Chapter 1[1].mmii

Marketing Channel Questions

• What is the nature of marketing channels and why are they important?

• How do channel firms interact and organize to do the work of the channel?

• What role do physical distribution and supply chain management play in attracting customers?

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The Nature and Importance of Marketing Channels

Marketing Channel Defined

Marketing channel is a set of independent organizations that help make a product or service available for use or consumption by the consumer or business users

Marketing channel system is a particular set of marketing channels employed by an organization Channels may absorb 30% to 50% of ultimate selling price to consumer

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How Channel Members Add Value

Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them

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Producers use intermediaries because they create greater efficiency in making goods available to target markets.

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Intermediaries offer the firm more than it can achieve on its own through their contacts, experience, specialization, and scale of operations

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From an economic view, intermediaries transform the assortment of products into assortments wanted by consumers

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Information refers to the gathering and distributing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange

Promotion refers to the development and spreading persuasive communications about an offer

Contacts refers to finding and communicating with prospective buyers

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Matching refers to shaping and fitting the offer to the buyer’s needs, including activities such as manufacturing, grading, assembling, and packaging

Negotiation refers to reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred

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Physical distribution refers to transporting and storing goods

Financing refers to acquiring and using funds to cover the costs or carrying out the channel work

Risk taking refers to assuming the risks of carrying out the channel work

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Number of Channel Members

Channel level refers to each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer

Direct marketing channel has no intermediary levels; the company sells directly to consumers

Indirect marketing channels contain one or more intermediaries

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Channel Levels

1. Zero-level (or direct marketing channel) - sell direct to end user with no intermediary

2. One-level or one intermediary – retailer

3. Two-level or two intermediaries – jobber, retailer

4. Three-level or three intermediaries - wholesaler, transporter, retailer

5. Reverse-flow channels - bring back products for reuse, refurbish for resale, recycle, and disposal. Different intermediaries may perform one or more of these functions

E. Service-Sector Channels - focus on location and minimizing levels. Adapting to new channels such as the Internet


Number of Channel Members

Connected by types of flows:• Physical flow of products• Flow of ownership• Payment flow• Information flow• Promotion flow

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Channel Functions and Flows

1. Main function is to overcome time, place, and possession gaps that separate the producers and their goods and services from those who need and want them.2. All channels have three things in common:a) They use up scarce resources.

b) They demonstrate better performance by specialization.

c) They can shift functions among members.

3. Forward flow of activity - organization to the end user (e.g. physical delivery, title, promotion).

4. Backward flow of activity - end user to the organization (e.g. ordering, payment, returns).

5. Interactive flow of activity - simultaneous exchange of physical, transactional or communication (e.g. negotiation, risk taking, information).

Channel Behavior and Organization

Channel Behavior

Marketing channel consists of firms that have partnered for their common good with each member playing a specialized role

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Channel Behavior

Channel conflict refers to disagreement over goals, roles, and rewards by channel members

• Horizontal conflict• Vertical conflict

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Channel Behavior

Horizontal conflict is conflict among members at the same channel level

Vertical conflict is conflict between different levels of the same channel

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Conventional Distribution Systems

Conventional distribution systems consist of one or more independent producers, wholesalers, and retailers. Each seeks to maximize its own profits and there is little control over the other members and no formal means for assigning roles and resolving conflict.

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Vertical Marketing Systems

Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system and consist of:

• Corporate marketing systems• Contractual marketing systems• Administered marketing systems

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Corporate vertical marketing system integrates successive stages of production and distribution under single ownership

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Contractual vertical marketing system consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone. The most common form is the franchise organization.

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Franchise organization links several stages in the production distribution process

• Manufacturer-sponsored retailer franchise system

• Manufacturer-sponsored wholesaler franchise system

• Service firm-sponsored retailer franchise system

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Administered vertical marketing system has a few dominant channel members without common ownership. Leadership comes from size and power.

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Horizontal Marketing Systems

Horizontal marketing systems include two or more companies at one level that join together to follow a new marketing opportunity. Companies combine financial, production, or marketing resources to accomplish more than any one company could alone.

