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Marketing Channels
• They are set of independent
organizations involved in the process of
making a product or service available
for use n consumption.
• Why?
use of intermediaries bring greater
efficiency in making goods available to
target markets. In other words, they
match the supply with the demand.
• Most important benefit of using
intermediaries is that they provide
economies. They reduce the amount of
work that must be done by both
producers and consumers.
Channel Functions
• A distribution channel moves goods from producers to consumers.
they;
– give information about the product and consumers
– promote the offer
– contact with the consumers
– match the offer with the consumer’s needs
– negotiate with the buyers about the price and offer
– physically distribute (transport) the product
– may finance the manufacturer to cover the costs of the channel
work therefore may take risk.
• All these functions can be carried out by the manufacturers but they
then increases their costs and prices.
Physical flow
suppliers
transporters
Manufa
cturer
transporters
dealers transporters
customers
Title flow
Manufa
cturer
suppliers
dealer
customer
Info flowboth ways
suppliers
transporters
Manufa
cturer
transporters
dealers transporters
customers
Payment
flowbackward
suppliers
banks
Manufa
cturer
banks
dealers
banks
customers
Promotion
flow-forward
suppliers
advertising
Manufa
cturer
advertising
dealers
customers
Channel flows
• Forward flow: physical, title, promotion
• Backward flow: ordering and payment
• Both direction: information, negotiation, finance, risk
taking
• 3 channels
– Sales channel
– Delivery channel
– Service channel
Channel level
• Zero level (direct marketing)-manufacturer selling directly
to final customer
• One level- 1 selling intermediary as retailer
• Two level- 2 intermediaries as wholeseller, retailer
• Three level- 3 intermediaries as wholesellers, retailers,
jobbers
• Service sector: hospitals, schools,fire station
Marketing channel-consumer goods
manufacturer
manufacturer
manufacturer
wholesaler
manufacturer
wholesaler
jobber
retailer
consumer
consumer
retailer
retailer
consumer
consumer
Channel design decisions
Designing a channel system include;
• analyzing consumer service needs
• setting the channel objectives and constraints
• identifying the major channel alternatives
• evaluating the major alternatives
Analyzing Consumer Service
Needs
• Designing the distribution channel begins with determining
– convenient location to buy the products
– Product variety
– immediate delivery
– credit, repairs
– long-term warranty
• The company must balance the consumer service needs with the
feasibility and costs plus prices.
Setting Channel Objectives and
Constraints
• The company must decide which segments to target and the best
channels to use in each segment. Here, the objective of the
company is to minimize the total channel cost
• Besides the target market, the company’s channel objectives are
influenced by;
– the nature of its product, e.g. perishable products require more
direct marketing to avoid delays and too much handling.
– company characteristics, e.g. the company’s size and financial
situation determine which functions it can
handle, how many channels it can use, which transportation
can be used…
– characteristics of intermediaries, intermediaries differ in their
abilities to handle promotions, customer contact, storage and
credit e.g. the company’s own sales force is more intense in
selling.
– competitors’ channel, some companies may prefer to
compete in or near the same outlets that carry competitors’
products, some may not e.g. Burger King wants to locate
near McDonald’s
– environmental factors, economic conditions and legal
constraints affect channel design decisions e.g. in a
depressed economy, producers want to distribute their
goods in the most economical way, using shorter channels.
Identifying major channel
alternatives-Types
 E.g Industrial product
 Company sales force
 Manufacturer agency
 Industrial distributors
E. g consumer
electronics co.
 Dealer market
 Retail dealer
 Specialist dealer
 Mail order market
 OEM market
The advent of print media, the telephone,
radio, television, and the Internet have all
provided new ways for marketers to get their
message to their intended audience. As
various technologies advance, these
information channels offer more precise
delivery of a message. Can
you identify an emerging
information distribution
channel?
• Number of Marketing
Intermediaries
– Intensive distribution- strategy in which companies stock
their products in as many outlets as possible. Convenience
products and common raw materials must be available where
and when consumers want them e.g. toothpaste, candy…
Procter & Gamble, Coca-Cola .
Advantages – max. brand exposure & consumer convenience.
– Exclusive distribution- strategy (opposite to intensive
distribution) in which the producer gives only a limited number
of dealers the exclusive right to distribute its products in their
territories.
– new automobiles and prestige women’s clothing e.g. RollsRoyce.
Advantages- establishing image and getting higher markups.
No. of Marketing
channel
– Selective distribution; (is between
intensive and exclusive distribution)
strategy in which the company uses
more than one but fewer than all of
the intermediaries.
– television, furniture brands
Advantages - good market
coverage more control & less cost
– it does not spread its efforts over
many outlets.
Responsibilities of Channel Members
price policies
discounts
territories & services of each party.
E.g. McDonald’s provides franchisees with
promotional support, training,
management assistance,
in turn, franchisees must meet company
standards for physical facilities, buy
specific food products...
