Channel design begins with assessing customer channel-service needs
and company channel
objectives and constraints. The company then identifies the major
channel alternatives in terms of
the types of intermediaries, the number of intermediaries, and the
channel responsibilities of each.
No system, no matter how well it has been planned, is without conflict.
Managing distribution
conflict is a necessity if quality service and low cost is to be
delivered. Since distribution
relationships tend to be long-term in nature, the choice of channel
partners is very important and
should be taken very seriously these are the all concepts that should be
clear after today’s Lesson.
PLACE- THE 3RD P OF MARKETING MIX.
Marketing channel decisions are among the most important facing
marketing managers. A
company’s channel decisions are linked with every other marketing
decision. Companies often
pay too little attention to their distribution channels. This can be
very damaging. Distribution
channel decisions often involve long-term commitments to other firms.
There are four major
issues or questions that concern distribution channels:
1). What is the nature of distribution channels?
2). How do channel firms interact and organize to do the work of the
channel?
3). What problems do companies face in designing and managing their
channels?
4). what role does physical distribution play in attracting and
satisfying customers?
A. Marketing Channel
A set of interdependent organizations involved in the process of
making a product or service
available for use or consumption by the consumer or business user.
Figure summarizes the simple
marketing system that consists of customer, producers that are having
some thing valuable for
making transactions. These transaction are made in exchange process and
creation availability of
products for customers. This availability is created by using networks
of distribution channels. Every product and service, whether an
automobile, a watch, a personal computer, or office furniture, must
somehow be made available to billions of people. Products must also be
made available to millions of industrial firms, businesses,
government institutions, and other organizations worldwide. Firms try to
realize this goal through the creation of distribution channels.
Channel structure has three basic dimensions: the length of the channel,
the intensity at various levels, and the types of intermediaries
involved. Channel intensity ranges from intensive to
selective to exclusive. Intensive means that there are many
intermediaries. Selective means that there are a smaller number of
intermediaries. Exclusive refers to only one.
B. Why Are Marketing Intermediaries Used?
Why do producers give some of the selling job to intermediaries?
After all, doing so means giving
up some control over how and to whom the products are sold. The use of
intermediaries results
from their greater efficiency in making goods available to target
markets. Through their contacts,
experience, specialization, and scale of operation, intermediaries
usually offer the firm more than it
can achieve on its own.
Figure shows how using intermediaries can provide economies. Figure A
shows three
manufacturers, each using direct marketing to reach three customers.
This system requires nine
different contacts. Figure B shows the three manufacturers working
through one distributor, who
contacts the three customers. This system requires only six contacts. In
this way, intermediaries
reduce the amount of work that must be done by both producers and
consumers.
From the economic system's point of view, the role of marketing
intermediaries is to transform the
assortments of products made by producers into the assortments wanted by
consumers. Producers
make narrow assortments of products in large quantities, but consumers
want broad assortments
of products in small quantities. In the distribution channels,
intermediaries buy large quantities
from many producers and break them down into the smaller quantities and
broader assortments
wanted by consumers. Thus, intermediaries play an important role in
matching supply and
demand.
The concept of distribution channels is not limited to the distribution
of tangible products.
Producers of services and ideas also face the problem of making their
output available to target
markets. In the private sector, retail stores, hotels, banks, and other
service providers take great
care to make their services conveniently available to target customers.
In the public sector, service
organizations and agencies develop "educational distribution systems"
and "health care delivery
systems" for reaching sometimes widely dispersed populations. Hospitals
must be located to serve
various patient populations, and schools must be located close to the
children who need to be
taught. Communities must locate their fire stations to provide rapid
response to fires and polling
stations must be placed where people can vote conveniently.
C. Distribution Channel Functions
The distribution channel moves goods and services from producers to
consumers. It overcomes
the major time, place, and possession gaps that separate goods and
services from those who would
use them. Members of the marketing channel perform many key functions:
• Information: gathering and distributing marketing research
and intelligence information
about actors and forces in the marketing environment needed for planning
and aiding
exchange.
• Promotion: developing and spreading persuasive communications
about an offer.
• Contact: finding and communicating with prospective buyers.
• Matching: shaping and fitting the offer to the buyer's needs,
including activities such as
manufacturing, grading, assembling, and packaging.
• Negotiation: reaching an agreement on price and other terms
of the offer so that ownership
or possession can be transferred.
