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Chapter 7
Marketing Channel
Strategy and
Management
In this chapter, you will
learn about…
1. The Channel-Selection Decision
The Design of Marketing Channels
Channel Selection at the Retail Level
Channel Selection at Other Levels of
Distribution
2. Dual Distribution and Multi-Channel Marketing
Dual Distribution
Multi-Channel Marketing
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In this chapter, you will
learn about…
3. Satisfying Intermediary Requirements and
Trade Relations
Intermediary Requirements
Trade Relations
4. Channel-Modification Decisions
Qualitative Factors in Modification
Decisions
Quantitative Factors in Modification
Decisions
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What is a marketing
channel?
A marketing channel consists of
individuals and firms involved in
the process of making a product or
service available for consumption
or use by consumers and industrial
users.
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Role of the channel in
marketing strategy
Links a producer to buyers
Performs sales, advertising, and
promotion
Influences the firm’s pricing strategy
Affects product strategy through branding
policies, willingness to stock and
customize offerings, install, maintain,
offer credit, etc.
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The Channel-Selection
Decision
Fundamental Questions
The marketing manager must
answer the following questions:
Who are potential customers?
Where do they buy?
When do they buy?
How do they buy?
What do they buy?
- Avon Cosmetics example
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Traditional Marketing Channel
Designs
Producer
Brokers or Agents
Distributors or Wholesalers
Retailers or Dealers
Ultimate Buyers
The Design of Marketing
Channels
INDIRECT DIST.
Use intermediaries to
reach target market
type
location
density
number of
channel levels
vs.
DIRECT DIST.
Contact ultimate
buyers directly
using its own
sales force or
distribution outlets
using the Internet
through a
marketing Web
site or electronic
storefront
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The Design of Marketing
Channels
Direct distribution is typically used
when:
Buyers are easily identifiable
Personal selling is a major
component of the communication mix
Organization has a wide variety of
offerings for the target market
Sufficient resources are available
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The Design of Marketing
Channels
Direct distribution must be considered
when:
Intermediaries are not available
for reaching target markets
Intermediaries do not possess
the capacity to service the
requirements of target markets
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The Design of Marketing
Channels
Indirect distribution must be considered
when:
Intermediaries can perform distribution
functions more efficiently and less
expensively
Customers are hard to reach directly
Organization does not have resources
to perform distribution function
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The Design of Marketing
Channels
Electronic marketing channels employ
some form of electronic communication,
including the Internet, to make products
and services available for consumption
or use by consumers and industrial
users.
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Representative Electronic Marketing
Channels
Amazon.com
Autobytel.com
Travelocity.com
Dell.com
Book
Publisher
Auto
Manufacturer
Airline
Dell
Computers
Book
Distributor
Auto Dealer
Amazon.com
Auto-By-Tel
Travelocity
(Virtual
Retailer)
(Virtual
Broker)
(Virtual
Agent)
Ultimate Buyers
The Design of Marketing
Channels
Disintermediation is the elimination of
traditional intermediaries and direct
distribution through electronic
marketing channels.
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Channel Selection at the
Retail Level
Channel Selection Decisions
1. Which channel and intermediaries will
provide the best coverage of the target
market?
2. Which channel and intermediaries will
best satisfy the buying requirements of
the target market?
3. Which channel and intermediaries will
be the most profitable?
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Channel Selection at the
Retail Level
Target Market Coverage
Exclusive
Rolex
Faberge
Selective
Intensive
Levi’s
Sony
Wrigley’s
Coke
Channel Selection at the
Retail Level
Effective Distribution occurs when a
limited number of retail outlets account
for a significant fraction of the market
potential.
Example: A marketer distributes the
product through 40% of available
outlets, but these outlets account for
80% of the market.
