marketing channels as on 24.03.2008

Marketing Channels- Structure and Functions

• Book Name: Marketing Channels– Author: Anne T. Coughlan, Erin Anderson, Louis W. Stern, Adel

I. El-Ansary

• The need to learn about marketing channels

– Gatekeeper role of marketing channel

– Channel can act as an important differentiator

– Channel experience affects end user perception

– Need to create an effective channel


• Definition of Marketing Channel– It is a set of interdependent organizations who make a product

or service available to the end user for consumption

– Examples• Clothes (US)

– Department stores– Focused Specialty stores– Factory outlets– Online??– Difference in India ???


– Examples• Books (US)

– Book Store chains, Barnes & Noble– Online, Amazon– Discount Stores, 1 dollar store– India Example????

– Evolution of Channels

• Demand Side Factors

– Facilitation of Search (end user & seller)

– Adjustment of Assortment Discrepancy» Manufacturer : large quantity of a limited variety of goods» End User: Limited quantity of a wide variety of goods


– Demand Side Factors

• Adjustment of Assortment Discrepancy– Manufacturer : large quantity of a limited variety of goods– End User: Limited quantity of a wide variety of goods

– Assortment functions

» Sorting, breaking a heterogeneous supply into separate homogeneous stocks e.g. Wheat by quality

» Accumulation: bringing similar stocks together» Allocation: breaking down a homogeneous supply into smaller lots» Assorting: collecting related goods for resale

– Utilities created: Possession, Place and Time


• Supply Side Factors

– Routinization of Transactions• Order, value and payment

• Leads to efficiencies

• Inventory replenishment programs

– Reduction in No. of Contacts• Manufacturer only to

• Manufacturer , wholesaler and retailer

• Online – disintermediation but also leads to competing with retail chains, important in experience goods


• Role of Marketing Channel– Manages several Flows between Producers,

wholesaler and retailers• Physical Possession• Ownership• Promotion• Negotiation• Financing• Risking• Ordering• Payment


• Key Members of a Marketing Channel– Manufacturers– Intermediaries

• Wholesalers• Retailers• Specialized

– End Users• Individual Consumers• Business organizations

– Channel Captain


• Key Members of a Marketing Channel– Manufacturers

• Branded

• Private Label

• Products and Services (insurance)

• Role of manufacturer

– Intermediaries• Wholesale

– Distributors, Manufacturer’s reps, agents and brokers

• Retail– Department stores, specialty stores, franchises etc.,

• Specialized – Insurance, finance, credit card, logistics, ad firms etc.


• Key Members of a Marketing Channel– End Users

• Role as a financer, stockist, risk of spoilage etc.

• Channel Formats– Manufacturer based Channel Formats

• Manufacturer direct• Manufacturer Outlets• Licensing (Importing)• Broker


• Channel Formats– Retailer based channel formats

• Franchise• Cataloguers• Food Courts• Department stores, shoppers stop• Mass Merchandisers . Wal Mart• Specialty Stores• Convenience stores


• Channel Formats– Service Provider based channel formats

• Contract warehousing• Direct Mailer• VARs• Finance Companies


• Framework for Channel Analysis– Designing the right channel– Implementing the design

– Channel Design: Segmentation• Service Outputs

– Bulk breaking (allocation), Spatial Convenience, waiting and delivery time, assortment and variety, customer service, information

– Example of a book buyer as vacationer and as a student having different needs


• Framework for Channel Analysis– Channel Design: Channel Structure Decisions

• Who are the channel members• Whether to use independent distributors, financing

companies, credit card tie-ups etc.• Exact identity of the channel member• How many also known as channel intensity decision


• Framework for Channel Analysis– Channel Design: Splitting the Workload

• ABC analysis

– Channel Design: Degree of Commitment• Vertical integration

– Channel Design: Gap Analysis• Managerial Bounds• Environmental bounds, cigarettes• Competitive benchmarks• Difference between optimal channel and existing channel:

gap


• Framework for Channel Analysis

– Channel Implementation: Identifying Power Sources• Inducing all the channel members to perform

• Using channel power

– Channel Implementation: Identifying Channel Conflicts• Channel members goals and objectives (Goal conflict)

• Domain of action and responsibility in the channel

• Differences in the perceptions of the market place

• Differentiate between poor channel design and design conflict leading to underperformance

• Use power to resolve: give discount or increase pull


• Framework for Channel Analysis– Channel Implementation: Channel Coordination

• Coordination of interests and actions• Coordination of performance

Marketing Channels: Segmentation & Service Outputs

• Bucklin’s model for determining channel structure

– Service Outputs• Bulk Breaking• Spatial Convenience• Waiting or Delivery time• Product Variety

– Two additional • Customer service• Information Provision


• Bulk Breaking– Reduces storage costs, increases convenience, per unit cost

– More the bulk breaking, higher the costs

– When more or less bulk breaking is required

– Home v/s Travel

– BPL class would require what??

