The Role of Marketing Channels

The Importance of Channels:

A marketing channel system is the particular set of marketing channels employed by a firm. Decisions about the marketing channel system are among the most critical facing management. In the United States, channel members collectively earn margins that account for 30 to 50 percent of the ultimate selling price, whereas advertising typically accounts for less than 7 percent of the final price.

The Role of Marketing Channels

The channels chosen affect all other marketing decisions. The companys pricing depends on whether it uses mass merchandisers or high-quality boutiques.

The Role of Marketing Channels

The firm must decide how much effort to devote to push versus pull marketing. A push strategy involves the manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end users.

The Role of Marketing Channels

A pull strategy involves the manufacturer using advertising and promotion to persuade consumers to ask intermediaries for the product, thus inducing the intermediaries to order it.

Value Networks
The company should first think of the target market and then design the supply chain backward from that point, a view called demand-chain planning. The concept of a value networka system of partnerships and alliances that a firm creates to source, augment, and deliver its offeringstakes an even broader view. A value network includes a firms suppliers and its suppliers suppliers, and its immediate customers and their end customers.

The Role of Marketing Channels

Why would a producer delegate some of the selling job to intermediaries? Delegation means relinquishing some control over how and to whom the products are sold.
Producers do gain several advantages by using intermediaries:

The Role of Marketing Channels

Many producers lack the financial resources to carry out direct marketing. General Motors Producers who do establish their own channels often can earn a greater return by increasing investment in their main business. (20-10) In some cases, direct marketing simply is not feasible. The William Wrigley Jr. Company

Channel Functions and Flows

A marketing channel performs the work of moving products from producers to consumers, overcoming the time, place, and possession gaps that separate goods and services from those who need or want them.

Channel Functions and Flows

Forward flow of activity - organization to the end user (i.e., physical delivery, title, promotion) Backward flow of activity - end user to the organization (i.e., ordering, payment, returns) Interactive flow - simultaneous exchange of physical, transactional or communication (i.e., negotiation, risk taking, information)

Channel Functions and Flows

Zero-level (or direct marketing channel) - sell direct to end user with no intermediary One-level or one intermediary such as a retailer Two-level or two intermediaries - jobber and retailer Three-level or three intermediaries - wholesaler, transporter, retailer Reverse-flow-channels. Bring back products for reuse, refurbish for resale, recycle, disposal. Different intermediaries may perform one or more of these functions

Service Sector Channels

Producers of services and ideas also face the problem of making their output available and accessible to target populations. For instance, schools develop educational dissemination systems and hospitals develop health-delivery systems. These institutions must determine agencies and locations for reaching a population that is spread out over an area.

CHANNEL-DESIGN DECISIONS
Analyzing Customers Desired Service Output Levels
Because the point of a marketing channel is to make a product available to customers, the marketer must understand what its target customers actually want. Channels produce five service outputs:

CHANNEL-DESIGN DECISIONS
1. Lot size. The number of units the channel permits a typical customer to purchase on one occasion. In buying for its fleet, Hertz wants a channel from which it can buy a large lot size; a household wants a channel that permits buying a lot size of one. 2. Waiting time. The average time customers of that channel wait for receipt of the goods. Customers normally prefer fast delivery channels. 3. Spatial convenience. The degree to which the marketing channel makes it easy for customers to purchase the product. 4. Product variety. The assortment breadth provided by the channel. Normally, customers prefer a greater assortment, which increases the chance of finding what they need. 5. Service backup. The add-on services (credit, delivery, installation, repairs) provided by the channel. The greater the service backup, the greater the work provided by the Channel.

Establishing Objectives and Constraints

Channel objectives should be stated in terms of targeted service output levels. Under competitive conditions, channel institutions should arrange their functional tasks to minimize total channel costs and still provide desired levels of service outputs. Usually, planners can identify several market segments that want different service levels. Effective planning requires determining which market segments to serve and the best channels for each.