Others help to fulfill the completed transactions:
• Physical distribution: transporting and storing goods.
• Financing: acquiring and using funds to cover the costs of
the channel work.
• Risk taking: assuming the risks of carrying out the channel
work.
The question is not whether these functions need to be
performed—they must be—but rather who
will perform them. To the extent that the manufacturer performs these
functions, its costs go up
and its prices have to be higher. At the same time, when some of these
functions are shifted to
intermediaries, the producer's costs and prices may be lower, but the
intermediaries must charge
more to cover the costs of their work. In dividing the work of the
channel, the various functions
should be assigned to the channel members who can perform them most
efficiently and effectively
to provide satisfactory assortments of goods to target consumers.
D. Number of Channel Levels
Distribution channels can be described by the number of channel
levels involved. Each layer of
marketing intermediaries that performs some work in bringing the product
and its ownership
closer to the final buyer is a channel level. Because
the producer and the final consumer both perform some work, they are
part of every channel. We
use the number of intermediary levels to indicate the length of a
channel. Figure A shows several
consumer distribution channels of different lengths.
Channel 1, called a direct marketing channel, has no intermediary
levels. It consists of a company
selling directly to consumers. The remaining channels in Figure A are
indirect marketing channels.
Channel 2 contains one intermediary level. In consumer markets, this
level is typically a retailer.
For example, the makers of televisions, cameras, tires, furniture, major
appliances, and many other
products sell their goods directly to large retailers which then sell
the goods to final consumers.
Channel 3 contains two intermediary levels, a wholesaler and a retailer.
This channel is often used
by small manufacturers of food, drugs, hardware, and other products.
Channel 4 contains three
intermediary levels. In the meatpacking industry, for example, jobbers
buy from wholesalers and
sell to smaller retailers who generally are not served by larger
wholesalers. Distribution channels
with even more levels are sometimes found, but less often. From the
producer's point of view, a
greater number of levels means less control and greater channel
complexity.
Figure B shows some common business distribution channels. The business
marketer can use its
own sales force to sell directly to business customers. It can also sell
to industrial distributors, who
in turn sell to business customers. It can sell through manufacturer's
representatives or its own
sales branches to business customers, or it can use these
representatives and branches to sell
through industrial distributors. Thus, business markets commonly include
multilevel distribution
channels.
All of the institutions in the channel are connected by several types of
flows. These include the
physical flow of products, the flow of ownership, the payment flow, the
information flow, and the
promotion flow. These flows can make even channels with only one or a
few levels very complex.
E. Channel Behavior and Organization
Distribution channels are more than simple collections of firms tied
together by various flows.
They are complex behavioral systems in which people and companies
interact to accomplish
individual, company, and channel goals. Some channel systems consist
only of informal
interactions among loosely organized firms; others consist of formal
interactions guided by strong
organizational structures. Moreover, channel systems do not stand
still—new types of
intermediaries emerge and whole new channel systems evolve. Here we look
at channel behavior
and at how members organize to do the work of the channel.
Channel Behavior
A distribution channel consists of firms that have banded together
for their common good. Each
channel member is dependent on the others. Each channel member plays a
role in the channel and
specializes in performing one or more functions. The channel will be
most effective when each
member is assigned the tasks it can do best.
Ideally, because the success of individual channel members depends on
overall channel success, all
channel firms should work together smoothly. They should understand and
accept their roles,
coordinate their goals and activities, and cooperate to attain overall
channel goals. By cooperating,
they can more effectively sense, serve, and satisfy the target market.
However, individual channel members rarely take such a broad view. They
are usually more
concerned with their own short-run goals and their dealings with those
firms closest to them in the
channel. Cooperating to achieve overall channel goals sometimes means
giving up individual
company goals. Although channel members are dependent on one another,
they often act alone in
their own short-run best interests. They often disagree on the roles
each should play—on who
should do what and for what rewards. Such disagreements over goals and
roles generate channel
conflict.
Horizontal conflict occurs among firms at the same level of the channel.
Vertical conflict, conflicts
between different levels of the same channel, is even more common. Some
conflict in the channel
takes the form of healthy competition. Such competition can be good for
the channel—without it,
the channel could become passive and non innovative. But sometimes
conflict can damage the
channel. For the channel as a whole to perform well, each channel
member's role must be specified
and channel conflict must be managed. Cooperation, role assignment, and
conflict management in
the channel are attained through strong channel leadership. The channel
will perform better if it
includes a firm, agency, or mechanism that has the power to assign roles
and manage conflict.