Evaluating the Major Alternatives
In order to select the channel that satisfy the company
objectives in the best way, each alternative should be
evaluated by using;
• economic criteria; the company compares the projected
profits and costs of each channel.
– Co. sales force OR sales agency
• control issues; the company prefers to keep the channel
where it has the highest control.
• adaptive criteria; the company prefers to keep the
channel which is the most flexible to the changing
marketing environment.
Channel-Design Decisions
Company sales force or sales agency
Figure 17.5:
Break-even
Cost Chart
Channel management decisions
• Selection channel
members
– Sales agents- size n quality of
sales force
– Deptt stores- evaluate location,
growth potential
• Training channel
members
– Microsoft certified professionals
– CD Rom
Motivating channel
memberschannel positioning,
offering, capability building
programs
• Coercive power- threaten to terminate
relationship
• Reward power- xtra benefit for good performance
• Legitimate –warranted under contract. GM insist
dealers for certain inventory
• Expert power- special knowledge, ex. Sales lead
generation, sales training
• Referent power- manufacturer is highly respected
that members feel proud. e.g IBM, caterpilar, HP
Channel Dynamics
New channel systems evolve
Evolution of channels
High-growth
Growth- Dedicated
stores
Introductoryspecialist stores
Low growth-high
value
Mature- deptt. stores
Decline- discount
stores
low value
Vertical Marketing Systems (VMS)
• VMS consists of producers,
wholesalers, and retailers
acting as a unified system that seek to maximize profits
for the whole channel.
• one channel members owns
the others, has contracts with
them or use so much power
that they all cooperate.
• this occur to control channel
behaviour and manage
channel conflict.
Vertical
marketing
systems (VMS)
Corporate
VMS
Contractual
VMS
Administered
VMS
Wholesalersponsored
voluntary
chains
Retailer
cooperatives
Franchise
organizations
Corporate VMS
• In a corporate VMS, production and distribution
stages are combined under single ownership, in order
to manage cooperation and conflict management e.g.
AT&T ,Bata & woodland.
Administered VMS
– A vertical marketing system that coordinates
production and distribution stages, not through
ownership but through the size and power of one
of the parties
– e.g. P&G,HLL, Nestle, Maruti are market leaders,
they can command special displays, shelf space,
promotions and prices form the other parties
Contractual VMS:
• It 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.
• three types of contractual VMSs;
– wholesaler-sponsored voluntary chains; are contractual
marketing systems in which wholesalers organize voluntary chains
of independent retailers to help them compete with large corporate
chain organizations. E.g-vegetables n food market
– retailer cooperatives; are contractual marketing systems in which
retailers organize a new, jointly owned business to carry on
wholesaling and possibly production.e.g vishal, amartex
– franchise organizations; are contractual marketing systems in which a
channel member, called a franchiser, links several stages in the
production-distribution process.
Parle brands: thums up, gold spot, limca, mazza
NIIT, Aptech, SSI
 three forms of franchisees;
• manufacturer-sponsored retailer franchise system e.g. Ford licenses
dealers to sell its cars. The dealers are independent businesspeople
who agree to meet various conditions of sales and service.
• manufacturer-sponsored wholesaler franchise system e.g. Coca-Cola
licenses bottlers (wholesalers) in various markets who buy CocaCola syrup concentrate and then carbonate, bottle and sell the
finished product to retailers in local markets.
• service-firm-sponsored retailer franchise system in which a service
firm e.g. McDonald’s, Burger King, Holiday Inn licenses a system of
retailers to bring its service to consumers.
Hybrid Marketing
(multichannel)
•
company uses several marketing
channels (e.g. direct mail telemarketing, retailers, distributors,
dealers, sales force) to sell its
products to different customer
segments.
• E.g. IBM uses its own sales force
,direct catalog & telemarketing
operation , independent IBM
dealers , dealers for business
segments + large retailers like WalMart.
– Adv.- in large and complex markets
the company can expand its sales
and market coverage
• services to the specific needs
of diverse customer segments.
– disadvantage
• they are harder to control and
generate more conflict.
Horizontal Marketing Systems (HMS)
• HMS is a channel arrangement in which two or more
companies at one level join together to follow a new
marketing opportunity.
– Adv.-companies combine their capital, production capabilities,
marketing resources and therefore accomplish more.
• Companies might join forces with competitors or
noncompetitors. They might work with each other on a
temporary or permanent basis or they may create a
separate company.
• E.g. Coca-Cola and Nestle formed a joint venture to
market ready-to-drink coffee and tea worldwide. Coke
provided worldwide experince in marketing and
distribution beverages and Nestle contributed two
established brand names - Nescafe and Nestea.
Channel Behaviour
• All channel firms should work
together to be successful.
Each channel member is
dependent on the others
• e.g. a Ford dealer (retailer)
depends on the Ford Co. for
design cars
– Ford depends on the dealer
to attract consumers,
persuade them to buy
– service cars after the sale.
– dealer depends on other
dealers to create overall
reputation for the entire
distribution channel.
