Marketing Channel Strategy and Management

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CHAPTER
Marketing Channel Strategy and Management
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AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO

• Describe the nature of a marketing channel and
  their functions as intermediaries.

• Distinguish between traditional and electronic
  marketing channel designs.

• Identify the factors organizations use to select
  and manage a single or multiple marketing
  channel(s).

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AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO

• Describe the role intermediaries havein the
  marketing channel selection process.

• Discuss how organizations modify marketing
  channel decisions.

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MARKETING CHANNELS

• A marketing channel consists of individuals and
  firms involved in the process of making an
  offering available for consumption or use by
  consumers and industrial users.

• Channels link the producer and its buyers

Marketing ChannelIntermediaries
Producer
Consumers
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MARKETING CHANNELS
Marketing channels affect an organizations
Communications Strategy
Determined by their willingness and ability to
perform sales, advertising,and promotion
activities.
PricingStrategy
Influenced by their markup and discount policies.
OfferingStrategy
Impacted by their

• Branding policies.

• Willingness to stock and customize offerings.

• Ability to augment offerings through
  installation/maintenance services, credit, etc.

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CHANNEL SELECTION DECISION PROCESS
Marketers must make these marketing channel
decisions

• Determine specific aspects of intermediaries

Functions
Density
Location
Type

• Assess prospective marketing channels by
  conducting a market analysis to identify the
  target markets served and their buying
  requirements.

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THE DESIGN OF MARKETING CHANNELS

• The number of levels in a marketing channel is
  determined by the number of intermediaries
  between the producer and ultimate buyers or users.

• As the number of intermediaries between the
  producer and the ultimate buyer increases, the
  channel increases in length.

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CHAPTER 7 MARKETING CHANNEL STRATEGY AND
MANAGEMENT
THE CHANNEL SELECTION DECISION
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EXHIBIT 7.1 TRADITIONAL MARKETING CHANNEL DESIGNS
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DIRECT VERSUS INDIRECT DISTRIBUTION
Marketers must decide whether to use

• Intermediaries to reach target markets.

• Contact buyers directly via either

Producer
Producer
OwnSales Force
Own Distribution Outlets
OwnMarketingWebsite
Ultimate Buyers
Ultimate Buyers
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DIRECT VERSUS INDIRECT DISTRIBUTION
Marketers employ direct distribution when

• Buyers of target markets are easily identifiable.

• Personal selling is a major component of the
  organizations communication program.

• The organization has a wide variety of offerings
  for the target market.

• Resources are available to satisfy target market
  requirements normally handled by intermediaries
  (credit, technical advice, delivery, and postsale
  service).

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DIRECT VERSUS INDIRECT DISTRIBUTION
Marketers employ direct distribution when

• Intermediaries are not available for reaching
  target markets.

• Intermediaries do not possess the capacity to
  service the requirements of target markets.

• Offerings possess certain characteristics

High Unit Value
Nonstandardized
TechnicallySophisticated
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DIRECT VERSUS INDIRECT DISTRIBUTION
Marketers employ direct distribution when

• The organizations marketing strategy dictates

• An aura of exclusivity

• An emphasis on buying direct

• The organization seeks to differentiate its
  offering from others distributed through
  intermediaries.

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DIRECT VERSUS INDIRECT DISTRIBUTION

• The decision to employ direct distribution to
  ultimate buyers requires the absorptionof all
  functions performed and costs incurred by the
  intermediaries bypassed.

• Similarly, intermediaries who wish to acquire
  functions typically performed by channel members
  above or below them must also absorb their costs.

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ELECTRONIC MARKETING CHANNELS

• Electronic marketing channels employsome form of
  electronic communication, including the Internet,
  to make products and services available for
  consumption or use by consumers and industrial
  users.

• Many services can be distributed through
  electronic marketing channels, while others still
  involve traditional intermediaries.

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EXHIBIT 7.2 REPRESENTATIVE ELECTRONIC MARKETING
CHANNELS
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CHANNEL SELECTION AT THE RETAIL LEVEL
Marketers ask three questions when selecting the
type and location of retail outlets
Target MarketCoverage
Which retailers will provide the best coverage?
Buyer Requirement Satisfaction
Which retailers will best satisfy the target
markets buying requirements?
Profitability
Which retailers will be the most profitable?
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CHAPTER 7 MARKETING CHANNEL STRATEGY AND
MANAGEMENT
SATISFYING INTERMEDIARY REQUIREMENTS AND TRADE
RELATIONS
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TARGET MARKET COVERAGE
The three degrees of distribution density are
IntensiveDistribution
ExclusiveDistribution
SelectiveDistribution
Levis Womens503 Jeans
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TARGET MARKET COVERAGE DISTRIBUTION DENSITY
IntensiveDistribution
The firms offerings are sold through as many
retail outlets as possible.
One retail outlet in a geographic area or one
retail chain sells the firms offerings.
ExclusiveDistribution