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Multichannel Distribution Systems Hybrid Marketing Channels

Hybrid marketing channels exist when a single firm sets up two or more marketing channels to reach one or more customer segments

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Multichannel Distribution Systems Hybrid Marketing Channels

• Advantages• Increased sales and market coverage• New opportunities to tailor products and

services to specific needs of diverse customer segments

• Challenges• Hard to control• Create channel conflict

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Changing Channel Organization

Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones

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Channel Design Decisions

Analyzing Consumer Needs

Designing a channel system requires:• Analyzing consumer needs• Setting channel objectives• Identifying major channel alternatives• Evaluation

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Channel-Design Decisions

A. Analyze Customers’ Desired Service Output Levels1. Lot size - number of units channel allows customer to purchase at one time2. Waiting time - average time customers wait for delivery of goods in respective channel3. Spatial convenience - ease of purchase4. Product variety - large variety increases chance of consumer filling need5. Service backup - the greater the number of ancillary services surrounding the purchase of a product, the more effort required of the channelB. Establish Objectives and Constraints based on:1. Targeted service output levels2. Markets chosen to serve3. Product characteristics as service levels will vary (e.g. perishable goods require expedient delivery, bulk products require minimal handling, non-standard products require informative selling)

C. Identifying Major Channel Alternatives1. Types of intermediaries2. Number of intermediariesa) Exclusive distribution - one or a select fewb) Selective distribution - more than a few, less than allc) Intensive distribution - as many outlets as possible3. Terms and responsibilities of channel members - trade relations mixa) Price policies - must be equitable and efficientb) Conditions of sale - terms and guaranteesc) Territorial rights of distributorsd) Mutual services and responsibilitiesD. Evaluate the Major Alternatives1. Economic criteria - sales versus costs2. Control and adaptive criteria - degree of intermediary commitment


Analyzing Consumer Needs

Designing a marketing channel starts with finding out what target customers want from the channel

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Setting Channel Objectives

In terms of:• Targeted levels of customer service• What segments to serve• Best channels to sue• Minimizing the cost of meeting

customer service requirements

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Objectives are influenced by:• Nature of the company• Marketing intermediaries• Competitors• Environment

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Setting Channel Objectives


Identifying Major Alternatives

In terms of:

• Types of intermediaries• Number of intermediaries• Responsibilities of each channel

member

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Types of intermediaries refers to channel members available to carry out channel work. Examples include:

• Company sales force• Manufacturer’s agency• Industrial distributors

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Company sales force strategies• Expand direct sales force• Assign outside salespeople to

territories• Develop a separate sales force • Telesales

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Manufacturer’s agencies are independent firms whose sales forces handle related products from many companies in different regions or industries

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Industrial distributors• Find distributors in different regions or

industries • Exclusive distribution• Margin opportunities• Training• Support

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Number of marketing intermediaries to use at each level

• Strategies:• Intensive distribution• Exclusive distribution• Selective distribution

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Intensive distribution is a strategy used by producers of convenience products and common raw materials in which they stock their products in as many outlets as possible

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Exclusive distribution is a strategy in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories

• Luxury automobiles• High-end apparel

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Selective distribution is a strategy when a producer uses more than one but fewer than all of the intermediaries willing to carry the producer’s products

• Televisions• Appliances

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Responsibilities of Channel Members

Producers and intermediaries need to agree on:

• Price policies• Conditions of sale• Territorial rights• Services provided by each party

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Evaluating the Major Alternatives

Each alternative should be evaluated against:

• Economic criteria• Control• Adaptive criteria

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Evaluating the Major Alternatives

Economic criteria compares the likely sales costs and profitability of different channel members

Control refers to channel members’ control over the marketing of the product

Adaptive criteria refers to the ability to remain flexible to adapt to environmental changes

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Designing International Distribution Channels

Channel systems can vary from country to country

Must be able to adapt channel strategies to the existing structures within each country

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Channel Management Decisions

Channel management involves:• Selecting channel members• Managing channel members• Motivating channel members• Evaluating channel members

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Selecting Channel Members

Selecting channel members involves determining the characteristics that distinguish the better ones by evaluating channel members