F. Vertical Marketing Systems
Historically, distribution channels have been loose collections of
independent companies, each
showing little concern for overall channel performance. These
conventional distribution channels
have lacked strong leadership and have been troubled by damaging
conflict and poor performance.
One of the biggest recent channel developments has been the vertical
marketing systems that have
emerged to challenge conventional marketing channels. Figure contrasts
the two types of channel
arrangements. A conventional distribution channel consists of one or
more independent
producers, wholesalers, and retailers. Each is a separate business
seeking to maximize its own profits, even at the expense of profits for
the system as a whole. No channel member has much control over the other
members, and no formal means exists for assigning roles and resolving
channel conflict. In contrast, a Vertical Marketing System (VMS)
consists of producers, wholesalers, and retailers acting as a unified
system. One channel member owns the others, has contracts with them, or
wields so much power that they must all cooperate. The VMS can be
dominated by the producer, wholesaler, or retailer. Vertical
marketing systems came into being to control channel behavior and manage
channel conflict.
We look now at three major types of VMSs: corporate, contractual,
and administered. Each uses a
different means for setting up leadership and power in the channel. We
now take a closer look at
each type of VMS.
a. Corporate VMS
A corporate VMS combines successive stages of production and
distribution under single
ownership. Coordination and conflict management are attained through
regular organizational
channels.
b. Contractual VMS
A contractual VMS consists of independent firms at different levels
of production and distribution
who joins together through contracts to obtain more economies or sales
impact than each could
achieve alone. Coordination and conflict management are attained through
contractual agreements
among channel members. There are three types of contractual VMSs:
wholesaler-sponsored
voluntary chains, retailer cooperatives, and franchise organizations.
In wholesaler-sponsored voluntary chains, wholesalers organize
voluntary chains of independent retailers
to help them compete with large chain organizations. The wholesaler
develops a program in which
independent retailers standardize their selling practices and achieve
buying economies that let the
group compete effectively with chain organizations. In retailer
cooperatives, retailers organize a new,
jointly owned business to carry on wholesaling and possibly production.
Members buy most of
their goods through the retailer co-op and plan their advertising
jointly. Profits are passed back to
members in proportion to their purchases. In franchise organizations, a
channel member called a
franchiser links several stages in the production-distribution
process. There are three forms of
franchises. The first form is the manufacturer-sponsored retailer
franchise system, as found in the
automobile industry. The second type of franchise is the
manufacturer-sponsored wholesaler franchise
system, as found in the soft drink industry.. The third
franchise form is the service-firm-sponsored retailer
franchise system, in which a service firm licenses a system of
retailers to bring its service to
consumers. The fact that most consumers cannot tell the difference
between contractual and
corporate VMSs shows how successfully the contractual organizations
compete with corporate
chains.
c. Administered VMS
An administered VMS coordinates successive stages of production and
distribution, not through
common ownership or contractual ties but through the size and power of
one of the parties. In an
administered VMS, leadership is assumed by one or a few
dominant channel members.
Manufacturers of a top brand can obtain strong trade cooperation and
support from resellers.
G. Horizontal Marketing Systems
Another channel development is the horizontal marketing system, in
which two or more
companies at one level join together to follow a new marketing
opportunity. By working together,
companies can combine their capital, production capabilities, or
marketing resources to accomplish
more than any one company could alone. 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. Such channel arrangements also work well
globally.
H. Hybrid Marketing Systems
In the past, many companies used a single channel to sell to a single
market or market segment.
Today, with the proliferation of customer segments and channel
possibilities, more and more
companies have adopted multichannel distribution systems—often
called hybrid marketing channels.
Such multichannel marketing occurs when a single firm sets up two or
more marketing channels to
reach one or more customer segments. The use of hybrid channel systems
has increased greatly in
recent years.
Figure shows a hybrid channel. In the figure, the producer sells
directly to consumer segment 1
using direct-mail catalogs and telemarketing and reaches consumer
segment 2 through retailers. It
sells indirectly to business segment 1 through distributors and dealers
and to business segment 2
through its own sales force.