• Is the defined trade area of the retailer

• Some retailers sign exclusive distribution
  agreements with manufacturers

A manufacturer or service provider gives the
retailer exclusive rights to sell a line of
offerings in a defined area in return for
performing specific marketing functions.
Franchising
SelectiveDistribution
The firm selects a few retail outlets in a
specific area to carry its offerings.
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TARGET MARKET COVERAGE DISTRIBUTION DENSITY

• Effective distribution means that a limited
  number of outlets at the retail level account for
  a significant fraction of the market potential.

• Example A marketer distributes the product
  through 40 percent of available retail outlets,
  but these outlets account for 80 percent of the
  market.

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TARGET MARKET COVERAGE DISTRIBUTION DENSITY
The decision as to which of the three degrees of
distribution density to select rests on

• How buyers purchase the manufacturers offering.

• The amount of control over resale desired by the
  manufacturer.

• The degree of exclusivity intermediaries seek.

• The contribution of intermediaries to the
  manufacturers marketing effort.

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TARGET MARKET COVERAGE DISTRIBUTION DENSITY
IntensiveDistribution
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SATISFYING BUYER REQUIREMENTS
Information

• Is important when buyers

• Have limited knowledge

• Desire specific data about an offering

• Communicate with buyers through in-store
  displays, demonstrations, and personal selling.

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SATISFYING BUYER REQUIREMENTS
Convenience

• Has different meanings for buyers at outlets

• Proximity

• Minimal time and hassle

• Driving time

• For Internet purchases, it means

• Websites are easy to locate and navigate

• The 8-second ruleConsumers will abandon
  efforts to enter or navigate a website if
  download time exceeds 8 seconds

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SATISFYING BUYER REQUIREMENTS
Variety

• Reflects buyers interest in having numerous
  competing and complementary items from which to
  choose.

• Is evident in both the breadth and depth of
  products and brands carried by intermediaries.

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SATISFYING BUYER REQUIREMENTS
AttendantServices
Are an important buying requirement for products
such as large household appliances that require
delivery, installation, and credit.
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PROFITABILITY

• Profitability is determined by the

• Margins earned (revenues minus costs) for each
  channel member

• Channel as a whole

• Extent to which channel members share costs

• Channel costs include distribution, advertising,
  and selling expenses associated with different
  types of marketing channels.

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CHANNEL SELECTION SECOND-LEVEL INTERMEDIARIES
Wholesalers
IndustrialDistributors
Brokers
Specialty
Carries a limited line of items within a product
line.
GeneralMerchandise
Carries a wide assortment of products.
General Line
Carries a complete assortment of items in a
single retailing field.
The issue to resolve for marketers is which of
these wholesalers sell to the desired retail
outlets.
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CHANNEL SELECTION WHOLESALERS

• The location of wholesalers is determined by

• Transportation costs

• The requirement for fast delivery service

• The density of wholesalers is influenced by

• The density of the retail network

• Wholesaler service capabilities

• As the density of retail outlets increases, the
  density of wholesalers necessary to service them
  also increases.

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CHAPTER 7 MARKETING CHANNEL STRATEGY AND
MANAGEMENT
DUAL DISTRIBUTION AND MULTI-CHANNEL MARKETING
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DUAL DISTRIBUTION
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.
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DUAL DISTRIBUTION
A firm uses dual distribution because it

• Produces its own brand (for resellers) as well as
  a private store brand (for a specific retailer).

• May distribute directly to a large-volume
  retailer and use wholesalers for small-volume
  retailers.

• Considers geography

• Uses it own sale force in concentrated markets

• Uses intermediaries elsewhere

• Employs a multibrand strategy.

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MULTI-CHANNEL MARKETING
Multi-channel marketing involves the blending of
an electronic marketing channel (electronic
storefront or website) and a traditional channel
in ways that are mutually reinforcing in
attracting, retaining, and building customer
relationships.
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MULTI-CHANNEL MARKETING
A firm uses multi-channel marketing because

• The addition of an electronic marketing channel
  can provide incremental revenue.

• An electronic marketing channel can leverage the
  presence of a traditional channel.

• It can satisfy buyer requirements.

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MULTI-CHANNEL MARKETING ELECTRONIC MARKETING
CHANNELS
Multi-channel marketing is viable if an
electronic marketing channel

• Generates incremental revenue.

• Does not cannibalize sales from traditional
  channel intermediaries.

• Reaches a different segment of customers than the
  traditional channel.