• Years in business• Lines carried• Profit record

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Selecting intermediaries that are sales agents involves evaluating:

• Number and character of other lines carried

• Size and quality of sales force

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Selecting intermediaries that are retail stores that want exclusive or selective distribution involves evaluating:

• Store’s customers• Locations• Growth potential

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Managing and Motivating Channel Members

Partner relationship management (PRM) and supply chain management (SCM) software are used to forge long-term partnerships with channel members and to recruit, train, organize, manage, motivate, and evaluate channel members

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Public Policy and Distribution Decisions

Exclusive distribution is when the seller allows only certain outlets to carry its products

Exclusive dealing is when the seller requires that the sellers not handle competitor’s products

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Benefits of exclusive distribution include:• Seller obtains more loyal and

dependable dealers• Dealers obtain a steady and stronger

seller support

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Exclusive territorial agreement refers to an agreement where the producer may agree not to sell to other dealers in a given area or the buyer may agree to sell only in its own territory

Tying agreements, while not necessarily illegal as long as they do not substantially lessen competition, are agreements where there is a strong brand that producers sometimes sell to dealers only if the dealers will take some or all of the rest of the line

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Marketing Logistics

Nature and Importance of Marketing Logistics

Marketing logistics involves:• Outbound distribution: Moving products from

the factory to resellers and consumers• Inbound distribution: Moving products and

materials from suppliers to the factory• Reverse distribution: Moving broken,

unwanted, or excess products returned by consumers or resellers

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Marketing Logistics

Nature and Importance of Marketing Logistics

Importance of logistics• Competitive advantage by giving customers

better service at lower prices• Cost savings to the company and its

customers• Product variety requires improved logistics• Information technology has created

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Marketing Logistics

Goals of the Logistics System

To provide a targeted level of customer service at the least cost with the objective to maximize profit, not sales

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Marketing Logistics

Major Logistics Functions

• Warehousing• Inventory management• Transportation• Logistics information management

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Marketing Logistics


Storage warehouses are designed to store goods, not move them

Distribution centers are designed to move goods, not store them

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Marketing Logistics


Inventory management balances carrying too little and too much inventory

• Just-in-time logistics systems• RFID

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Marketing Logistics


Just-in-time logistics systems allow producers and retailers to carry small amounts of inventories of parts or merchandise

RFID (radio frequency identification devices) are small transmitter chips embedded in or placed on products or packages to provide greater inventory control

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Marketing Logistics

Transportation affects the pricing of products, delivery performance, and condition of the goods when they arrive

• Truck• Rail• Water• Pipeline• Air• Internet

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A channel of distribution comprises a set of institutions which perform all of the activities utilised to move a product and its title from production to consumption. Means used to transfer merchandise from the manufacturer to the end user. An intermediary in the channel is called a middleman. Channels normally range from two-level channels without intermediaries to five-level channels with three intermediaries. For example, a caterer who prepares food and sells it directly to the customer is in a two-level channel. A food manufacturer who sells to a restaurant supplier, who sells to individual restaurants, who then serve the customer, is in a four-level channel. Intermediaries in the channel of distribution are used to facilitate the delivery of the merchandise as well as to transfer title, payments, and information about the merchandise. For example, a manufacturer may rely upon the workforce employed by a distributor to sell the product, make deliveries, and collect payments. The channels used by a marketer are an integral part of the marketing plan and play a role in all strategic marketing decisions.Bucklin - Theory of Distribution Channel Structure (1966)Another element of Neil H.Borden's Marketing Mix is Place. Place is also known as channel, distribution, or intermediary. It is the mechanism through which goods and/or services are moved from the manufacturer/ service provider to the user or consumer.There are six basic 'channel' decisions:•Do we use direct or indirect channels? (e.g. 'direct' to a consumer, 'indirect' via a wholesaler). •Single or multiple channels. •Cumulative length of the multiple channels. •Types of intermediary (see later). •Number of intermediaries at each level (e.g. how many retailers in Southern Spain). •Which companies as intermediaries to avoid 'intrachannel conflict' (i.e. infighting between local distributors). Selection Consideration - how do we decide upon a distributor?•Market segment - the distributor must be familiar with your target consumer and segment. •Changes during the product life cycle - different channels can be exploited at different points in the PLC e.g. Foldaway scooters are now available everywhere. Once they were sold via a few specific stores.

