Designing Marketing Channels Part 2: Developing the Marketing Channel Designing Marketing Channels

Channel Design Distinguishing points of the definition include: A decision made by the marketer The creation or modification of channels The active allocation of distribution tasks in an attempt to develop an efficient structure The selection of channel members A strategic tool for gaining a differential advantage

Channel Design Paradigm 3 Recognize the need for channel design decision 7. Select channel members 2. Set & coordinate distribution objectives 6. Choose the “best” channel structure 3. Specify distribution tasks 5. Evaluate relevant variables 4. Develop alternative channel structures

When to Make a Channel Design Decision 4 Developing a new product/product line (or a new firm) Aiming an existing product at a new market (or expanding geographic marketing areas) Making a major change in some other component of the marketing mix Adapting to changing intermediary policies that may inhibit attainment of distribution objectives (or in availability of intermediaries) Facing major environmental changes Meeting the challenge of conflict or other behavioral problems Reviewing and evaluating

The Need for Congruency Firm’s overall objectives & strategies General marketing objectives & strategies Product marketing objectives & strategies Pricing marketing objectives & strategies Promotion marketing objectives & strategies Distribution marketing objectives & strategies

= Distribution Tasks 6 Outlining distribution tasks is specific and situationally dependent on the firm. For example: Distribution tasks for a manufacturer of consumer products differs from those for component parts sold in industrial markets. = Distribution tasks are a function of the distribution objectives and the types of firms involved.

Channel Structure Dimensions 7 1. Number of levels in the channel 2. Intensity at the various levels Allocation Alternatives 3. Types of intermediaries at each level – divide by the task, be aware of emerging types

Number of Levels Range from two to five or more Number of alternatives is limited to two or three choices Limitations result from the following factors: Particular industry practices Nature & size of the market Availability of intermediaries

Intensity at the Various Levels Relationship between the intensity of distribution dimension & number of retail intermediaries used in a given market area. Intensity Dimension Intensive Selective Exclusive Numbers of Intermediaries (retail level) Many Few One

Variables Affecting Channel Structure 8 Market Variables (geography, size, density, behaviors) Product Variables (bulk, perishable, unit value, standardization, newness) Company Variables (size, financial capacity, managerial expertise, strategies) Intermediary Variables (availability, cost, services) Environmental Variables (see Chapter 3) Behavioral Variables (member roles, power structure, communication)

Choosing an Optimal Channel Structure 10 Choosing an optimal channel structure is not always possible? Because… management is incapable of knowing all possible alternatives, and 2. precise methods for calculating the exact payoffs associated with each alternative structures do not always exist. BUT Techniques exist for developing more exact methods.

Channel Structure Approaches “Characteristics of Goods & Parallel Systems” Approach – based on key product variables such as replacement rate, searching time, gross margin, product standardization. Financial Approach – examining revenue and costs of alternative structures. Transaction Cost Analysis Approach – vertical integration versus independent intermediaries based on opportunistic behaviors. Management Science Approaches – using mathematical modeling to consider channel alternatives. Judgmental-Heuristic Approach – managerial judgment – requires previous knowledge of key variables.