Establishing Objectives and Constraints

Channel objectives vary with product characteristics. Perishable products require more direct marketing. Bulky products, such as building materials, require channels that minimize the shipping distance and the amount of handling. Nonstandard products, such as custom-built machinery, are sold directly by company sales representatives. Products requiring installation or maintenance services, such as heating systems, are usually sold and maintained by the company or franchised dealers. High unit-value products such as turbines are often sold through a company sales force rather than intermediaries.

Identifying Major Channel Alternatives

Types of Intermediaries available to carry on channel work: Merchants such as wholesalers and retailersbuy, take title to, and resell the merchandise.

Agents such as brokers, manufacturers representatives, and sales agents search for customers and may negotiate on the producers behalf but do not take title to the goods. Facilitators, including transportation companies, independent warehouses, banks, and advertising agencies, assist in the distribution process but neither take title to goods nor negotiate purchases or sales

Identifying Major Channel Alternatives

Number of Intermediaries: Exclusive distribution means severely limiting the
number of intermediaries. Firms such as automakers use this approach to maintain control over the service level and service outputs offered by the resellers. Often it involves exclusive dealing arrangements, in which resellers agree not to carry competing brands.

Identifying Major Channel Alternatives

Selective distribution involves the use of more than a few but less than all of the intermediaries who are willing to carry a particular product. In this way, the producer avoids dissipating its efforts over too many outlets, and it gains adequate market coverage with more control and less cost than intensive distribution. (Ex: Disney)

Identifying Major Channel Alternatives

Intensive distribution consists of the manufacturer placing the goods or services in as many outlets as possible. This strategy is generally used for items such as tobacco products, soap, snack foods, and gum, products for which the consumer requires a great deal of location convenience.

CHANNEL-MANAGEMENT DECISIONS
Selecting Channel Members:
Companies need to select their channel members carefully because to customers, the channels are the company. Producers should determine what characteristics distinguish the better intermediaries and examine the number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation of potential channel members.

Training Channel Members

Companies need to plan and implement careful training programs for their intermediaries.

Motivating Channel Members

Companies should look at their channel members in the same way they look at their end users. This means determining intermediaries needs and tailoring the channel positioning to provide superior value to these intermediaries. To improve intermediaries performance, the company should provide training, market research, and other capability-building programs. The company must also constantly reinforce that its intermediaries are partners in the joint effort to satisfy customers.

Evaluating Channel Members

Producers must periodically evaluate intermediaries performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs Underperformers need to be counseled, retrained, re-motivated, or terminated.

Modifying Channel Arrangements

Channel arrangements must be reviewed periodically and modified when distribution is not working as planned, consumer buying patterns change, the market expands, new competition arises, innovative distribution channels emerge, or the product moves into later stages in the product life cycle. The change could involve adding or dropping individual channel members, adding or dropping particular market channels, or developing a totally new way to sell goods.

CHANNEL DYNAMICS
Vertical Marketing Systems: A vertical marketing system (VMS), comprises the producer, wholesaler(s), and retailer(s) acting as a unified system. One channel member, the channel captain, owns the others, franchises them, or has so much power that they all cooperate. The channel captain can be the producer, the wholesaler, or the retailer.

VMSs arose as a result of strong channel members attempts to control channel behavior and eliminate conflict from independent channel members pursuing their own objectives.

Vertical Marketing Systems

A corporate VMS combines successive stages of production and distribution under single ownership. Companies that desire a high level of control over their channels favor vertical integration. For example, Sears obtains over 50 percent of the goods it sells from companies that it partly or wholly owns.

Vertical Marketing Systems

An administered VMS coordinates successive stages of production and distribution through one members size and power. Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers. For example, Procter & Gamble and Campbell Soup can command cooperation from their resellers in connection with displays, shelf space, promotions, and price policies.

Vertical Marketing Systems

A contractual VMS consists of independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Often called value-adding partnerships (VAPs).

Vertical Marketing Systems

Three types:
1. Wholesaler-sponsored voluntary chains organize groups of independent retailers to better compete with large chains. These wholesalers work with participating retailers to standardize selling practices and achieve buying economies so the group can compete with chains.