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Channel Selection at the
Retail Level
Satisfying Buyer Requirements
Information
Convenience
Variety
Attendant services
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Channel Selection at the
Retail Level
Profitability
Margins = Revenues – Channel Costs
Channel costs are:
- Distribution costs
- Advertising costs
- Selling costs
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Channel Selection at Other
Levels of Distribution
Types of Wholesaler
Specialty wholesaler
– Limited line of items within a product
line
General-merchandise wholesaler
– Wide assortment of products
General-line wholesaler
– Complete assortment of items in a
single retailing field
Combination
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Dual Distribution
occurs when an organization distributes
its offering through two or more different
marketing channels that may or may not
compete for similar buyers
the main consideration is whether it will
provide incremental sales revenue or
cannibalize existing sales
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Dual Distribution
When is it used
own brand and private store brand
distribution to large and small retailers
multibrand strategy
geographic factors
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Dual Distribution
Example
Hallmark
Sells Hallmark brand cards through
Hallmark stores and selected
department stores
Sells Ambassador brand cards through
discount drugstore chains
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Multi-Channel Marketing
Multi-channel marketing involves the
blending of an electronic marketing
channel and a traditional channel in
ways that are mutually reinforcing in
attracting, retaining, and building
relationships with customers.
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Multi-Channel Marketing
Justifications
An electronic marketing channel can
provide incremental revenue (Victoria’s
Secret)
An electronic marketing channel can
leverage the presence of a traditional
channel (Ethan Allen)
Multi-channel marketing can satisfy
buyer requirements (Clinique division of
Estée Lauder)
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Multi-Channel Marketing
Considerations
Actual incremental revenue or merely
cannibalization?
Incremental cost to launch and sustain
an electronic forefront
Disintermediation – a traditional
intermediary member is replaced by
electronic storefront
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Satisfying Intermediary
Requirements and Trade
Relations
Intermediary Requirements
Improvements in product assortments
Trade discounts
Fill-rate standards
Promotional support
Lead-time requirements
Product-service exclusivity agreements
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Satisfying Intermediary
Requirements and Trade
Relations
Trade Relations
Channel Conflict arises when one
channel member believes another
channel member is engaged in
behavior that is preventing it from
achieving its goals.
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Satisfying Intermediary
Requirements and Trade
Relations
Sources of Channel Conflict
Channel member bypasses another
member and sells or buys direct (WalMart)
Uneven distribution of profit margins
among channel members (Michelin)
Manufacturer believes channel member is
not giving its products adequate attention
(Heinz)
Manufacturer engages in dual distribution
(Elizabeth Arden)
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Satisfying Intermediary
Requirements and Trade
Relations
Channel Power
Channel Captain is a channel
member that takes on the role of
coordinating, directing, and
supporting other channel members.
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Satisfying Intermediary
Requirements and Trade
Relations
Forms of Channel Captain Power
Ability to reward or coerce other
members (Microsoft and Wal-Mart)
Expertness (American Hospital Supply)
Identification with a particular channel
member (Ralph Lauren)
Legitimate right to dictate the behavior of
other members (franchising)
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Channel-Modification
Decisions
Reasons
Shifts in the geographical
concentration of buyers
Inability of existing intermediaries
to meet the needs of buyers
Costs of distribution
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Channel-Modification
Decisions
Basic Objectives
1. Provide the best coverage of the
target market sought
2. Satisfy the buying requirements of
the target market
3. Maximize revenue and minimize
cost
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Channel-Modification
Decisions
Qualitative Factors
1. Will the change improve the effective coverage
of the target markets sought? How?
2. Will the change improve the satisfaction of buyer
needs? How?
3. Which marketing functions, if any, must be
absorbed in order to make the change?
4. Does the organization have the resources to
perform new functions?
5. What effect will the change have on other
channel participants?
6. What will be the effect of the change on the
achievement of long-range organizational
objectives?
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Channel-Modification
Decisions
Quantitative Assessment
…considers the financial impact of
the change in channel members in
terms of revenues and expenses
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Channel-Modification
Decisions
Quantitative Assessment Example
Suppose an organization is considering
replacing its wholesalers with its own
distribution centers. The cost of wholesalers
includes:
Margin to wholesalers
Service expense
Total cost
$5,000,000
500,000
$5,500,000
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Channel-Modification
Decisions
Quantitative Assessment Example
The cost of Distribution Centers:
Sales to retailers
$1,500,000
Sales administration
250,000
Inventory cost
935,000
Delivery and storage
1,877,000
Accounts receivable
438,000
Total cost
$5,000,000
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Channel-Modification
Decisions
Quantitative Assessment Example
Since using wholesalers costs $3.5 million
and the cost of distribution centers would
be $5 million, a cost perspective suggests
selection of the latter option. However, the
effect on revenues must be considered by:
Determining the dollar value of:
– Market coverage
– Satisfaction of buyer needs
– Channel-participant response
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