Types of Channel Intermediaries.

There are many types of intermediaries such as wholesalers, agents, retailers, the Internet, overseas distributors, direct marketing (from manufacturer to user without an intermediary), and many others. The main modes of distribution will be looked at in more detail.1. Channel Intermediaries - Wholesalers•They break down 'bulk' into smaller packages for resale by a retailer. •They buy from producers and resell to retailers. They take ownership or 'title' to goods whereas agents do not (see below). •They provide storage facilities. For example, cheese manufacturers seldom wait for their product to mature. They sell on to a wholesaler that will store it and eventually resell to a retailer. •Wholesalers offer reduce the physical contact cost between the producer and consumer e.g. customer service costs, or sales force costs. •A wholesaler will often take on the some of the marketing responsibilities. Many produce their own brochures and use their own telesales operations.

2. Channel Intermediaries - Agents•Agents are mainly used in international markets. •An agent will typically secure an order for a producer and will take a commission. They do not tend to take title to the goods. This means that capital is not tied up in goods. However, a 'stockist agent' will hold consignment stock (i.e. will store the stock, but the title will remain with the producer. This approach is used where goods need to get into a market soon after the order is placed e.g. foodstuffs). •Agents can be very expensive to train. They are difficult to keep control of due to the physical distances involved. They are difficult to motivate.

•Producer - distributor fit - Is there a match between their polices, strategies, image, and yours? Look for 'synergy'. •Qualification assessment - establish the experience and track record of your intermediary. •How much training and support will your distributor require?

3. Channel Intermediaries - Retailers•Retailers will have a much stronger personal relationship with the consumer. •The retailer will hold several other brands and products. A consumer will expect to be exposed to many products. •Retailers will often offer credit to the customer e.g. electrical wholesalers, or travel agents. •Products and services are promoted and merchandised by the retailer. •The retailer will give the final selling price to the product. •Retailers often have a strong 'brand' themselves e.g. Ross and Wall-Mart in the USA, and Alisuper, Modelo, and Jumbo in Portugal.

4. Channel Intermediaries - Internet•The Internet has a geographically disperse market. •The main benefit of the Internet is that niche products reach a wider audience e.g. Scottish Salmon direct from an Inverness fishery. •There are low barriers low barriers to entry as set up costs are low. •Use e-commerce technology (for payment, shopping software, etc) •There is a paradigm shift in commerce and consumption which benefits distribution via the Internet

A company’s channel decisions directly affect every other marketing decision. Place decisions, for example, affect pricing. Marketers that distribute products through mass merchandisers such as Wal-Mart will have different pricing objectives and strategies than will those that sell to specialty stores. Distribution decisions can sometimes give a product a distinct position in the market. The choice of retailers and other intermediaries is strongly tied to the product itself. Manufacturers select mass merchandisers to sell mid-price-range products while they distribute top-of-the-line products through high-end department and specialty stores. The firm’s sales force and communications decisions depend on how much persuasion, training, motivation, and support its channel partners need. Whether a company develops or acquires certain new products may depend on how well those products fit the capabilities of its channel members. Some companies pay too little attention to their distribution channels. Others, such as FedEx, Dell Computer, and Charles Schwab have used imaginative distribution systems to gain a competitive advantage. Functions of Distribution ChannelsDistribution channels perform a number of functions that make possible the flow of goods from the producer to the customer. These functions must be handled by someone in the channel. Though the type of organization that performs the different functions can vary from channel to channel, the functions themselves cannot be eliminated. Channels provide time, place, and ownership utility. They make products available when, where, and in the sizes and quantities that customers want.

