Marketing Channels• They are set of independent

organizations involved in the process of making a product or service available for use n consumption.

• Why? use of intermediaries bring greater efficiency in making goods available to target markets. In other words, they match the supply with the demand.

• Most important benefit of using intermediaries is that they provide economies. They reduce the amount of work that must be done by both producers and consumers.

Channel Functions• A distribution channel moves goods from producers to consumers.

they;– give information about the product and consumers– promote the offer– contact with the consumers– match the offer with the consumer’s needs– negotiate with the buyers about the price and offer– physically distribute (transport) the product – may finance the manufacturer to cover the costs of the channel

work therefore may take risk.

• All these functions can be carried out by the manufacturers but they then increases their costs and prices.

suppliers transporters transporters transportersManufacturer dealers customers

suppliers transporters Manufacturer transporters dealers transporters customers

suppliers Manufacturer dealer customer

Physical flow

Title flow

Info flow-both ways

suppliers banks Manufacturer banks dealers banks customers

suppliers advertising Manufacturer advertising dealers customers

Payment flow-backward

Promotion flow-forward

Channel flows• Forward flow: physical, title, promotion

• Backward flow: ordering and payment

• Both direction: information, negotiation, finance, risk taking

• 3 channels– Sales channel– Delivery channel– Service channel

Channel level

• Zero level (direct marketing)-manufacturer selling directly to final customer

• One level- 1 selling intermediary as retailer

• Two level- 2 intermediaries as wholeseller, retailer

• Three level- 3 intermediaries as wholesellers, retailers, jobbers

• Service sector: hospitals, schools,fire station

manufacturer manufacturer manufacturer manufacturer

consumer consumer consumer consumer

retailer retailer retailer

wholesaler wholesaler

jobber

Marketing channel-consumer goods

Channel design decisions

Designing a channel system include;

• analyzing consumer service needs

• setting the channel objectives and constraints

• identifying the major channel alternatives

• evaluating the major alternatives

Analyzing Consumer Service Needs

• Designing the distribution channel begins with determining– convenient location to buy the products– Product variety– immediate delivery– credit, repairs– long-term warranty

• The company must balance the consumer service needs with the feasibility and costs plus prices.

Setting Channel Objectives and Constraints

• The company must decide which segments to target and the best channels to use in each segment. Here, the objective of the company is to minimize the total channel cost

• Besides the target market, the company’s channel objectives are influenced by;

– the nature of its product, e.g. perishable products require more direct marketing to avoid delays and too much handling.

– company characteristics, e.g. the company’s size and financial situation determine which functions it can

handle, how many channels it can use, which transportation can be used…

– characteristics of intermediaries, intermediaries differ in their abilities to handle promotions, customer contact, storage and credit e.g. the company’s own sales force is more intense in selling.

– competitors’ channel, some companies may prefer to compete in or near the same outlets that carry competitors’ products, some may not e.g. Burger King wants to locate near McDonald’s

– environmental factors, economic conditions and legal constraints affect channel design decisions e.g. in a depressed economy, producers want to distribute their goods in the most economical way, using shorter channels.

Identifying major channel alternatives-Types

E.g Industrial product

Company sales force

Manufacturer agency

Industrial distributors

E. g consumer electronics co.

Dealer marketRetail dealerSpecialist dealerMail order marketOEM market

The advent of print media, the telephone, The advent of print media, the telephone, radio, television, and the Internet have all radio, television, and the Internet have all provided new ways for marketers to get their provided new ways for marketers to get their message to their intended audience. As message to their intended audience. As various technologies advance, these various technologies advance, these information channels offer more precise information channels offer more precise delivery of a message. Can delivery of a message. Can you identify an emerging you identify an emerging information distribution information distribution channel?channel?

• Number of Marketing Intermediaries

– Intensive distribution- strategy in which companies stock their products in as many outlets as possible. Convenience products and common raw materials must be available where and when consumers want them e.g. toothpaste, candy… Procter & Gamble, Coca-Cola .

Advantages – max. brand exposure & consumer convenience.

– Exclusive distribution- strategy (opposite to intensive distribution) in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories.

– new automobiles and prestige women’s clothing e.g. Rolls-Royce.

Advantages- establishing image and getting higher markups.

No. of Marketing channel – Selective distribution; (is between

intensive and exclusive distribution) strategy in which the company uses more than one but fewer than all of the intermediaries.

– television, furniture brands Advantages - good market coverage more control & less cost

– it does not spread its efforts over many outlets.

Responsibilities of Channel Membersprice policies discountsterritories & services of each party.

E.g. McDonald’s provides franchisees with promotional support, training, management assistance, in turn, franchisees must meet company standards for physical facilities, buy specific food products...

