Supply Side Channel Analysis:

Channel Structure and IntensityChapter 4 – Part 1

Learning Objectives

1. Describe the idea of selectivity in marketing channels2. Explain why manufacturers prefer more coverage, especially

in fast moving consumer goods (FMCG), while preferring the downstream channel member to limit its assortment in their product category

3. Explain why downstream channel members prefer less coverage, while preferring more assortment in the manufacturer’s product category.

4. Explain why limited distribution is preferable for brands with high-end positioning or a narrow target market

Introduction• A description of the channel structure summarizes the following:

1. Types of members that are in the channel2. The intensity or number of members of each type that coexist in

the market3. The number of distinct channels that coexist in the market

• Channel design presents three (3) challenges:1. To determine the level of intensity needed (How much coverage

should the producer have)2. Combining different channel types by going to market in multiple

ways, mixing different formats3. To decide whether the manufacturer should simultaneously go to

market via its own channels and via third parties

Introduction• Intensive distribution – a brand can be purchased through

many of the possible outlets in a trading area (at saturation, every possible outlet)

• Exclusive distribution – a brand can be purchased only through one vendor in a trading area, so that a vendor has a local monopoly on the brand.

• Typically, a brand is distributed with some degree of intensity, achieving partial coverage of available outlets in a market area.

• Degree of selectivity and intensity is a major factor driving the manufacturer’s ability to implement its programs.

Introduction

• The upstream member (manufacturer, supplier) considers how many outlets to pursue (degree of selectivity)

• The downstream member (reseller) considers the question: How many competing brands to carry in a product category (category selectivity)

Coverage vs Assortment• Why coverage is better for manufacturers of Convenience

goods?

• When it comes to availability of a brand in a trading area, more is always better (or so it would seem).

• The more outlets carry a brand, the more it will sell.

• If prospective purchasers encounter vigorous sales efforts for the brand in every outlet they visit, they are persuaded to make a purchase of the brand.

Coverage vs Assortment• How could it NOT be true that more coverage is better?

• It would depend on the NATURE OF THE PRODUCT CATEGORY.

• Many categories of product or service are routine, low involvement purchases that the buyer considers minor and low risk. Fast moving consumer goods (FMCG) fits into this category• Foods, tissues, office supplies, etc.

• Given acceptable brand choice, buyers will tend to take what is offered rather than search for their favorite brand.

• FOR ANYTHING OTHER THAN CONVENIENCE GOODS, Intensive distribution might not hold.

Coverage vs Assortment• Why downstream channel members dislike intensive

distribution?

• Channel members differentiate themselves by offering unique assortment. Intensive distribution means that a channel member’s competitors have the same brand, thereby eroding the outlet’s uniqueness.

• Each downstream member would prefer exclusivity.

Coverage vs Assortment• Intrabrand competition – Competition between sellers of the

same brand. (Price discounts, etc.)

• From a manufacturer’s perspective, intrabrand competition at the retail level is desirable in the short term. Channel members will move more product by charging lower prices (as an example) and are likely to fund it by slashing their own margins.

• The manufacturer will realize higher sales volumes at the same wholesale price. However, channel members will also press for lower wholesale price because of the small margins.

Coverage vs Assortment• If the wholesale prices are not cut , the problem of low

margin persists, the channel member will most likely DROP the supplier (unless it is a powerful brand).

• Channel members drop a brand in three ways:1. Discontinuing the saturated brand and substituting another

that is less intensively distributed in their trading areas. (Only applicable for typical, not strong, brands)

2. Discontinue the entire product category if a substitute cannot be found and the category is not essential.

3. Bait and switch

Coverage vs Assortment• Can the manufacturer sustain intensive distribution?

• Intensive distribution often creates lackluster sales support, defection of downstream channel members and even bait and switch tactics.

• Solutions:• Contractual – impose a contract demanding certain standards of

conduct then bringing legal actions against offenders. However, this may alienate channel members and generate unfavorable publicity for the supplier.

• Pull Strategy – by building brand equity. Downside is it will be very costly in the form of massive investments in advertising and promotion.

Coverage vs Assortment• Another solution is Resale price maintenance (RPM).

• This means that the manufacturer can legally set a price floor below which channel members cannot charge their own customers. The legality of RPM varies widely in world. (It was illegal in the U.S. but is now governed under a rule of reason).

• If RPM is allowed, manufacturers can use it to set minimum resale prices high enough so that all channel members have an acceptable margin.

• For purchasers, the brand will be easy to find and resellers will compete on a non-price basis (selling services, amenities, etc.)

• The bad news is, it will be difficult to get a discount.

Coverage vs Assortment• Degree of category exclusivity: The downstream channel member’s decision

• Distributors are likely to carry one or more brand in a certain category to meet the assortment demands of its customer base. Keeping assortments satisfies customers (although it drives up inventory costs)

• Conflicts:• Manufacturers want to blanket a trading area with outlets, but outlets prefer

the reverse.

• Downstream channel members prefer to have multiple brands to offer in a category, but manufacturers prefer to the reverse.

• Manufacturers prefer that downstream members support the brand vigorously and charge low margins, but the latter prefers lower costs and higher margins.

Striking a Deal: “How much selectivity to trade away”• THE THREAT OF COMPLACENCY

• Whenever coverage of a brand is highly selective, the manufacturer faces a difficult circumstance. When a small set of channel member carries the brand, intrabrand competition is low.

• A certain degree of intrabrand competition is beneficial to the manufacturer. It brings forth each channel member’s best efforts without going so far as to put them in a losing situation.

Striking a Deal: “How much selectivity to trade away”• The Nature of the Product Category

• In designing how much selectivity to grant to channel members in a market area, the manufacturer should begin with service output demands that are likely to be common in a product class.

• A policy of selective distribution is that manufacturers should carefully select, cultivate and support the correct outlets in the trading area.

Brand Strategy: Quality Positioning and Premium Pricing• The first consideration in turning to a class of factors that apply

to a given brand and its marketing strategy is the brand’s positioning on the quality dimension.

• If a brand is positioned as high quality (Mercedes Benz, Cabasse) it convey an image that the brand has superior ability to perform its functions, or more simply, that is so superior as to be excellent.

• The manufacturer must pay attention to the image or reputation of the channel member representing the brand because this image will impaired to everything the channel member sells. Preference lies toward channel members that excel in handling high-end brands.

Brand Strategy: Quality Positioning and Premium Pricing• A variation on the theme of high quality is the theme of

SCARCITY – some manufacturers deliberately create product shortages.• The idea is that scarcity can be appealing (If not everyone can get

the product, it may be psychologically more desirable).

• Artificial scarcity is a marketing strategy that is coupled with selective distribution in order to increase illusiveness , hence the allure of the product. (i.e. Harley Davidson)

• To combat low intrabrand competition, the manufacturer will offer a contract to exchange vigorous effort with minimal or no competition for the brand.