Distribution channels provide a number of logistics or physical distribution functions that increase the efficiency of the flow of goods from producer to customer. Distribution channels create efficiencies by reducing the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customers. This occurs in two ways. The first is called breaking bulk. Wholesalers and retailers purchase large quantities of goods from manufacturers but sell only one or a few at a time to many different customers. Second, channel intermediaries reduce the number of transactions by creating assortments—providing a variety of products in one location—so that customers can conveniently buy many different items from one seller at one time. Channels are efficient. The transportation and storage of goods is another type of physical distribution function. Retailers and other channel members move the goods from the production site to other locations where they are held until they are wanted by customers. Channel intermediaries also perform a number of facilitating functions, functions that make the purchase process easier for customers and manufacturers. Intermediaries often provide customer services such as offering credit to buyers and accepting customer returns. Customer services are oftentimes more important in B2B markets in which customers purchase larger quantities of higher-priced products. Some wholesalers and retailers assist the manufacturer by providing repair and maintenance service for products they handle. Channel members also perform a risk-taking function. If a retailer buys a product from a manufacturer and it doesn’t sell, it is “stuck” with the item and will lose money. Last, channel members perform a variety of communication and transaction functions. Wholesalers buy products to make them available for retailers and sell products to other channel members. Retailers handle transactions with final consumers. Channel members can provide two-way communication for manufacturers. They may supply the sales force, advertising, and other marketing communications necessary to inform consumers and persuade them to buy. And the channel members can be invaluable sources of information on consumer complaints, changing tastes, and new competitors in the market.

The Internet in the Distribution Channel

By using the Internet, even small firms with limited resources can enjoy some of the same competitive advantages as their largest competitors in making their products available to customers internationally at low cost. E-commerce can result in radical changes in distribution strategies. Today most goods are mass-produced, and in most cases end users do not obtain products directly from manufacturers. With the Internet, however, the need for intermediaries and much of what has been assumed about the need and benefits of channels will change. In the future, channel intermediaries that physically handle the product may become largely obsolete. Many traditional intermediaries are already being eliminated as companies question the value added by layers in the distribution channel. This removal of intermediaries is termed disintermediation, the elimination of some layers of the distribution channel in order to cut costs and improve the efficiency of the channel.

Product Factor

a) Sizes & weight of the product – If the size, weight & price of the product is very large, then direct supply should be there as it will lead to convenience & low transportation cost & there will be less chances of damage during transportation. For eg. Big industrial products like boilers, grinders etc.On the other hand, if size & weight of product is not so big, a long chain can be as in case of Fast Moving Consumers Goods (FMCG)b) Unit Value – If the per unit value of product is less, say for eg. salt, sugar, wheat, rice etc. then the distribution channel may be large as consumption of it is comparatively more. But, if the unit price is very high, for eg. gold, silver, then a smaller distribution channel is required.c) Stability of the product – If the product is of perishable in nature, i.e. it becomes useless after a specific period of time, like milk, butter, cheese, fish, etc. then a small distribution channel is required to ensure prompt delivery, but if the product is stable in nature like soaps, shampoo etc, then the distribution channel can be long.d) Standard v/s Specific products – Some distributors only want to sell standard & famous products, so if the product is standard in nature, manufacturer has to use these types of distributors or middlemen.But, if the product is specific one, say : engineering & medical books, which are not kept by all book-sellers, so in that case, these specific dealers on middlemen have to be chosen.e) Technical nature of product – If the product is of technical nature then an effective after sales service is also to be provided. So, in this case, either direct marketing or marketing through authorized dealer should be used, on only then company can use the services of its services- engineers more effectively. For eg., in case of electronic item TV’s and Refrigerators, outlet is authorized dealers, so if after sales service is required customers may contact the dealer, which passes it to the company for final service.f) Expert of product line – The manufacturer has to decide that he should take the services of a wholesaler or retailers or both and then accordingly decide to increase or decrease the product line. For eg., if the manufacturer is manufacturing soaps, then he can increase the product line by incorporating shampoos also, as the distribution channel will be the same.

A small manufacturer of potato chips would like to be available in grocery stores nationally, but this may not be realistic. We need to consider, then, both who will be willing to carry our products and whom we would actually like to carry them. In general, for convenience products, intense distribution is desirable, but only brands that have a certain amount of power—e.g., an established brand name—can hope to gain national intense distribution.

Distribution intensity Issues-

DETERMINING INTENSITY OF DECISIONS

Full service retailers tend dislike intensive distribution.

