Chapter 13 Marketing Channels

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Chapter 13 Marketing Channels
Professor Jason C. H. Chen, Ph.D. School of
Business Administration Gonzaga
University Spokane, WA 99223 chen_at_jepson.gonzaga.e
du
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After studying this chapter, you should be able
to

• Explain the functions and key activities of
  marketing channels.
• Discuss the role of intermediaries in marketing
  channels.
• Distinguish between direct and indirect marketing
  channels.

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After studying this chapter, you should be able
to

• Illustrate how some firms use multiple channels
  successfully.
• See how marketing-channel decisions are related
  to other key marketing decision variables.
• Understand how power, conflict, and cooperation
  affect the operation of a marketing channel.
• Give examples of ethical and legal issues
  encountered in the operations of marketing
  channels.

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Overview of Marketing Strategy Planning Process
Narrowing down to focused strategy with
quantitative and qualitative screening criteria
Customers Needs and other Segmenting Dimensions
S. W. O. T.
Segmentation Targeting
Company Objectives Resources
Segmentation Positioning
Competitors Current Prospective
External Market Environment Technologies
Political and Legal Cultural and Social
Economic
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Consumer and Business-to-Business Marketing
Channels
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Consumer and Business-to-Business Marketing
Channels
Consumer and business-to-business marketing
channels
Exhibit 13-1
Consumer channels
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Consumer and Business-to-Business Marketing
Channels
Consumer and business-to-business marketing
channels
Exhibit 13-1
Business-to-business channels
P
BB
P
W
BB
P
A
BB
P
A
W
BB
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Place Decisions in the Marketing Mix

• Making products available in the right quantities
  and locationswhen customers want them
• Channels of distribution
• Focus on institutions involved in getting product
  to the customer
• Logistics
• Focus on the physical flow of the product
• Facilities needed for storing and transporting
• Customer service levels to satisfy customers

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Strategy Decision Areas in Place
Place Objectives
Type of channel
Customer services level desired
Inventory level Transportation Arrangements
Facilities needed Information technology needed
Direct
Indirect
Degree of market Exposure desired (intensive,
selective, or exclusive)
Middlemen / facilitator needed (many types,
Chapters 12-13)
How to manage Channel relationships
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Channel Specialists Adjust Discrepancy of Quantity
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The Importance of Marketing Channels

• Marketing channels determine how and where
  customers buy.

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Key Functions Performed in Marketing Channels

• Marketing Communications
• Advertising the Product
• Providing P-O-P Displays
• Providing a salesforce that offers information
  service to customers

• Inventory Management
• Ordering appropriate merchandise assortment
• Maintaining adequate stock to meet customer
  demand
• Storing merchandise in an appropriate facility

• Physical Distribution
• Delivering products
• Coordinating delivery schedules to meet customer
  expectations
• Arranging for the return of defective merchandise

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Key Functions Performed in Marketing Channels

• Market Feedback
• Serving on manufacturer advisory boards
• Informing other channel members of competitive
  activity
• Participating in test market evaluations

• Financial Risk
• Offering credit
• Managing risks related to product loss or
  deterioration
• Managing risks related to product safety and
  liability

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Contributions of Intermediaries

• Provide Economic Value
• Provide Social Value
• Provide Marketing Support
• Impact Supply-chain Management
• Add Value to the Market Offering

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Types of Marketing Channels

• Direct Channels
• Indirect Channels
• Single Marketing Channels
• Multiple Marketing Channels
• Vertical Marketing Systems

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Companies Using Direct Marketing Channels
Exhibit 13-3
Companies using direct marketing channels
Personal selling
Business buyer Truck manufacturers
Producer Cummins Engine Co. (International
market) Diesel engine
Telemarketing, direct response advertising
Consumer
Producer Munder Capital Man- agement
(International market) Mutual Fund
Producer Dell Computer Corp. (International
market) Personal computers
Toll-free phone/fax ordering, internet
Consumer
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Companies Using Indirect Marketing Channels
Exhibit 13-4
Examples of indirect channels
A
B
Producer Thousands of manufacturers Examples
Black Decker, Stanley Tools, 3M, Weedeater
Producer Beecham Products Examples Aqua-Fresh
toothpaste, Mennen aftershave, Sucrets lozenges
Wholesaler Orgill Brothers, one of the worlds
largest hardware Wholesalers, located in Memphis,
Tennessee
Retailers Thousands of hardware stores
Retailers Thousands of drug, grocery discount
stores Examples Wal-mart, Kroger, Eckerd Drugs,
Walgreens
Ultimate consumers Millions of people in the
United Stated, Mexico, South Central America
Ultimate consumers Millions of people around the
world
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Companies Using Vertical Marketing Systems
Exhibit 13-5
Types of vertical marketing systems
Channel systems
Corporate Forward integration
Polo, Laura Ashley, Gulf States Paper Corp.
Backward integration
Winn-Dixie grocery chain Description
One channel member owns one or more other channel
members
Contractual Wholesaler-sponsored
voluntary groups Ace Hardware,
Western Auto Retailer-sponsored
cooperative groups Affiliated
Grocers, Cotter Company (True
Value Hardware) Franchise system
McDonalds, Holiday Inns,
Personnel Pool of America Description
Channel members operate according to
contractual agreement
Administered
Abbott Labs, General Electric, Rolex
Description Channel members
operate according to agreed-upon plan
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Vertical Marketing Systems

• Whole channel focuses on the same target market
  at the end of the channel
• Corporate channel systems
• corporate ownership all along the channel
• often involves vertical integration
• Administered channel systems
• informal agreements among channel members
• Contractual channel systems
• legal contracts among channel members
• Alliances are also popular
• Usually short term, and may involve a whole
  network of firms

