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Ashesi University COURSE TITLE : MARKETING SEMESTER : FIRST, 2011/2012 MODULE 8: Making Distribution and Retailing Decisions Lecturer: Ebow Spio Learning Objectives 1. Explain how companies use marketing channels and discuss the functions these channels perform 2. Identify the major channel alternatives open to a company 3. Understand factors that inform the way firms take channel decisions and establish strategy 4. Explain the roles of retailers and wholesalers in the distribution channel 5. Explain the marketing decisions facing retailers and wholesalers 6. Explain how companies select, motivate, and evaluate channel members 12-2 Marketing/Distribution Channels Marketing (or distribution) channel a set of interdependent organisations involved in the process of making products or service available for use or consumption by the consumer or industrial user. Marketing channels are an integral part of the marketing mix. They provide the means by which manufacturers become linked with their target markets. More importantly and more pertinently, marketing channels are the means by which customers can access the products and services that they want, at the time that they prefer and at their convenience How Channel Members Add Value 1. Creating Utility : Time, place, possession, form 2. Facilitating exchange efficiencies 3. Alleviating Discrepancies e.g. quantity and assortment 4. Standardising Transactions: products, packaging, pricing, delivery is standardised through the channel 5. Customer Service e.g. technical advice, dealing with customer enquiries, after sale service etc. Functions of Members of Marketing Channel 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 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 Functions of Members of Marketing Channel 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 Types of Distribution Channels There 3 broad types of Distribution Channel 1. Consumer Goods Channel 2. Business Channels Tend to be shorter than Consumer goods channel for the following reason • Small number of ultimate customers • The greater geographic concentration of customers • The greater complexity of the products that require closer producer-customer liaison 3. Service Channels also tend to be shorter because of the intangibility of services and need for personal contact between the service provider and consumer Types of Distribution Channels Consumer Goods Channels Channel Level A layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer Channel 1 Manufacturer Channel 2 Manufacturer Channel 3 Manufacturer Channel 4 Manufacturer Consumer Retailer Wholesaler Retailer Agent Wholesaler Retailer Consumer Consumer Consumer NB: Hybrid Marketing Channels or multi-channel distribution, as when a single firm sets up 2 or more marketing channels to reach one or more customer segments. Types of Distribution Channels Business Marketing Channels Channel Level A layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer Channel 1 Manufacturer Channel 2 Manufacturer Agent Channel 3 Manufacturer Distributor Channel 4 Customer Manufacturer Business Customer Agent Business Customer Business Customer Distributor Business Types of Distribution Channels Distribution Channels for Services Channel Level A layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer Channel 1 Service Provider Channel 2 Customer Service Provider Consumer or Business Customer Agent Consumer or Business How the Members of the Marketing Channel are Connected Connected by types of flows: • Physical flow of products • Flow of ownership • Payment flow • Information flow • Promotion flow Establishing Channel Strategies Channel strategy decisions involve the following : 1. The selection of the most effective distribution channel, 2. The most appropriate level of distribution intensity 3. The degree of channel integration Establishing Channel Strategies :Channel Selection Why will Procter and Gamble sell its brands through supermarkets rather than selling direct to consumers ? Why Dell will sell direct to end users and not necessarily through retailers? 1.Market Factors : 2.Producer Factors 3.Product Factors 4.Competitive Factors Establishing Channel Strategies :Channel Selection 1. Market Factors : • Buyer Behaviour, • Buyer needs information, installation & technical assistance etc. • Willingness of channel intermediaries to market product • The profit margins demanded by wholesalers & retailer and commission by sales agents • The number and size of buyers • The location and geographical concentration of customers Establishing Channel Strategies :Channel Selection Producer Factors • Resource availability : Financial and Managerial resources • Product Mix • Desired Degree of Control of Channel Operations (price, stocking of new products etc) Product Factors • Product Complexity • Price • Size • Degree of difficulty in carrying e.g. storage etc. Establishing Channel Strategies :Channel Selection Competitive Factors • Control of traditional channels of distribution through franchise or exclusive dealing arrangements Establishing Channel Strategies :Channel Selection Why a Firm May like to use Direct Marketing Channels