channel decisions

Marketing Channels

MarketingChannel

SupplyChain

A set of interdependent organizations that ease the transfer of ownership as products move from producer to business user or consumer.

The connected chain of all the business entities, both internal and external to the company, that perform or support the logistics function.

Marketing Channel Functions

Specialization andDivision of Labor

ChannelsFulfillThreeImportantFunctions

OvercomingDiscrepancies

Providing ContactEfficiency

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Specialization and Division of Labor

• Provides economies of scale

• Aids producers who lack resources to market directly

• Builds good relationships with customers

Overcoming Discrepancies

Discrepancyof Quantity

DiscrepancyofAssortment

The difference between the amount of product produced and the amount an end user wants to buy.

The lack of all the items a customer needs to receive full satisfaction from a product or products.

Overcoming Discrepancies

TemporalDiscrepancy

SpatialDiscrepancy

A situation that occurs when a product is produced but a customer is not ready to buy it.

The difference between the location of a producer and the location of widely scattered markets.

Channel Functions

•Information•Promotion•Contact•Matching•Negotiation•Physical Distribution•Financing•Risk taking

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Channel Levels

Producer Producer Producer Producer

Consumers Consumers Consumers Consumers

Retailers Retailers Retailers

Wholesalers Wholesalers

Agents orBrokers

WholesalerChannel

RetailerChannel

DirectChannel

Agent/BrokerChannel

Channel Flow

• Forward flow• Backward flow• Flow both ways

Five Channel flows

• Physical flow of goods• Title flow of goods• Payment flow• Information flow• Promotion flow

Channel Design Decisions

Analyze customer needsEstablish channel objectivesIdentify major channel alternativesEvaluate major channel alternatives

Analyzing Consumer Service Needs

• Designing the distribution channel begins with determining what (e.g. convenient location to buy the products, immediate delivery, credit, repairs, long-term warranty…) the consumers want from the channel.

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

Channel objectives

• Defines what the channel system is suppose to do to support customer service

• Product characteristics, market profile, competition• Customer needs could include

– Lot size– Waiting/delivery time– Spatial convenience– Product variety– Service backup

Identifying Channel Alternatives

• Types of intermediaries• Number of intermediaries

– Exclusive– Selective– Intensive

• Terms and responsibilities– Price policy– Condition of sale– Distributors’ territorial rights– Mutual services and responsibilities

Evaluation of alternatives

Cost of operationsAbility to manage

& ControlAdaptabilityRange & volume to be

handled

Channel-Management Decisions

• Selecting channel members• Training channel members• Motivating channel members• Evaluating channel members• Modifying channel members

Channel Integration and Systems

Vertical marketing systems• Corporate VMS• Administered VMS• Contractual VMSHorizontal marketing systemsMultichannel systems

Vertical Marketing Systems

• Vertical Marketing Systems (VMS) consists of producers, wholesalers, and retailers acting as a unified system - that seek to maximize profits for the whole channel.

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

• Such systems occur to control channel behavior and manage channel conflict.

• There are three major types of VMSs which has different means for setting up leadership and power in the channel;– Corporate VMS– Contractual VMS

• Wholesaler-sponsored voluntary chains• Retailer cooperatives• Franchise organizations

– Administered VMS

Types of Vertical Marketing Systems

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 markets its products through its own chain of distributors.

Contractual VMS

• A contractual VMS 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.

• There are 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.

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

– franchise organizations; are contractual marketing systems in which a channel member, called a franchiser, links several stages in the production-distribution process. There are 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 franchisee system e.g. Coca-Cola licenses bottlers (wholesalers) in varius 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. Hertz, Avis, McDonald’s, Burger King, Holiday Inn, Ramada Inn licenses a system of retailers to bring its service to consumers.

» Reduced set-up costs» Contractual relationship» Proven system and established brand name» Centralised buying power» Expertise in operational, managerial, legal

matters» Forfeit some control» Performance against exacting standards» Aggressive targets

Administered VMS

• A vertical marketing system that coordinates production and distribution stages, not through common ownership or contractual ties, but through the size and power of one of the parties e.g. Procter & Gamble, Kraft, Campbell Soup (or retailers like Wal-Mart, Toys `R` Us) are very strong that they can command special displays, shelf space, promotions and prices form the other parties.

Horizontal Marketing Systems• Horizontal marketing systems is a channel arrangement in

which two or more companies at one level join together to follow a new marketing opportunity.

• The major benefit is that companies combine their capital, production capabilities, marketing resources and therefore accomplish more.

• Companies might join forces with competitors or non -competitors. 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.

Hybrid Marketing Systems

• Hybrid marketing systems is also called multichannel distribution systems where the company uses several marketing channels (e.g. direct mail - telemarketing, retailers, distributors, dealers, own sales force) to sell its products to different customer segments.

E.g. IBM uses its own sales force + IBM direct which is the catalog and telemarketing operation of IBM + independent IBM dealers + IBM dealers for business segments + large retailers like Wal-Mart.• The major benefit is that when the company has large and

complex markets (consumers) the company can expand its sales and market coverage by providing services to the specific needs of diverse customer segments.

• The disadvantage is that they are harder to control and generate more conflict.

What is Channel Conflict?

• Channel conflict occurs when one member’s actions prevent another channel from achieving its goal.

• Types of channel conflict– Vertical– Horizontal– Multichannel

Causes of Channel Conflict

• Goal incompatibility• Unclear roles and rights• Differences in perception• Intermediaries’ dependence on manufacturer

Strategies for Managing Channel Conflict

• Adoption of superordinate goals• Exchange of employees• Joint membership in trade associations

• Cooptation• Diplomacy• Mediation• Arbitration• Legal recourse