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Characteristics of Traditional and Vertical
Marketing Systems
Type of Channel
Vertical marketing Systems
Characteristics
Traditional
Administered
Contractual
Corporate
Fairly good to good
Complete
Amount of cooperation
Little or none
Some to good
Control Maintained by
None
Economic Power and leadership
Contracts
Ownership By one company
General Electric, Miller Beer, O.M. Scott Sons
(lawn Products)
Examples
Typical Channel Of inde- pendents
McDonald s, Holiday Inn, IGA, Ace Hardware, Super
Valu, Coca-Cola, Chevrolet
Florsheim Shoes, Sherwin- Williams, Mothers Work
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Factors Related to the Use of Direct Distribution

• Direct (producer to customer) distribution is
  more common when
• the customer is a business or organization
  (rather than a final consumer)
• an aggressive personal selling effort is required
  and/or when customers need special technical
  service
• the product is primarily a service rather than a
  physical good
• when working with middlemen would make it
  difficult to maintain control of the marketing
  mix
• the producer can perform marketing functions more
  efficiently (economically) by itself
• Internet websites are making direct distribution
  easier and more common

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Managing Marketing Channels
Exhibit 13-7
Managing marketing channels

• Develop channel
• strategy
• Objectives
• Buyer
• preferences
• Relationship
• orientation
• Degree of
• market coverage

• Evaluate channel
• alternatives
• Capabilities
• costs
• Internal
• Intermediaries
• Collaborators/
• strategic allies
• Compatibility
• Product
• considerations
• Pricing
• considerations
• Marketing
• communications

• Determine
• channel structure
• Direct versus
• indirect channel
• Single versus
• multiple
• channels
• Vertical
• marketing
• system

• Implement
• channel strategy
• Trial period
• thereafter
• Set performance
• expectations
• Create
• communications
• network

• Evaluate
• channel
• performance
• Financial
• performance
• Working
• relationships
• Ethical legal
• issues
• Future
• considerations

Formulate firms marketing objectives strategy
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Formulating Marketing Objectives and Strategies

• Marketing channel objectives and strategies must
  be compatible with overall marketing strategy.

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Developing Channel Objectives and Strategy

• The development of channel strategies requires
  decisions in three key areas
• Buyer Preferences
• Relationship Orientation
• Degree of Market Coverage

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Evaluating Channel Alternatives

• Evaluation of Capabilities and Costs
• Evaluation of Channel Compatibility
• Product Considerations
• Pricing Considerations
• Marketing Communications Considerations
• Evaluation of Availability

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Determining Channel Structure

• The key question is What channel structure is
  best for us to use?

Direct of Indirect Channels?
Single or Multiple Channels?
Vertical Marketing Systems?
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Implementing Channel Strategy

• Run a Trial Period
• Set Performance Expectations
• Create Communication Networks

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Channel Captain

• A manager who helps direct the activities of the
  whole channel
• Tries to develop cooperation and avoid or resolve
  conflicts
• May be either a producer or middleman
• Big retail chains increasingly taking this role
• Guides the whole channel to compete better with
  other channels
• Effective allocation of functions
• A common product-market commitment

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Evaluating Channel Performance

• Financial Evaluation
• Evaluate Working Relationships
• Evaluate Legal and Ethical Issues

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Financial Evaluation
In the short run channel members will accept low
levels of financial performance
In the long run channel members must have
positive financial results to sustain channel
relationships
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How Channel Functions May Be Shifted and Shared
in Different Channel Systems. A. How strategy
decisions are handled in a producer-led channel,
and B. How strategy decisions are handled in a
retailer-led channel
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A Continuum of Distribution Intensity
Selective Distribution
PepsiCo Soft Drinks
Florsheim Shoes
Steinway Pianos
Wrigley Chewing Gum
Maytag Appliances
Stride Rite (Kids Baby Smart) At Target
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Level of Market Exposure

• Intensive
• selling through all responsible and suitable
  wholesalers and retailers who will stock and/or
  sell the product
• Selective
• selling through only those middlemen who will
  give the product special attention
• Exclusive
• selling through only one middleman in a
  particular geographic region

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Selective Distribution

• Sell only through middlemen who give the product
  special attention
• Avoids dealing with middlemen who
• have poor credit standing
• make too many returns
• require too much service
• place only small orders
• can't or won't do a satisfactory job
• Becoming more popular
• less expensive than intensive distribution
• better cooperation among channel members

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Cooperative Arrangements in Exclusive Distribution
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An Example of Dual Distribution by a Publisher of
Computer Books
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Reverse Channels of Distribution

• Reverse channels are channels used to retrieve
  products that customers no longer want
• Examples of situations
• recall of unsafe products
• return of products from incorrectly filled order
• return of products under warranty
• return of products customer orders in error
• return of products customer orders online
• return of products to be recycled (bottles, etc.)

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Evaluating Working Relationships

• Channel Power
• Reward Power
• Legitimate Power
• Expert Power
• Referent Power
• Coercive Power
• Channel Leader Power
• Channel Conflict
• Channel Cooperation

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Evaluate Legal and Ethical Issues

• Are any laws being violated?
• Are any exclusive territories set up?
• Are any exclusive dealing arrangements being
  made?
• Are resellers being bound to tying contracts?

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Future Considerations for Channel Management

• Firms must always ask How well can this channel
  be expected to perform in the future?
• Companies will be forced to alter their channels
  because of
• Changing consumer preferences
• Intense competition
• Innovation in information technology