1. Marketing Channels: Structure and Functions 14 th February 2008

2. Middlemen are responsible for the increase in prices!!! You have good reasons to agree to this statement…. Comment!!!

3. Marketing Channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption The purpose of a marketing channel is to satisfy the end – users in the market. Many entities are involved Not an event The purpose of the process

4. Concepts underlying the Distribution System A middleman is an independent business concern standing between the producer and the ultimate user Either he - Takes title to the merchandise as it flows from producer to consumer - or he actively negotiates the transfer of title

5. Classifying Middlemen Basis :Whether they take title to the products involved Type :Merchant Middlemen Wholesalers and retailers who take title Agent Middlemen Brokers and manufacturer’s agents who do not take title but actively assist in the transfer of title

6. Exchange without Intermediaries Cloth Shovels Vege- tables Baskets Meat Number of Exchanges = n(n -1) 2 = 10 Where n = number of consuming units

7. Number of Transactions Without Marketing Intermediaries In the real world the number of producing and consuming units would be far greater. Number of Number of Units Transactions 25 300 100 4950 500 124750 1000 499500

8. Exchange with Intermediaries Cloth Shovels Vege- tables Baskets Meat Number of Exchanges = 5 Trading Post

9. Contact Cost to Reach the Market with and without Intermediaries Manufacturers Retailers 40 Contact Lines Selling Directly

10. Contact Cost to Reach the Market with and without Intermediaries Selling Through One Wholesaler Manufacturers Wholesaler Retailers 14 Contact Lines

11. Contact Cost to Reach the Market with and without Intermediaries Selling Through Two Wholesalers Manufacturers Wholesalers Retailers 28 Contact Lines

12. Number of Transactions and Marketing Costs Activities involved in sale to a retailer Costs involved for each activity Contact with the retailer by salesman Travel costs and selling time to canvass biz If it’s a new account, credit investigation Unchanged with number of products sold If an order is received, processing of the order Marginal increase with increase in size of order Delivery of the goodsUnchanged or relatively higher for smaller orders BillingUnchanged Collection of paymentsUnchanged

13. Why are there Marketing Channels??? Facilitation of search Adjustment of assortment discrepancy Routinization Reduction in number of contacts Demand side factors : Supply side factors : End-users’ point of view Sellers’ point of view

14. What is the work of the Marketing Channels??? Performance of the Marketing Flows The term “FLOWS” is used (instead of functions or activities) to emphasize that these processes flow through the channel.

15. Marketing Flows in Channels Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment Producers Wholesalers Retailers Consumers Industrial and Household Commercial Channel Subsystem Note :Each flow carries a cost

16. Examples of Costs of various Flows Marketing flow Cost represented 1.Physical possessionStorage and delivery costs 2.OwnershipInventory carrying costs 3.PromotionPersonal selling, advertising, sales promotion, public relations, publicity 4.NegotiationTime and legal costs 5.FinancingCredit terms, terms and conditions of sale 6.RiskingWarranties, repair, after sales service costs 7.OrderingOrder-processing costs 8.PaymentCollections, bad debts costs

17. Who Belongs to a Marketing Channel??? The key members are : Manufacturers – producer or originator of the product Intermediaries – (wholesalers, agents, brokers, retailers) that assist producers and manufacturers (and final users) in the performance of negotiatory functions End-users – either individual or business customers

18. Intermediaries Refers to any channel member other than the manufacturer or the end-user. Three types of intermediaries : Wholesalers Retailers Specialized – such as insurance companies, banks, shipping firms, advertising agencies Our focus during this course is on

19. Market coverage Sales contact Inventory holding Order processing Market information Customer support Product availability Customer service Credit Assortment convenience Breaking bulk Advice and technical support Tasks performed by Wholesalers Result? Effective and efficient marketing channels For Manufacturers For Consumers

20. Distribution Tasks performed by Retailers The role of a retailer in the distribution channel, regardless of his size or type, is to : Interpret the demands of his customers Find and stock the goods these customers want When they want them, And in the way the want them.

