Marketing Channel Strategy and Management Chapter 7 Marketing Channel Strategy and Management

In this chapter, you will learn about… The Channel-Selection Decision The Design of Marketing Channels Channel Selection at the Retail Level Channel Selection at Other Levels of Distribution Dual Distribution and Multi-Channel Marketing Dual Distribution Multi-Channel Marketing

In this chapter, you will learn about… Satisfying Intermediary Requirements and Trade Relations Intermediary Requirements Trade Relations Channel-Modification Decisions Qualitative Factors in Modification Decisions Quantitative Factors in Modification Decisions

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.

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.

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

Traditional Marketing Channel Designs Producer Retailers or Dealers Distributors or Wholesalers Brokers or Agents Ultimate Buyers

The Design of Marketing Channels vs. INDIRECT DIST. DIRECT DIST. Use intermediaries to reach target market type location density number of channel levels Contact ultimate buyers directly using its own sales force or distribution outlets using the Internet through a marketing Web site or electronic storefront

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

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

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

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.

Representative Electronic Marketing Channels Amazon.com Autobytel.com Travelocity.com Dell.com Book Publisher Book Distributor Amazon.com (Virtual Retailer) Dell Computers Airline Travelocity (Virtual Agent) Auto Manufacturer Auto Dealer Auto-By-Tel (Virtual Broker) Ultimate Buyers

The Design of Marketing Channels Disintermediation is the elimination of traditional intermediaries and direct distribution through electronic marketing channels.

Channel Selection at the Retail Level Channel Selection Decisions Which channel and intermediaries will provide the best coverage of the target market? Which channel and intermediaries will best satisfy the buying requirements of the target market? Which channel and intermediaries will be the most profitable?

Channel Selection at the Retail Level Target Market Coverage Exclusive Selective Intensive Rolex Faberge 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.

Channel Selection at the Retail Level Satisfying Buyer Requirements Information Convenience Variety Attendant services

Channel Selection at the Retail Level Profitability Margins = Revenues – Channel Costs Channel costs are: Distribution costs Advertising costs Selling costs

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

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

Dual Distribution When is it used own brand and private store brand distribution to large and small retailers multibrand strategy geographic factors

Dual Distribution Example Hallmark Sells Hallmark brand cards through Hallmark stores and selected department stores Sells Ambassador brand cards through discount drugstore chains

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.

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)

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

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

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.

Satisfying Intermediary Requirements and Trade Relations Sources of Channel Conflict Channel member bypasses another member and sells or buys direct (Wal-Mart) 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)

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.

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)

Channel-Modification Decisions Reasons Shifts in the geographical concentration of buyers Inability of existing intermediaries to meet the needs of buyers Costs of distribution

Channel-Modification Decisions Basic Objectives Provide the best coverage of the target market sought Satisfy the buying requirements of the target market Maximize revenue and minimize cost

Channel-Modification Decisions Qualitative Factors Will the change improve the effective coverage of the target markets sought? How? Will the change improve the satisfaction of buyer needs? How? Which marketing functions, if any, must be absorbed in order to make the change? Does the organization have the resources to perform new functions? What effect will the change have on other channel participants? What will be the effect of the change on the achievement of long-range organizational objectives?

Channel-Modification Decisions Quantitative Assessment …considers the financial impact of the change in channel members in terms of revenues and expenses

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 $5,000,000 Service expense 500,000 Total cost $5,500,000

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

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