Marketing Channel Strategy and Management

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Chapter 7

• Marketing Channel Strategy and Management

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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

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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

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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.
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Role of the channel in marketing strategy

• Links a producer to buyers
• Performs sales, advertising, and promotion
• Influences the firms pricing strategy
• Affects product strategy through branding
  policies, willingness to stock and customize
  offerings, install, maintain, offer credit, etc.

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The Channel-Selection DecisionFundamental
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

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Traditional Marketing Channel Designs
Producer
Ultimate Buyers
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The Design of Marketing Channels

• 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

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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

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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

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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

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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.

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Representative Electronic Marketing Channels
Autobytel.com
Amazon.com
Dell.com
Travelocity.com
Ultimate Buyers
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The Design of Marketing Channels

• Disintermediation is the elimination of
  traditional intermediaries and direct
  distribution through electronic marketing
  channels.

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Channel Selection at the Retail LevelChannel
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?

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Channel Selection at the Retail LevelTarget
Market Coverage
Intensive
Exclusive
Selective
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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.

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Channel Selection at the Retail LevelSatisfying
Buyer Requirements

• Information
• Convenience
• Variety
• Attendant services

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Channel Selection at the Retail
LevelProfitability

• Margins Revenues Channel Costs
• Channel costs are
• Distribution costs
• Advertising costs
• Selling costs

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Channel Selection at Other Levels of
DistributionTypes 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

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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

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Dual Distribution When is it used

• own brand and private store brand
• distribution to large and small retailers
• multibrand strategy
• geographic factors

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Dual Distribution Example

• Hallmark
• Sells Hallmark brand cards through Hallmark
  stores and selected department stores
  
• Sells Ambassador brand cards through discount
  drugstore chains

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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.

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Multi-Channel MarketingJustifications

• An electronic marketing channel can provide
  incremental revenue (Victorias 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)

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Multi-Channel MarketingConsiderations

• 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

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Satisfying Intermediary Requirements and Trade
RelationsIntermediary Requirements

• Improvements in product assortments
• Trade discounts
• Fill-rate standards
• Promotional support
• Lead-time requirements
• Product-service exclusivity agreements

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Satisfying Intermediary Requirements and Trade
RelationsTrade Relations
Channel Conflict arises when one channel member
believes another channel member is engaged in
behavior that is preventing it from achieving its
goals.
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Satisfying Intermediary Requirements and Trade
RelationsSources 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)

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Satisfying Intermediary Requirements and Trade
RelationsChannel Power
Channel Captain is a channel member that takes on
the role of coordinating, directing, and
supporting other channel members.
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Satisfying Intermediary Requirements and Trade
RelationsForms 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)

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Channel-Modification DecisionsReasons

• Shifts in the geographical concentration of
  buyers
  
• Inability of existing intermediaries to meet the
  needs of buyers
  
• Costs of distribution

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Channel-Modification DecisionsBasic Objectives

• Provide the best coverage of the target market
  sought
  
• Satisfy the buying requirements of the target
  market
  
• Maximize revenue and minimize cost

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Channel-Modification DecisionsQualitative 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?

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

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Channel-Modification DecisionsQuantitative
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

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Channel-Modification DecisionsQuantitative
Assessment Example
Since using wholesalers costs 5.5 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

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Bypassing a Wholesaler
Current Situation Sales to Wholesalers
18 m Wholesaler margin
10 PCM
20 Situation being considered Inventory c
osts 25
Inventory turnover 5
Credit costs
15 Average credit period 36 da
ys Fixed Sales Force exp. 1 m V
ariable Sales Force exp. 2 of
sales Should the mfg. sell direct to retailers
?
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Bypassing a Wholesaler Running the s
Current Contribution Sales x PCM 18 m x 20
3.6 m Contribution with direct sales (assumin
g no sales increase) Additional contribution from
selling direct wholesalers margin 2.0 m
Less additional costs Inventory costs (Sales/I
nventory Turnover) x inventory costs
(20 m/5) x 25 1 m
Credit costs (Sales/360) x (average credit per
iod) x credit costs (20 m/360) x 36 x 15
0.3 m
Sales Force costs 1 m 20 m
x 2 1.4 m Total additional cost
s 2.7 m So unless sales increase by 2.5 m
(0.7m/28) to 22.5 m or there are compelling
strategic reasons, the mfg should not sell
direct