Marketing Channels

Establish channels for different target markets and aim for efficiency, control, and adaptability.

Marketing Channels

Most firms ğ single link in a larger supply chain

Supply chain with “make & sell” view vs. demand chain with “sense & respond” view

A value network ğ a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings upstream and downstream partners

Marketing Channels Marketers ğ focusing on the downstream part

of the supply chain --- the mktg channels that look forward toward the customer

Marketing channels ğ Sets of interdependent organizations (marketing intermediaries) involved in the process of making a product or service available for use or consumption by the consumer or business user called also: “distribution channels” or “trade

channels”

Marketing Channels

Reasons to use marketing intermediaries Lack of financial resources for direct marketing; Direct mktg may not be feasible; Producer’s greater return by increasing the

investment in the main business.

The use of intermediaries results from their greater efficiency in making goods available to target markets.

Marketing Channels

Offer the firm more than it can achieve on its own, through the intermediaries’: Contacts, Experience, Specialization, Scale of operation.

Purpose: match supply from producers to demand from consumers.

Importance of Marketing Channels

• How Channel Members Add Value

• Fewer contacts• Match product

assortment demand with supply

• Bridge, time, place, and possession gaps that separate products from users.

ContactContact

FinancingFinancing

InformationInformationRisk TakingRisk Taking

PromotionPromotion

MatchingMatchingNegotiationNegotiation

PhysicalDistribution

PhysicalDistribution

Channel Functions

Flows in the Marketing Channel

ManufacturerManufacturer WholesalerWholesaler JobberJobber RetailerRetailer ConsumerConsumer

ManufacturerManufacturer WholesalerWholesaler RetailerRetailer ConsumerConsumer

ManufacturerManufacturer RetailerRetailer ConsumerConsumer

ManufacturerManufacturer ConsumerConsumer

0-level channel

1-level channel

2-level channel

3-level channel

Channel Level ğ Each layer of marketing intermediaries that perform some work in bringing the product and its ownership closer to the final buyer.

Consumer Marketing Channels

Direct Channel

Indirect Channel

Industrialdistributors

Man

ufa

ctu

rer

Co

nsu

mer

Manufacturer’srepresentative

Manufacturer’ssales branch

Industrial Marketing Channels

Channel Design Decisions

Push strategy ğ the manufacturer using its salesforce and trade promotion money to induce intermediaries to carry, promote, and sell the product to end users

Pull strategy ğ the manufacturer using advertising and promotion to induce consumers to ask intermediaries for the product, thus inducing the intermediaries to order it.

Channel Design Decisions

1. Analyzing customers’ service needs (customers’ desired service output levels)

2. Setting channel objectives and constraints

3. Identifying the major channel alternatives

4. Evaluating the major channel alternatives

Channel Design Decisions Analysis of Customers’ Desired Service Output Levels

Lot size Waiting time Spatial convenience Product variety Service backup

Channel Design Decisions Channel Objectives and Constraints

Channel objectives should be stated in terms of: Targeted service output levels Product characteristics Company policies Intermediaries’ characteristics Competitors’ channels and policies Environmental factors

Channel Design Decisions Identification of Channel Alternatives

Major channel alternatives have to be identified in terms of: Types of Intermediaries Number of Intermediaries Terms and Responsibilities of Channel

Members

Channel Design Decisions Identification of Channel Alternatives

Types of Intermediaries Example: A test-equipment manufacturer-

alternatives: Expand the company’s salesforce Hire manufacturers’ agents in different

regions Find industrial distributors and give them

exclusive distribution

Channel Design Decisions Identification of Channel Alternatives

Number of Intermediaries Intensive distribution Selective distribution Exclusive distribution

Channel Design Decisions Identification of Channel Alternatives

Responsibilities of Channel Members Price policy ğ to establish a price list and

determine discounts for intermediaries Conditions of sales ğ refer to payment

terms and producer guarantees Distributors’ territorial rights Mutual services and responsibilities

Channel Design Decisions Evaluation of Channel Alternatives

Each alternative needs to be evaluated against: Economic criteria

To determine whether a company’s salesforce or a sales agency will produce more sales