Vertical Marketing Systems

2. Retailer cooperatives arise when the stores take the initiative and organize a news entity to carry on wholesaling and possibly some production. Members of retail cooperatives concentrate their purchases through the co-op and jointly plan their advertising; members share in profits in proportion to their purchases. Examples: hardware, food, agriculture products, and even movie theaters.

Vertical Marketing Systems

Franchise organizations are created when a channel member called a franchisor links several successive stages in the productiondistribution process. Franchises include manufacturer-sponsored retailer franchises (Ford and its dealers); manufacturer-sponsored wholesaler franchises (Coca-Cola and its bottlers); and service-firm sponsored retailer franchises (Ramada Inn and its motel franchisees).

Horizontal Marketing Systems

Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Many supermarket chains have arrangements with local banks to offer in-store banking.
Each company lacks the capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The companies might work with each other on a temporary or permanent basis or create a joint venture company.

Multichannel Marketing Systems

Once, many companies sold to a single market through a single channel. Today, with the proliferation of customer segments and channel possibilities, more companies have adopted multichannel marketing. Multichannel marketing occurs when a single firm uses two or more marketing channels to reach one or more customer segments.

Multichannel Marketing Systems

By adding more channels, companies can gain three important benefits. The first is increased market coverage.

The second is lower channel costcompanies may add a new channel to lower the cost of selling to an existing customer group (selling by phone rather than personally visiting small customers).
The third is more customized sellingsuch as adding sales force to sell more complex equipment.

Legal and Ethical Issues in Channel Relations

For the most part, companies are legally free to develop whatever channel arrangements suit them. In fact, the law seeks to prevent companies from using exclusionary tactics that might keep competitors from using a channel.

Legal and Ethical Issues in Channel Relations

With exclusive dealing, the seller allows only certain outlets to carry its products and requires that these dealers not handle competitors products. Both parties benefit from exclusive arrangements: The seller obtains more loyal and dependable outlets, and the dealers obtain a steady source of supply of products and stronger seller support. Exclusive arrangements are legal as long as they do not substantially lessen competition or tend to create a monopoly, and both parties have voluntarily entered into the agreement.

Legal and Ethical Issues in Channel Relations

The producer of a strong brand sometimes sells it to dealers only if they will take some or all of the rest of the line. This practice is called full-line forcing. Such tying agreements are not necessarily illegal, but they do violate U.S. law if they tend to lessen competition substantially. Note that a producers right to terminate dealers is somewhat restricted. In general, sellers can drop dealers for cause, but not if, for instance, the dealers refuse to cooperate in a doubtful legal arrangement, such as exclusive dealing or tying agreements.

E-COMMERCE MARKETING PRACTICES

E-business describes the use of electronic means and platforms to conduct a companys business. E-commerce means that the company or site transacts or facilitates the selling of products and services online. E-commerce has given rise to e-purchasing and emarketing. E-purchasing means companies decide to buy goods, services, and information from various online suppliers. Emarketing describes company efforts to inform buyers, communicate, promote, and sell its offerings online.

Pure-Click Companies
There are several kinds of pure-click companies: search engines, Internet service providers (ISPs), commerce sites, transaction sites, content sites, and enabler sites.
Commerce sites sell all types of products and services, notably books, music, toys, insurance, clothes, and so on. Among the most prominent commerce sites are Amazon, eBay, and Expedia.

Brick-and-Click Companies

Many brick-and-mortar companies have agonized over whether to embrace e-commerce. Some opened Web sites describing their businesses but resisted adding e-commerce because they feared that channel conflict would arise from competing with their offline retailers, agents, or their own stores.

Brick-and-Click Companies
There are at least three strategies for trying to gain acceptance from intermediaries: (1) offer different brands or products on the Internet; (2) offer the offline partners higher commissions to cushion the negative impact on sales; and (3) take orders on the Web site but have retailers deliver and collect payment. For example, Harley-Davidson asks customers who want to order accessories online to select a participating dealer. The dealer, in turn, fulfills the order, adhering to Harleys standards for prompt shipping.

References
Kotler, P. and Keller, K. (2007) A Framework for Marketing Management, Third Edition by Prentice Hall. Pearson Education, Inc.