• Reinforces with traditional channels in
  attracting, retaining, and building customer
  relationships.

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MULTI-CHANNEL MARKETING ELECTRONIC MARKETING
CHANNELS

• Firms increasing focus on the incremental cost to
  launch and sustain websites.

• The up-front cost to build a website with

• Static content, simple search tools, and non-
  personalized merchandising is expensive

• Interactive content, sophisticated search tools,
  and highly personalized merchandising is even
  more expensive

• Thus, high-margin and high volume products are
  best suited for electronic marketing channels.

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DISINTERMEDIATION
Disintermediation is the practice whereby a
traditional intermediary member is dropped from a
marketing channel and replaced by an electronic
storefront.
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DISINTERMEDIATION

• Disintermediation is considered more serious than
  cannibalization by intermediariesit affects
  reseller survival.

• Disintermediation may cause firms to avoid
  multi-channel marketing due to complaints and
  threats by intermediaries, particularly
  retailers, to discontinue carrying their products
  and delivering their services.

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CHAPTER 7 MARKETING CHANNEL STRATEGY AND
MANAGEMENT
SATISFYING INTERMEDIARY REQUIREMENTS AND TRADE
RELATIONS
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INTERMEDIARY REQUIREMENTS
Intermediaries

• Choose the suppliers they want to deal with.

• Are concerned with the adequacy of a firms
  offerings in improving the assortment for their
  own target markets.

• Seek marketing support from manufacturers

Wholesalers
Want promotional assistance.
IndustrialDistributors
Want technical assistance.
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INTERMEDIARY REQUIREMENTS
The following contribute to long-term exchange
relationships between a manufacturer and their
intermediaries
TradeDiscounts
Fill-RateStandards
CooperativeAdvertising
Lead-TimeRequirements
OfferingExclusivity
ProfitMargins
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TRADE RELATIONS

• Marketing managers recognize that conflicts often
  arise in trade relations.

• Channel conflict arises when one channel member
  (such as a manufacturer or an intermediary)
  believes another channel member is engaged in
  behavior that is preventing it from achieving its
  goals.

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CHANNEL CONFLICT
Channel conflict occurs when

• A channel member bypasses another member and
  sells or buys direct.

• There is a dispute over how profit margins are
  distributed among channel members.

• Manufacturers believe wholesalers or retailers
  are not giving their products adequate attention.

• A manufacturer engages in dual distribution and
  particularly when different retailers or dealers
  carry the same brands.

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CHANNEL POWER
A channel captain is a member of a marketing
channel who seeks to coordinate, direct, support,
and influence the behavior of other channel
members to reduce the likelihood of conflict.
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CHANNEL POWER
Channel power can take these forms
Economic
The ability of a firm to reward or coerce other
members due to its strong financial position or
consumer franchise.
Expertise
A distinctive competence that provides
avalue-added service to channel members.
Channel MemberIdentification
Resellers may compete with others to carry a
particular firms highly valued brand offerings.
LegitimateRight
The ability of one channel member to legally
direct how another behaves (e.g. franchising).
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CHAPTER 7 MARKETING CHANNEL STRATEGY AND
MANAGEMENT
CHANNELMODIFICATION DECISIONS
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CHANNEL MODIFICATION DECISIONS
Reasons for modifying the channel

• Shifts in the geographical concentration of
  buyers.

• The inability of existing intermediaries to meet
  the needs of buyers.

• The costs of distribution.

• A change in marketing strategy.

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CHANNEL MODIFICATION DECISIONS
Bases of the channel modification decision

• Provide the best target market coverage.

• Satisfy the target markets buying requirements.

• Maximize revenue and minimize cost.

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CHANNEL MODIFICATION DECISIONS QUALITATIVE
FACTORS
Comparative analysis questions to ask when
modifying existing or adding new channels

• Will the change improve the effective coverage of
  the target markets sought?

• Will the change improve the satisfaction of buyer
  needs? How?

• Which marketing functions must be absorbed in
  order to make the change?

• Does the firm have the resources to perform the
  new functions?

• What effect will the change have on other channel
  members?

• What will be the effect of the change on the
  achievement of long-range organizational
  objectives?

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CHANNEL MODIFICATION DECISIONS QUANTITATIVE
FACTORS

• Marketers must consider the financial impact of a
  channel modification decision.

• If a firm eliminated its wholesalers, it would
  have to assume the costs of

• Sales to retail accounts

• Sales administration

• Carrying the inventory

• Delivery and storage

• Carrying the accounts receivable

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CHANNEL MODIFICATION DECISIONS QUANTITATIVE
FACTORS
Cost of Wholesalers
Cost of Distribution Centers

• Which alternative should be selected?

• What factors could affect revenues?