Evaluating the Major Alternatives

In order to select the channel that satisfy the company objectives in the best way, each alternative should be evaluated by using;

• economic criteria; the company compares the projected profits and costs of each channel.– Co. sales force OR sales agency

• control issues; the company prefers to keep the channel where it has the highest control.

• adaptive criteria; the company prefers to keep the channel which is the most flexible to the changing marketing environment.

Figure 17.5: Break-even Cost Chart

Channel-Design DecisionsCompany sales force or sales agency

Channel management decisions• Selection channel

members– Sales agents- size n quality of

sales force– Deptt stores- evaluate location,

growth potential

• Training channel members– Microsoft certified professionals– CD Rom

Motivating channel members-

channel positioning,offering, capability building

programs

• Coercive power- threaten to terminate relationship• Reward power- xtra benefit for good performance• Legitimate –warranted under contract. GM insist

dealers for certain inventory• Expert power- special knowledge, ex. Sales lead

generation, sales training • Referent power- manufacturer is highly respected

that members feel proud. e.g IBM, caterpilar, HP

Channel Dynamics

New channel systems evolve

Evolution of channels

High-growth

Growth- Dedicated stores

Mature- deptt. stores

Introductory- specialist stores

Low growth-high value

Decline- discount stores

low value

Vertical Marketing Systems (VMS)• VMS consists of producers,

wholesalers, and retailers acting as a unified system - that seek to maximize profits for the whole channel.

• one channel members owns the others, has contracts with them or use so much power that they all cooperate.

• this occur to control channel behaviour and manage channel conflict.

C orp ora teV M S

W h olesa le r-sp on soredvo lu n tary

ch a in s

R eta ile rcoop era tives

F ran ch iseorg an iz a tion s

C on trac tu a lV M S

A d m in is te redV M S

V ertica lm arke tin g

sys tem s (V M S )

Corporate VMS• In a corporate VMS, production and distribution

stages are combined under single ownership, in order to manage cooperation and conflict management e.g. AT&T ,Bata & woodland.

Administered VMS– A vertical marketing system that coordinates

production and distribution stages, not through ownership but through the size and power of one of the parties

– e.g. P&G,HLL, Nestle, Maruti are market leaders, they can command special displays, shelf space, promotions and prices form the other parties

Contractual VMS:• It consists of independent firms at different levels of

production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone.

• three types of contractual VMSs;– wholesaler-sponsored voluntary chains; are contractual

marketing systems in which wholesalers organize voluntary chains of independent retailers to help them compete with large corporate chain organizations. E.g-vegetables n food market

– retailer cooperatives; are contractual marketing systems in which retailers organize a new, jointly owned business to carry on wholesaling and possibly production.e.g vishal, amartex

– franchise organizations; are contractual marketing systems in which a channel member, called a franchiser, links several stages in the production-distribution process. Parle brands: thums up, gold spot, limca, mazzaNIIT, Aptech, SSI

three forms of franchisees;• manufacturer-sponsored retailer franchise system e.g. Ford licenses

dealers to sell its cars. The dealers are independent businesspeople who agree to meet various conditions of sales and service.

• manufacturer-sponsored wholesaler franchise system e.g. Coca-Cola licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup concentrate and then carbonate, bottle and sell the finished product to retailers in local markets.

• service-firm-sponsored retailer franchise system in which a service firm e.g. McDonald’s, Burger King, Holiday Inn licenses a system of retailers to bring its service to consumers.

Hybrid Marketing (multichannel)

• company uses several marketing channels (e.g. direct mail - telemarketing, retailers, distributors, dealers, sales force) to sell its products to different customer segments.

• E.g. IBM uses its own sales force ,direct catalog & telemarketing operation , independent IBM dealers , dealers for business segments + large retailers like Wal-Mart.

– Adv.- in large and complex markets the company can expand its sales and market coverage

• services to the specific needs of diverse customer segments.

– disadvantage• they are harder to control and

generate more conflict.

Horizontal Marketing Systems (HMS)

• HMS is a channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity.– Adv.-companies combine their capital, production capabilities,

marketing resources and therefore accomplish more.

• 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.

• E.g. Coca-Cola and Nestle formed a joint venture to market ready-to-drink coffee and tea worldwide. Coke provided worldwide experince in marketing and distribution beverages and Nestle contributed two established brand names - Nescafe and Nestea.

Channel Behaviour

• All channel firms should work together to be successful. Each channel member is dependent on the others

• e.g. a Ford dealer (retailer) depends on the Ford Co. for design cars – Ford depends on the dealer

to attract consumers, persuade them to buy

– service cars after the sale.– dealer depends on other

dealers to create overall reputation for the entire distribution channel.