Hybrid Marketing Channel
Hybrid channels offer many advantages to companies facing large and
complex markets. With each
new channel, the company expands its sales and market coverage and gains
opportunities to tailor
its products and services to the specific needs of diverse customer
segments. But such hybrid
channel systems are harder to control, and they generate conflict as
more channels compete for
customers and sales
I. Channel Design Decisions
We now look at several channel decisions manufacturers face. In
designing marketing channels,
manufacturers struggle between what is ideal and what is practical. A
new firm with limited capital
usually starts by selling in a limited market area. Deciding on the
best channels might not be a
problem: The problem might simply be how to convince one or a few good
intermediaries to
handle the line.
If successful, the new firm might branch out to new markets through the
existing intermediaries.
In smaller markets, the firm might sell directly to retailers; in larger
markets, it might sell through
distributors. In one part of the country, it might grant exclusive
franchises; in another, it might sell
through all available outlets. In this way, channel systems often evolve
to meet market
opportunities and conditions. However, for maximum effectiveness,
channel analysis and decision
making should be more purposeful. Designing a channel system calls for
analyzing consumer
service needs, setting channel objectives and constraints, identifying
major channel alternatives,
and evaluating them.
a. Analyzing Consumer Service Needs
As noted previously, marketing channels can be thought of as
customer value delivery systems in which
each channel member adds value for the customer. Thus, designing the
distribution channel starts
with finding out what targeted consumers want from the channel. Do
consumers want to buy from
nearby locations or are they willing to travel to more distant
centralized locations? Would they
rather buy in person, over the phone, through the mail, or via the
Internet? Do they value breadth
of assortment or do they prefer specialization? Do consumers want many
add-on services
(delivery, credit, repairs, installation) or will they obtain these
elsewhere? The faster the delivery,
the greater the assortment provided, and the more add-on services
supplied, the greater the
channel's service level.
But providing the fastest delivery, greatest assortment, and most
services may not be possible or
practical. The company and its channel members may not have the
resources or skills needed to
provide all the desired services. Also, providing higher levels of
service results in higher costs for
the channel and higher prices for consumers. The company must balance
consumer service needs
not only against the feasibility and costs of meeting these needs but
also against customer price
preferences. The success of off-price and discount retailing shows that
consumers are often willing
to accept lower service levels if this means lower prices.
b. Setting Channel Objectives and Constraints
Channel objectives should be stated in terms of the desired service
level of target consumers.
Usually, a company can identify several segments wanting different
levels of channel service. The
company should decide which segments to serve and the best channels to
use in each case. In each
segment, the company wants to minimize the total channel cost of meeting
customer service
requirements.
The company's channel objectives are also influenced by the nature of
the company, its products,
marketing intermediaries, competitors, and the environment. For example,
the company's size and
financial situation determine which marketing functions it can handle
itself and which it must give
to intermediaries. Companies selling perishable products may require
more direct marketing to
avoid delays and too much handling. In some cases, a company may want to
compete in or near
the same outlets that carry competitors' products. In other cases,
producers may avoid the
channels used by competitors. Finally, environmental factors such as
economic conditions and
legal constraints may affect channel objectives and design. For example,
in a depressed economy,
producers want to distribute their goods in the most economical way,
using shorter channels and
dropping unneeded services that add to the final price of the goods.
c. Identifying Major Alternatives
When the company has defined its channel objectives, it should next
identify its major channel
alternatives in terms of types of intermediaries, the
number of intermediaries, and the responsibilities of each
channel member.
d. Types of Intermediaries
A firm should identify the types of channel members available to
carry out its channel work. For
example, suppose a manufacturer of test equipment has developed an audio
device that detects
poor mechanical connections in machines with moving parts. Company
executives think this
product would have a market in all industries in which electric,
combustion, or steam engines are
made or used. The company's current sales force is small, and the
problem is how best to reach
these different industries. The following channel alternatives might
emerge from management
discussion:
Company sales force: Expand the company's direct sales force. Assign
outside salespeople to
territories and have them contact all prospects in the area or develop
separate company sales forces
for different industries. Or, add an inside telesales operation in which
telephone salespeople
handles small or midsize companies.
Manufacturer's agency: Hire manufacturer's agents—independent firms
whose sales forces handle
related products from many companies—in different regions or industries
to sell the new test
equipment.
Industrial distributors: Find distributors in the different regions or
industries who will buy and
carry the new line. Give them exclusive distribution, good margins,
product training, and
promotional support.
e. Number of Marketing Intermediaries
Companies must also determine the number of channel members to use at
each level. Three
strategies are available: intensive distribution, exclusive
distribution, and selective distribution.
