Marketing Channels

Establish channels for different target markets and aim for efficiency, control, and adaptability.

Marketing Channels Most firms ğ single link in a larger supply chain Supply chain with “make & sell” view vs. demand chain with “sense & respond” view A value network ğ a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings upstream and downstream partners

Marketing Channels Marketers ğ focusing on the downstream part of the supply chain --- the mktg channels that look forward toward the customer Marketing channels ğ Sets of interdependent organizations (marketing intermediaries) involved in the process of making a product or service available for use or consumption by the consumer or business user called also: “distribution channels” or “trade channels”

Marketing Channels Reasons to use marketing intermediaries Lack of financial resources for direct marketing; Direct mktg may not be feasible; Producer’s greater return by increasing the investment in the main business. The use of intermediaries results from their greater efficiency in making goods available to target markets.

Marketing Channels Offer the firm more than it can achieve on its own, through the intermediaries’: Contacts, Experience, Specialization, Scale of operation. Purpose: match supply from producers to demand from consumers.

Importance of Marketing Channels How Channel Members Add Value Fewer contacts Match product assortment demand with supply Bridge, time, place, and possession gaps that separate products from users.

Channel Functions Risk Taking Information Financing Promotion Physical Distribution Contact Negotiation Matching

Flows in the Marketing Channel

Consumer Marketing Channels Channel Level ğ Each layer of marketing intermediaries that perform some work in bringing the product and its ownership closer to the final buyer. Manufacturer Consumer 0-level channel Direct Channel Manufacturer Retailer Consumer 1-level channel Indirect Channel Manufacturer Wholesaler Retailer Consumer 2-level channel Manufacturer Wholesaler Jobber Retailer Consumer 3-level channel

Industrial Marketing Channels Manufacturer Consumer Industrial distributors Manufacturer’s representative Manufacturer’s sales branch

Channel Design Decisions Push strategy ğ the manufacturer using its salesforce and trade promotion money to induce intermediaries to carry, promote, and sell the product to end users Pull strategy ğ the manufacturer using advertising and promotion to induce consumers to ask intermediaries for the product, thus inducing the intermediaries to order it.

Channel Design Decisions Analyzing customers’ service needs (customers’ desired service output levels) Setting channel objectives and constraints Identifying the major channel alternatives Evaluating the major channel alternatives

Channel Design Decisions Analysis of Customers’ Desired Service Output Levels Lot size Waiting time Spatial convenience Product variety Service backup

Channel Design Decisions Channel Objectives and Constraints Channel objectives should be stated in terms of: Targeted service output levels Product characteristics Company policies Intermediaries’ characteristics Competitors’ channels and policies Environmental factors

Channel Design Decisions Identification of Channel Alternatives Major channel alternatives have to be identified in terms of: Types of Intermediaries Number of Intermediaries Terms and Responsibilities of Channel Members

Channel Design Decisions Identification of Channel Alternatives Types of Intermediaries Example: A test-equipment manufacturer- alternatives: Expand the company’s salesforce Hire manufacturers’ agents in different regions Find industrial distributors and give them exclusive distribution

Channel Design Decisions Identification of Channel Alternatives Number of Intermediaries Intensive distribution Selective distribution Exclusive distribution

Channel Design Decisions Identification of Channel Alternatives Responsibilities of Channel Members Price policy ğ to establish a price list and determine discounts for intermediaries Conditions of sales ğ refer to payment terms and producer guarantees Distributors’ territorial rights Mutual services and responsibilities

Channel Design Decisions Evaluation of Channel Alternatives Each alternative needs to be evaluated against: Economic criteria To determine whether a company’s salesforce or a sales agency will produce more sales To estimate the costs of selling different volumes through each channel To compare sales and costs Control and adaptive criteria

Example: Evaluation of Channel Alternatives Break-Even Cost Chart

Channel Management Decisions Selecting Channel Members Training Channel Members Motivating Channel Members Producers can use: Coercive power Reward power Legitimate power Expert power Referent power Evaluating Channel Members Modifying Channel Arrangements

Channel Management Decisions Motivating Channel Members Coercive power ğ when a manufacturer threatens to withdraw a resource or to terminate the relationship if intermediaries fail to cooperate Reward power ğ the manufacturer offers an extra benefit for performing specific acts or functions Legitimate power ğ the manufacturer requests a behavior that is warranted under the contract Expert power ğ the manufacturer has special knowledge that the intermediaries value Referent power ğ the manufacturer is so higly respected that the intermediaries are proud to be associated with it

Changing Channel Organization A major trend ğ toward “disintermediation”: Product and service producers are bypassing intermediaries and going directly to final buyers or; New types of channel intermediaries are emerging to displace traditional ones

Channel Dynamics Conventional Vertical Marketing Marketing Channel System (VMS) Manufacturer Manufacturer Wholesaler Wholesaler Retailer Retailer Consumer Consumer

Channel Dynamics Types of Vertical Marketing Systems Systems (VMS) Contractual VMS Retailer Cooperatives Franchise Organizations Wholesaler Sponsored Voluntary Chains Service-Firm- Sponsored Manufacturer- Sponsored Wholesaler Sponsored Retailer Corporate VMS Administered VMS

Channel Dynamics: Innovations in Marketing Systems Horizontal Marketing System Two or more companies at one channel level join together to follow a new marketing opportunity. e.g. banks in food retailers Multichannel (Hybrid) Marketing System A Single firm sets up two or more marketing channels to reach one or more customer segments e.g. Supermarkets, traditional stores, and sales force

Channel Dynamics: Conflict, Cooperation, and Competition The channel will be most effective when: Each member is assigned tasks it can do best All members cooperate to attain overall channel goals and satisfy the target market When this does not happen ğ “conflict” occurs For the channel to perform well, each channel member’s role must be specified and conflict must be managed.

Channel Dynamics: Types of Conflict Channel conflict ğ disagreements among mktg channel members on goals and roles Vertical conflict ğ conflict between different levels within the same channel Horizontal conflict ğ conflict between members at the same level within the channel Multichannel conflict ğ conflict between two or more different channels that are used by the same manufacturer

Channel Dynamics: Causes of Channel Conflict Goal Incompatibility ğ differences in expectations Unclear Roles and Rights ğ territory boundaries, credit for sales, etc. Differences in Perception Dependence

Channel Dynamics: Managing Channel Conflict The challenge ğ not to eliminate conflict, but to manage it! Some mechanisms for effective conflict management: Diplomacy Mediation Arbitration

Channel Dynamics: Legal and Ethical Issues Exclusive distribution Only certain outlets are allowed to carry a firm’s products Exclusive dealing Exclusive territorial agreements Tying agreements