Channel conflict
• There is disagreement among channel members on
goals and roles - who should do what and for what
rewards.
– Horizontal ; occurs among firms at the same level of the
channel. In other words, one dealer may complain about the
other.
– Vertical ; occurs among different levels of the same channel. In
other words, the producer may complain about its dealers or vise
versa.
– Multichannel ;manufacturer has established 2 or more channels
that sell to same market.
Causes of conflict
• Goal incompatibility
– Manufacturer- mkt share, max. profit
– Channel members-max. sales, max. profit
• Role ambiguity
– Automobile component ,FMCG
• Difference in perception of market
Managing conflict
• Dealer councils– they provide platform for dealers to voice grievances
• Superordinate goals
– Members can be motivated to perceive customer
satisfaction as ultimate goal
• Arbitration & mediation
– Manufacturer helps in intramiddlemen conflict
– Court ,govt. agency b/w manufacturer n dealers
Designing International Distribution
Channels
• Channel systems can vary from country to
country. Each country may have its own
unique distribution system. International
marketers have to adapt their channel
strategies to the existing structures within
each country.
Physical Distribution and
Logistics Management
• Companies must decide on the best way to
store, handle and move their products and
services so that they are available to customers
in the right amount, at the right time, and in the
right place.
• Logistics effectiveness has a major impact on (1)
customer satisfaction and (2) company costs
(15% of the product’s price).
Market Logistics
• Physical distribution
– Process of getting goods
to customers
• Supply chain
management
– Procure right inputs
– Convert into finished
goods
– Dispatch to final
destination
Nature and Imp of Market Logistics
• Marketing logistics includes
planning, implementation, and
controlling the physical flow of
materials, final goods, and related
information from points of origin to
points of consumption to meet
customer requirements at a profit.
• Logistics deal with
– outbound distribution - moving
products from the factory to
customers,
– inbound distribution - moving
products and materials from
suppliers to the factory.
• manage the whole-channel
activities of suppliers, purchasing
agents, marketers, channel
members and customers.
Goals of the Logistics System
• Getting right goods to right places at the right time for the
least cost.
•
Objective- to maximize profits, not sales.
– company must compare the benefits of providing
higher levels of service with the costs.
– Some companies may offer less services and charge
less, but others may offer more services than its
competitors and charge higher prices to cover their
costs.
Major Logistics Decisions
•
•
•
•
order processing
warehousing
inventory management
transportation
Order Processing
• Orders submitted thru mail, telephone,
salespeople or via computer.
• Short order-to-remittance cycle
– Elapsed time b/w order receipt, delivery & payment
•
•
•
•
•
•
Order transmission
Order entry
Customer credit checking
Inventory & prdn scheduling
Order and invoice shipment
Receipt of payment
– Longer above cycle-lower customer satisfaction
Warehousing
• Co stores its goods until they are sold coz prdn n
consumption cycles rarely match
• The company might own
– private warehouse
• bring more control
• ties up capital
• is less flexible if locations change
– public warehouses
• charge for rented space
• provide additional services for inspecting, packaging,
shipping and invoicing goods but at a cost
• offer wide choice of locations and warehouse types
• Basic types of warehouses are
– storage warehouses store goods for moderate to
long periods
– distribution centers are designed to move goods
rather than just store them. They are large and
automated warehouses designed to receive goods
from suppliers, take orders and deliver goods to
customers.
– Automated warehouses with advanced materials
handling systems under control of a central
computer
Inventory
• Inventory decisions involve
– when to order
• Order (reorder) point-stock level to place a new order
– how much to order.
• Balance order processing costs & inventory carrying costs
• Order processing cost-setup costs + running costs
• Just-in-time logistic systems are used by some companies in which
the producers carry only small inventories only enough for a few
days of operations. Such systems result in savings in inventory
carrying and handling costs.
Transportation
• The choice of transportation carriers affects
– the pricing of products
Customer
– delivery performance
satisfaction
– condition of the goods
• In shipping goods, there are five transportation modes: rail, water,
truck, pipeline, and air.
– Rail; is the most cost-effective mode for shipping large amounts
products e.g. coal, farm and forest products over long distances.
– Truck; trucks are very flexible in their routing and time
scheduling. They can move goods door to door, saving
the need to transfer goods from truck to rail and back again.
They are efficient for short hauls of high-value products.
They can offer faster service.
– Water; the cost is very low for shipping bulky, low-value,
nonperishable products e.g. coal, oil, metallic ores. It is the
slowest mode and affected by the weather.
– Pipeline; are specialized means of shipping petroleum,
natural gas and chemicals from sources to markets. It costs
less than rail but more than water.
– Air; costs higher than rail and truck but ideal when speed is
needed and distant markets have to be reached. Products
are perishables (fresh fish, cut flowers), high-value, low-bulk
items (technical instruments, jewellery).
• In choosing a transportation mode, shippers consider five
criteria;
 speed - door to door delivery time,
 meeting schedules on time,
 ability to handle various products,
 number of geographic points served,
 cost per tone-mile.