21. Facilitating Agencies 1.Transportation agencies 2.Storage agencies 3.Order processing agencies 4.Advertising agencies 5.Financial agencies 6.Insurance companies 7.Marketing research firms

22. What is the best channel for a particular product???

23. An Analytic Framework for Channel Design and Implementation

24. Designing the Right Channel The steps in designing the Right Channel are : Segmenting the market by service outputs desired Positioning Targeting

25. Segmentation for Marketing Channel Design: Service Outputs

26. The Marketing Channel System Design and Management requires starting with the END – USERs each of whom will have differential preference for service output levels that reduce their Search, Waiting time, Storage and other Costs

27. Segmenting for Channel Design Segmenting on the basis of the demands for the outputs of the marketing channel Service outputs include : Bulk breaking Assortment Variety Waiting and delivery time Spatial convenience Service outputs : value added services created by channel members and consumed by end-users along with the product purchased

28. Role of Service Output Demand Analysis in Marketing Channel Design After segmenting the market on the basis of SODs, the channel manager can easily 1.Assess segment attractiveness 2.Target a subset of the segments identified 3.Customize the marketing channel system solution for each targeted segment

29. Service Output Demand Differences FAMILYOFFICE EMPLOYEE SERVICE OUTPUT DESCRIPTOR SERVICE OUTPUT DEMAND LEVEL DESCRIPTOR SERVICE OUTPUT DEMAND LEVEL Bulk-breaking“I buy groceries weekly for my family, and all of us like soft drinks” LOW “I’m on my coffee break and I have only have time for one can of soft drink” HIGH Spatial convenience “I drive to the supermarkets in my area to shop” LOW “I only have 15 minutes for my break, so I need to buy whatever is handy” HIGH Quick delivery “We usually have some extra cans of soft drinks in the house, so I’ll just come back the next time if I can’t find the drinks I want on this trip” LOW “If I don’t get my soft drink right at 3:00 when my break starts, I’ll never have a chance to go back later and get one” HIGH Assortment and variety “My husband and I like Coke and Pepsi, but our kids aren’t permitted to drink caffeinated soft drinks. They like caffeine-free fruit- flavored soft drinks” HIGH “I can’t be too particular about which soft drink I pick. It’s important to me to get one, as long as it has caffeine” MODERATE

30. Service Output Demand Template for Laptop Computers SERVICE OUTPUT DEMAND: SEGMENT NAME/ DESCRIPTOR BULK BREAKING SPATIAL CONVENIENCE DELIVERY/ WAITING TIME ASSORTMENT/ VARIETY OTHER SERVICE OUTPUT DEMANDS 1. Business buyer Low 2. Home buyer 3. Student 4. 5. High Low

31. Targeting The segments to be targeted would depend upon : Internal environment – the constraints the company faces External environment – such as legal constraints, trade practices, channel power.

32. Channel design : Positioning Each segment will have its own set of service output demands The channel designer must therefore decide : 1.The type - optimal channel structure to produce the channel flows 2.The identity – exact identity of the channel partner to use at each level of the channel 3.The intensity – how many of each type of channel members of the channel members at each level At the minimum channel flow cost

33. Channels of Distribution - Levels Consumer Goods Manufacturer AgentWholesalerRetailer CONSUMER Manufacturer Wholesaler Retailer Zero Level One Level Two Level

34. Channels of Distribution Industrial Goods Manufacturer CONSUMER Manufacturer Manufacturer’s Agent Manufacturer Industrial Supply House

35. Channel Design Establish new channels – Zero based channel design Modify existing channels – after a Gap Analysis (the differences between the zero based and actual channels)

36. Demand and Supply Side Gaps Demand Side Gaps – at least one of the service output demands is not being appropriately met by the channel. Service Output Undersupplied Oversupplied Dissatisfaction High cost leading to drop in sales and market share Supply Side Gaps – at least one flow in the channel is carried out at too high a cost

37. Channel Power A channel member’s power to control the decision variables in the marketing strategy of another member in a given channel at a different level of distribution

38. Channel Conflict When one channel member’s actions prevents the channel from achieving its goal, there is Channel Conflict. Types of Channel Conflicts : * Goal conflict * Domain conflict * Perceptual conflict

39. Channel Management Schematic 1. SEGMENTATION Define SODs by segment Identify environmental characteristics and constraints 2. POSITIONING Define optimal channel flow performance for each segment Define optimal channel structure for each segment 4A. ESTABLISH NEW CHANNELS Channel flow performance Channel structure 3. TARGETING Choose segments to target, subject to: Environmental bounds Managerial bounds Competitive Benchmarks 4B. REFINE EXISTING CHANNELS Channel flow performance Channel structure Gap Analysis CHANNEL DESIGN PROCESS

40. THAT’S ALL FOR TODAY!!!