Low service channel members can "free ride" on full service sellers.

Manufacturers may be tempted toward intensive distribution—appropriate only for some; may be profitable in the short run.

Market balance suggests a need for diversity in product categories where intensive distribution is appropriate.

Service requirements differ by product category.

Distribution coverage is measured in terms of the intensity by which the product is made available. For the most part, distribution coverage decisions are of most concern to consumer products companies, though there are many industrial products that also must decide how much coverage to give their products. As we will see the marketer must take into consideration many factors when choosing the right level of distribution coverage.

There are three main levels of distribution coverage - mass coverage, selective and exclusive. • 1.Mass Coverage - The mass coverage (also known as intensive distribution) strategy attempts to distribute products widely in nearly all locations in which that type of product is sold. This level of distribution is only feasible for relatively low priced products that appeal to very large target markets (e.g., see consumer convenience products). A product such as Coca-Cola is a classic example since it is available in a wide variety of locations including grocery stores, convenience stores, vending machines, hotels and many, many more. With such a large number of locations selling the product the cost of distribution is extremely high and must be offset with very high sales volume. 2.Selective Coverage - Under selective coverage the marketer deliberately seeks to limit the locations in which this type of product is sold. To the non-marketer it may seem strange for a marketer to not want to distribute their product in every possible location. However, the logic of this strategy is tied to the size and nature of the product’s target market. Products with selective coverage appeal to smaller, more focused target markets (e.g., see consumer shopping products) compared to the size of target markets for mass marketed products. Consequently, because the market size is smaller, the number of locations needed to support the distribution of the product is fewer. 3. Exclusive Coverage - Some high-end products target very narrow markets that have a relatively small number of customers. These customers are often characterized as “discriminating” in their taste for products and seek to satisfy some of their needs with high-quality, though expensive products.

Effective channel management helps companies decrease costs and reach potential customers profitably. Effective channel management involves proper recruitment of channel members. Recruiting channel members should be a continuous process. In the recruitment process, screening involves elimination of applicants who do not match the criteria set for the position. After effective screening, the company has to make the final selection based on some criteria. These criteria can be divided into sales factors, product factors, experience factors, administrative factors and risk factors.

After selecting channel members, they have to be constantly evaluated and based on their performance, the company will either retain existing channel members or try to forge relationships with new channel members. Channel members can be evaluated by using parameters like sales quota attainment, average inventory levels, proper management of inventory, channel members'cooperation in promotional and training programmes, etc. The distribution requirements of a company will keep changing according to changes in the product life cycle. Modifying channels accordingly is essential for the success of the organization. However, care should be taken in dealing with channel members for proper channel management. Conflict management among channel members is another important activity for the management of the organization.

Channel-Management Decisions

A. Selecting Channel Members - evaluate experience, number of lines carried, growth and profit record, solvency, cooperativeness, and reputation

B. Training Channel Members - prepare the channel-member employees to perform more effectively and efficiently. This may also provide a competitive advantage

C. Motivating Channel Members - coercive, reward, legitimate, expert, or referent power. Producers vary in channel power 1. More sophisticated companies try to form partnerships2. Can evolve into long-term distribution programming

D. Evaluating Channel Members - sales quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs

E. Modifying Channel Arrangements - system will require periodic modification to1. Correct inefficiencies2. Adapt to change in consumer buying patterns3. Manage market expansion4. Thwart new competition5. Implement innovation6. Adjust activity to changes in product life cycle

Conflict, Cooperation, and Competition1. Types of conflict and competition a) Vertical channel conflict b) Horizontal channel conflictc) Multi-channel conflict

2. Causes of channel conflict a) Goal incompatibility b) Unclear roles and rights c) Differences in perception d) Overdependence

3. Managing channel conflict (responses) a) Adoption of super ordinate goals b) Exchange of people between channel levelsc) Co-optation - winning support at different levelsd) Joint membership in and between trade associationse) Diplomacy, mediation, and arbitration

E. Legal and Ethical Issues in Channel Relations1. Exclusive dealing2. Exclusive territories3. Tying agreements4. Dealers’ rights

Business

Chapter 1[1].mmii