To estimate the costs of selling different volumes through each channel

To compare sales and costs Control and adaptive criteria

Example: Evaluation of Channel AlternativesBreak-Even Cost Chart

Channel Management Decisions

Selecting Channel Members Training Channel Members Motivating Channel Members

Producers can use:Coercive powerReward powerLegitimate powerExpert powerReferent power

Evaluating Channel Members Modifying Channel Arrangements

Channel Management Decisions Motivating Channel Members

Coercive power ğ when a manufacturer threatens to withdraw a resource or to terminate the relationship if intermediaries fail to cooperate

Reward power ğ the manufacturer offers an extra benefit for performing specific acts or functions

Legitimate power ğ the manufacturer requests a behavior that is warranted under the contract

Expert power ğ the manufacturer has special knowledge that the intermediaries value

Referent power ğ the manufacturer is so higly respected that the intermediaries are proud to be associated with it

Changing Channel Organization

A major trend ğ toward “disintermediation”:

Product and service producers are bypassing intermediaries and going directly to final buyers

or; New types of channel intermediaries are emerging

to displace traditional ones

Channel DynamicsConventional

Marketing Channel

Vertical Marketing

System (VMS)

ManufacturerManufacturerManufacturer

Wholesaler

Retailer

Consumer Consumer

Wholesaler

Retailer

ContractualVMS

ContractualVMS

RetailerCooperatives

RetailerCooperatives

FranchiseOrganizations

FranchiseOrganizations

Wholesaler SponsoredVoluntary Chains

Wholesaler SponsoredVoluntary Chains

Service-Firm-Sponsored Franchise

Service-Firm-Sponsored Franchise

Manufacturer-Sponsored Wholesaler

Franchise

Manufacturer-Sponsored Wholesaler

Franchise

Manufacturer-Sponsored Retailer

Franchise

Manufacturer-Sponsored Retailer

Franchise

Vertical Marketing Systems (VMS)

Vertical Marketing Systems (VMS)

CorporateVMS

CorporateVMS

AdministeredVMS

AdministeredVMS

Channel DynamicsTypes of Vertical Marketing Systems

Channel Dynamics: Innovations in Marketing Systems

Horizontal Marketing

SystemTwo or more companies at one channel level join together to follow a new marketing opportunity.

e.g. banks in food retailers

Horizontal Marketing

SystemTwo or more companies at one channel level join together to follow a new marketing opportunity.

e.g. banks in food retailers

Multichannel (Hybrid)

Marketing System

A Single firm sets up two or more marketing channels to reach one or more customer segments

e.g. Supermarkets, traditional stores, and sales force

Multichannel (Hybrid)

Marketing System

A Single firm sets up two or more marketing channels to reach one or more customer segments

e.g. Supermarkets, traditional stores, and sales force

Channel Dynamics: Conflict, Cooperation, and Competition

The channel will be most effective when: Each member is assigned tasks it can do best All members cooperate to attain overall channel

goals and satisfy the target market

When this does not happen ğ “conflict” occurs For the channel to perform well, each channel

member’s role must be specified and conflict must be managed.

Channel Dynamics: Types of Conflict

Channel conflict ğ disagreements among mktg channel members on goals and roles

Vertical conflict ğ conflict between different levels within the same channel

Horizontal conflict ğ conflict between members at the same level within the channel

Multichannel conflict ğ conflict between two or more different channels that are used by the same manufacturer

Channel Dynamics: Causes of Channel Conflict

Goal Incompatibility ğ differences in expectations

Unclear Roles and Rights ğ territory boundaries, credit for sales, etc.

Differences in Perception Dependence

Channel Dynamics: Managing Channel Conflict

The challenge ğ not to eliminate conflict, but to manage it!

Some mechanisms for effective conflict management: Diplomacy Mediation Arbitration

Channel Dynamics: Legal and Ethical Issues

Exclusive distribution Only certain outlets are allowed to carry a

firm’s products

Exclusive dealing Exclusive territorial agreements Tying agreements