie Hennessy and Andrei Najjar. 2004. Invisalign: Orthodontics Unwired. Case 5-104-008 (KEL032).

Align Inc. is a start-up company with a revolutionary, patent-protected new technology for straightening teeth, called Invisalign. Invisalign is a set of invisible plastic aligners, made to each patient's specific needs, that substitutes for metal or ceramic braces in adults (it is not sold for children's orthodontic needs). The company has created tremendous consumer awareness and affect for its product, yet sales results are dismal. The case requires the reader to analyze why sales are so poor and what should be done to remedy the problem. While the case is oriented toward distribution channel issues, it can also be used to examine the marketing mix for a new product introduction situation as well.

Spanish translation available.

Coughlan, Anne and Lindsay M Plegza. 2004. Michael's Craft Stores: Integrated Channel Management and Vendor-Retailer Relations. Case 5-104-010 (KEL036).

Michaels Craft Stores is the largest arts and crafts retailer in the United States and in the world. Its CEO, Michael Rouleau, wants to expand the chain to 1,000 stores by 2006. The key constraint is the lack of sophistication among Michaels' supplier base, which is made up of over 1,000 suppliers, many of which are small, creative companies with little computer or logistics knowledge. This results in high costs of running Michaels' supply chain. The case describes the company's efforts to build the sophistication of its suppliers through educational "Vendor Flow Training" courses that teach suppliers how to adopt state-of-the-art practices for improved efficiency in supplying their channel.