Direct Marketing Channel is a marketing channel that has no intermediary levels. The end user is served directly .e.g. through the internet, mail order etc. 1. Greater Control 2. Lower Cost 3. Value Added Subsequent to Production Process 4. Direct Contact with Customer Needs 5. Quicker Response or Change in Marketing Mix 6. Suitable Middlemen Not Available Establishing Channel Strategies :Distribution Intensity 3 broad options are intensive, selective and exclusive: 1. Intensive 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 e.g. foods, toiletries, beer etc. Aim is to achieve saturation coverage of the market 2. Selective 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 Establishing Channel Strategies :Distribution Intensity 3. Exclusive is a strategy in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories e.g. only one wholesaler, retailer or industrial distributor is used in a geographic area. • Luxury automobiles • High-end apparel Establishing Channel Strategies : Channel Integration Channel Integration can range from conventional marketing channels, comprising an independent producer and channel intermediaries, through to a franchise operation, to channel ownership by a producer. Producers need to consider the strengths and weaknesses of each system when setting channel strategies Establishing Channel Strategies : Channel Integration Conventional Marketing Channels 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. Characterized by hard bargaining and occasionally conflict Each party can specialize in what it knows best; manufacturers produce and intermediaries distribute. Establishing Channel Strategies : Channel Integration Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system. One channel member owns the others, has contracts with them or has so much power that they all cooperate. The following can be identified: • Corporate marketing systems • Contractual marketing systems • Administered marketing systems Establishing Channel Strategies : Channel Integration Corporate vertical marketing systems (Channel Ownership) integrates successive stages of production and distribution under single ownership. By purchasing retail outlets, producers control their purchasing, production and marketing activities. E.g. purchase of Pizza Hut and KFC by Pepsi has tied these outlets to Pepsi’s soft drinks brands. E.g. Oil industry where Shell and BP own fuel stations as well as refineries or means of production. Contractual vertical marketing systems 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. Franchise organization links several stages in the production distribution process • Manufacturer-sponsored retailer franchise system • Manufacturer-sponsored wholesaler franchise system e.g. Coca Cola • Service firm-sponsored retailer franchise system e.g. MacDonald’s, Establishing Channel Strategies : Channel Integration Administered Vertical marketing systems has a few dominant channel members without common ownership. Leadership comes from size and power. Manufacturer that dominates it market through size and strong brands may exercise considerable power over intermediaries even though they are independent. Large dominant supermarkets/retail chains such as Marks & Spencer, Tesco, Wal Mart also wield power through size of purchasing and enormous access to end users (market power) Establishing Channel Strategies : Channel Integration Horizontal Marketing Systems A channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity E.g. MacDonald’s “ Express” version of restaurants opened in Wal-Mart stores. Establishing Channel Strategies :Evaluating the Major Alternatives Economic criteria compares the likely sales, costs and profitability of different channel alternatives 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 12-46 Retailing Retailing includes all the activities in selling products or services directly to final consumers for their personal, non-business use Retailers are businesses whose sales come primarily from retailing 13-4 Retailing Non-store retailing includes selling to final consumers through: • Direct mail • Catalogs • Telephone • Internet • TV shopping • Home and office parties • Door-to-door sales • Vending machines 13-5 Retailing Types of Retailers Classified in terms of: • Amount of service: Self-service, Limited-service, Full-service • Product lines : Length and breadth of product assortments • Relative price 13-6 Retailing • • • • • Retailer Marketing Decisions Target market and positioning Product assortment, services, store atmosphere : Differentiate the retailer while matching shoppers’ expectations. Price : Higher Mark ups on lower volumes or lower mark ups on higher volumes Promotion : advertising, personal selling, sales promotion, public relations & direct marketing Place : Location accessible to their target market & consistent with positioning. 