• There is disagreement among channel members on goals and roles - who should do what and for what rewards.– Horizontal ; occurs among firms at the same level of the

channel. In other words, one dealer may complain about the other.

– Vertical ; occurs among different levels of the same channel. In other words, the producer may complain about its dealers or vise versa.

– Multichannel ;manufacturer has established 2 or more channels that sell to same market.

Channel conflict

Causes of conflict

• Goal incompatibility– Manufacturer- mkt share, max. profit– Channel members-max. sales, max. profit

• Role ambiguity– Automobile component ,FMCG

• Difference in perception of market

Managing conflict

• Dealer councils-– they provide platform for dealers to voice grievances

• Superordinate goals– Members can be motivated to perceive customer

satisfaction as ultimate goal

• Arbitration & mediation– Manufacturer helps in intramiddlemen conflict– Court ,govt. agency b/w manufacturer n dealers

Designing International Distribution Channels

• Channel systems can vary from country to country. Each country may have its own unique distribution system. International marketers have to adapt their channel strategies to the existing structures within each country.

Physical Distribution and Logistics Management

• Companies must decide on the best way to store, handle and move their products and services so that they are available to customers in the right amount, at the right time, and in the right place.

• Logistics effectiveness has a major impact on (1) customer satisfaction and (2) company costs (15% of the product’s price).

Market Logistics

• Physical distribution– Process of getting goods

to customers• Supply chain

management– Procure right inputs– Convert into finished

goods– Dispatch to final

destination

Nature and Imp of Market Logistics• Marketing logistics includes

planning, implementation, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit.

• Logistics deal with – outbound distribution - moving

products from the factory to customers,

– inbound distribution - moving products and materials from suppliers to the factory.

• manage the whole-channel activities of suppliers, purchasing agents, marketers, channel members and customers.

Goals of the Logistics System

• Getting right goods to right places at the right time for the least cost.

• Objective- to maximize profits, not sales. – company must compare the benefits of providing

higher levels of service with the costs.– Some companies may offer less services and charge

less, but others may offer more services than its competitors and charge higher prices to cover their costs.

Major Logistics Decisions

• order processing• warehousing• inventory management• transportation

Order Processing

• Orders submitted thru mail, telephone, salespeople or via computer.

• Short order-to-remittance cycle– Elapsed time b/w order receipt, delivery & payment

• Order transmission• Order entry• Customer credit checking• Inventory & prdn scheduling• Order and invoice shipment• Receipt of payment

– Longer above cycle-lower customer satisfaction

Warehousing• Co stores its goods until they are sold coz prdn n

consumption cycles rarely match• The company might own

– private warehouse• bring more control• ties up capital• is less flexible if locations change

– public warehouses• charge for rented space• provide additional services for inspecting, packaging,

shipping and invoicing goods but at a cost• offer wide choice of locations and warehouse types

• Basic types of warehouses are

– storage warehouses store goods for moderate to long periods

– distribution centers are designed to move goods rather than just store them. They are large and automated warehouses designed to receive goods from suppliers, take orders and deliver goods to customers.

– Automated warehouses with advanced materials handling systems under control of a central computer

Inventory

• Inventory decisions involve – when to order

• Order (reorder) point-stock level to place a new order

– how much to order.• Balance order processing costs & inventory carrying costs• Order processing cost-setup costs + running costs

• Just-in-time logistic systems are used by some companies in which the producers carry only small inventories only enough for a few days of operations. Such systems result in savings in inventory carrying and handling costs.

Transportation

• The choice of transportation carriers affects – the pricing of products– delivery performance– condition of the goods

• In shipping goods, there are five transportation modes: rail, water, truck, pipeline, and air.– Rail; is the most cost-effective mode for shipping large amounts

products e.g. coal, farm and forest products over long distances.– Truck; trucks are very flexible in their routing and time

scheduling. They can move goods door to door, saving

Customer satisfaction

the need to transfer goods from truck to rail and back again. They are efficient for short hauls of high-value products. They can offer faster service.

– Water; the cost is very low for shipping bulky, low-value, nonperishable products e.g. coal, oil, metallic ores. It is the slowest mode and affected by the weather.

– Pipeline; are specialized means of shipping petroleum, natural gas and chemicals from sources to markets. It costs less than rail but more than water.

– Air; costs higher than rail and truck but ideal when speed is needed and distant markets have to be reached. Products are perishables (fresh fish, cut flowers), high-value, low-bulk items (technical instruments, jewellery).

• In choosing a transportation mode, shippers consider five criteria;

speed - door to door delivery time, meeting schedules on time, ability to handle various products, number of geographic points served, cost per tone-mile.