Producers of convenience products and common raw materials typically
seek intensive
distribution—a strategy in which they stock their products in as many
outlets as possible. These
goods must be available where and when consumers want them. For example,
toothpaste, candy,
and other similar items are sold in millions of outlets to provide
maximum brand exposure and
consumer convenience. By contrast, some producers purposely limit the
number of intermediaries
handling their products. The extreme form of this practice is exclusive
distribution, in which the
producer gives only a limited number of dealers the exclusive right to
distribute its products in
their territories. Exclusive distribution is often found in the
distribution of new automobiles and
prestige women's clothing. Exclusive distribution also enhances the
car's image and allows for
higher markups.
Between intensive and exclusive distribution lies selective
distribution—the use of more than one,
but fewer than all, of the intermediaries who are willing to carry a
company's products. Most
television, furniture, and small-appliance brands are distributed in
this manner. They can develop
good working relationships with selected channel members and expect a
better-than-average selling
effort. Selective distribution gives producers good market coverage with
more control and less cost
than does intensive distribution.
J. Channel Management Decisions
Once the company has reviewed its channel alternatives and decided on
the best channel design, it
must implement and manage the chosen channel. Channel management calls
for selecting and
motivating individual channel members and evaluating their performance
over time.
a. Selecting Channel Members
Producers vary in their ability to attract qualified marketing
intermediaries. Some producers have
no trouble signing up channel members. In some cases, the promise of
exclusive or selective
distribution for a desirable product will draw plenty of applicants.
At the other extreme are producers who have to work hard to line up
enough qualified
intermediaries..
When selecting intermediaries, the company should determine what
characteristics distinguish the
better ones. It will want to evaluate each channel member's years in
business, other lines carried,
growth and profit record, cooperativeness, and reputation. If the
intermediaries are sales agents,
the company will want to evaluate the number and character of other
lines carried and the size and
quality of the sales force. If the intermediary is a retail store that
wants exclusive or selective
distribution, the company will want to evaluate the store's customers,
location, and future growth
potential.
b. Motivating Channel Members
Once selected, channel members must be motivated continuously to do
their best. The company
must sell not only through the intermediaries but to
them. Most companies see their intermediaries
as first-line customers. Some use the carrot-and-stick approach: At
times they offer positive
motivators such as higher margins, special deals, premiums, cooperative
advertising allowances,
display allowances, and sales contests. At other times they use
negative motivators, such as
threatening to reduce margins, to slow down delivery, or to end the
relationship altogether. A
producer using this approach usually has not done a good job of studying
the needs, problems,
strengths, and weaknesses of its distributors.
More advanced companies try to forge long-term partnerships with their
distributors to create a
marketing system that meets the needs of both the manufacturer and
the distributors. In managing
its channels, a company must convince distributors that they can make
their money by being part
of an advanced marketing system.
c. Evaluating Channel Members
The producer must regularly check the channel member's performance
against standards such as
sales quotas, average inventory levels, customer delivery time, and
treatment of damaged and lost
goods, cooperation in company promotion and training programs, and
services to the customer.
The company should recognize and reward intermediaries who are
performing well. Those who
are performing poorly should be assisted or, as a last resort, replaced.
A company may periodically
"requalify" its intermediaries and prune the weaker ones.
Finally, manufacturers need to be sensitive to their dealers. Those who
treat their dealers lightly
risk not only losing their support but also causing some legal problems.
Changing Channel Organization
Changes in technology and the explosive growth of direct and online
marketing are having a
profound impact on the nature and design of marketing channels. One
major trend is toward
disintermediation—a big term with a clear message and important
consequences.
Disintermediation means that more and more, product and service
producers are bypassing
intermediaries and going directly to final buyers, or that radically new
types of channel
intermediaries are emerging to displace traditional ones.
Thus, in many industries, traditional intermediaries are dropping by the
wayside. Disintermediation
presents problems and opportunities for both producers and
intermediaries. To avoid being swept
aside, traditional intermediaries must find new ways to add value in the
supply chain. To remain
competitive, product and service producers must develop new channel
opportunities, such as
Internet and other direct channels. However, developing these new
channels often brings them
into direct competition with their established channels, resulting in
conflict. To ease this problem,
companies often look for ways to make going direct a plus for both the
company and its channel
partners:
However, although this compromise system reduces conflicts, it also
creates inefficiencies.
|