13-23 Wholesaling Wholesaling : All activities involved in selling goods and services to those buying for resale or business use. Wholesalers add value by performing channel functions • Selling and promoting • Buying assortment building • Bulk breaking • Warehousing • Transportation • Financing • Risk bearing • Market information • Management services and advice 13-40 Wholesaling Functions Selling and promoting involves the wholesaler’s sales force helping the manufacturer reach many smaller customers at lower cost Buying and assortment building involves the selection of items and building of assortments needed by their customers, saving the customers work Bulk breaking involves the wholesaler buying in larger quantity and breaking into smaller lots for its customers Warehousing involves the wholesaler holding inventory, reducing its customers’ inventory cost and risk 13-41 Wholesaling Functions Transportation involves the wholesaler providing quick delivery due to its proximity to the buyer Financing involves the wholesaler providing credit and financing suppliers by ordering earlier and paying on time Risk bearing involves the wholesaler absorbing risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence Market information involves the wholesaler providing information to suppliers and customers about competitors, new products, and price developments Management services and advice involves wholesalers helping retailers train their sales clerks, improve store layouts, and set up 13-41 accounting and inventory control systems Types of Wholesaler Merchant Wholesaler Independently owned business that takes title to the merchandise it handles e.g. -General Merchandise -Single Line -Specialty - Cash & Carry - Drop Shippers - Truck - Mail Order - Producer Cooperatives - Rack Jobbers Agent A wholesaler who represents buyers or sellers on a relatively Permanent basis, performs only a few functions , does not take title to goods -Manufacturers agents - Brokers - Commission Merchants - Auction Houses - Selling Agents Wholesaling Wholesaler Marketing Decisions Target market and positioning decisions • Size of customer • Type of customer • Need for service Marketing mix decisions • Product • Price • Promotion • Place 13-51 Channel Management Decisions Channel management involves: • Selecting channel members • Motivating channel members • Training • Managing Conflict • Evaluating channel members 12-48 Reasons for appointing a New Channel Member • Unsatisfactory performance of an existing member • Intermediary ceases trading or declines to renew contract • Conflicts of interest • Expansion of the network requiring new intermediaries and skills • Market expansion Channel Management Decisions : Selecting Channel Members Selection Criteria Determining the characteristics that distinguish the better ones by evaluating channel members • • • • • • • • • • • their financial position; depth and width of product lines carried; are competitive lines carried?; evidence of marketing, sales, and promotional ability; approach to order processing and order fulfillment; evidence of investment in IT; reputation within industry; willingness to share data Years in business Market coverage Market Knowledge etc. 12-49 Channel Management Decisions Motivating channel members • Key to effective motivation is to understand the needs and problems of distributors e.g. financial incentive or exclusive territory • Possible Motivators : Financial rewards, territorial exclusivity, providing support (e.g. sales training, advertising and promotion support etc) • Producers seek to develop strong relationships with distributors based on recognition of performance and integrated planning 12-48 Channel Management Decisions Training • • Provide the necessary technical knowledge about company and products & help to build a spirit of partnership and commitment Training for smaller distributors in the areas of sales management, marketing, financial management, stock control and personnel management 12-48 Channel Management Decisions Managing Conflict When producers and channel members are independent , conflict inevitably occurs from time to time Sources of Conflict • Difference in Goals • Role Conflict • Perception of Reality • Domain Differences • Performance Expectation 12-48 Channel Management Decisions Avoiding and Resolving Conflict • Developing a Partnership Approach • Training in Conflict handling • Improving Performance • Channel Ownership • Coercion : Producers threatening to withdraw supplier or retailers threatening to delist the manufacturers products. • Marketing Communications 12-48 Communications and Channel Management Communication consists of two components 1. Data Flows: the operational, i.e. Day-to-day, information that flows across channel. It builds trust and commitment Trust: Belief that another company will perform actions that will result in the positive outcomes from the firm as well as not take any unexpected actions that would result in negative outcomes for the firm. Commitment: The desire of one or more stakeholders to continue in a relationship 2. Marketing Communications: the use of the promotional mix designed to influence the channel to take a particular course of action. It is also designed to motivate and promote goodwill and understanding. Channel Management Decisions Evaluating channel members performance : Important bearing on distributor’s retention Based on the following: • Sales • Profitability • Level of stock, • Quality and position of display • Market information feedback etc. 12-48