• Spatial Convenience– Reduces transportation, time taken, and search costs

– ATMs

– Cars for service to be picked up from home

– Does high traffic, bad roads affect this service output


• Waiting Time:– Objective is to reduce waiting time for sale or service

– Faster the delivery more the costs and vice versa

– Requirements vary

• Product variety– Greater the product variety higher the service output & higher the costs

– Breadth & Depth parameters, varying requirements

– Assortment

– Right Assortment & Quick delivery could be a potent combination


• Customer Service– Eases the whole process

– Increases costs, sales and satisfaction

– Absence ?? Ginger??

• Information Provision– Educates end users about product attributes, usage capabilities, pre-

purchase and post-purchase services

– Product demos

– Increases costs

– Online option


• Factors in play while meeting service output demands

– Cost, • high cost leads to profit reduction or customer loss• Low cost leads to less profit and customer gain

– Competition• At same service output level, price needs to better• At same prices, better service output is required


• Ease of Entry

– Music CDs from shops

– Music Online• Assortment• Spatial Convenience• Quicker delivery

• Other Marketing Mix elements

Channel Flows & Efficiency Analysis

• Market Flows

• Physical Possession

• Ownership

• Promotion

• Negotiation

• Financing

• Risking

• Ordering

• Payment

• Costs Represented

• Storage & delivery costs

• Inventory Carrying Costs

• Selling, advertising, sales promotion, publicity, PR

• Time & Legal Costs

• Credit, terms & conditions of sale

• Price guarantees, warranties, insurance, repair, after sale service, spoilage etc.

• Order processing costs

• Collections, bad debt cases


• Reverse Logistics (Difference between Forward & Reverse Logistics)

• Factor

• Volume Forecasting Difficult for returns• Transportation Forward: Bulk shipping

Reverse: Variable• Product Quality Forward: Uniform

Reverse: Variable• Product Packaging Forward: Uniform

Reverse: Variable


• Reverse Logistics (Difference between Forward & Reverse Logistics)

• Factor

• Destination Forward: Clear cutReverse: Variable

• Cost Transparency Forward: HighReverse: Less Transparent


• Reverse Logistics Channel Flows

• Physical Possession Issues• Ownership Issues• Promotion Issues• Negotiation Issues• Financing Issues• Risking Issues• Payment Issues


• Zero Based Channel Design

• Equity Principle: Profit Shares– See efficiency template on page 95, figure 3.3

Channel Structure & Intensity

• Channel Structure Description– Type of Members– Intensity or Number of Members of each type– Number of distinct channels

• Channel Design Challenges– Level of intensity– How many different forms to pursue, web, stores,

third party etc.– Should manufacturer have its own or third party

channels


• Coverage & Assortment– Low involvement purchases (tissue papers etc.) & for

convenience goods, higher the coverage, better it is for the manufacturers

– For downstream, more coverage is not considered positive as it leads to intra-brand competition. Is it desirable???

– Channel members Tactics to combat intensive distribution• Go in for a substitute less intensely distributed• May discontinue a product category• Keep a token presence but Attempt to convert the customer

to another brand


• Intensive Coverage issues– Bait & Switch marketing technique– Free Riding ( a renowned store example)

– Can be combated by generating pull


• Threat of Complacency in limiting intensity• Nature of Product Category

– Convenience goods– Shopping goods like small appliances– Specialty Goods like Home Theaters

• What happens when a product category is new??


• Relationship between brand positioning on quality dimension and intensity

• Artificial Scarcity strategy (Nike)

• Can Restrictive Contracts (like ambitious goals etc.) work??

• What would a niche product require??


• How can manufacturer create influence over channel members?– Selective distribution

• Reverse influence


• Manufacturer specific investments by Channel Members– Idiosyncratic Knowledge: Unique– Unusual handling or storage– Brand specific parts and know-how– Customer Training– Installation and post warranty handling knowledge


• Dependence Balancing: Trading territory exclusivity for category exclusivity

• Influence of Web on buyers: knowledge thru web & buy at the best bargain

Gap Analysis

• Environmental bounds– Electric Supply– Malls to close on Tuesday

• Managerial bounds– Indifference of personnel to new techniques– Expertise & Knowledge levels

• Types of Gaps– Demand side

• When a service output supplied is greater than amount demanded

• When a service output supplied is less than amount demanded

Gap Analysis

• Types of Gaps– Supply side

• Cost of providing a service output is high when it can be lower (particularly in reverse logistics) , a cable manufacturer example

• Bucklin’s principle of postponement & speculation (manufacturer v/s consumer, books case, retail sale of CDs v/s downloads)

• Closing the Gaps– Demand side gaps

• Expand/ Retract the level of service output• Offer multiple/ tiered service output levels for different segments• Altering the list of segments targeted

Gap Analysis

– Supply Side Gaps• Changing the roles of current channel members• Investing in new distribution technologies to reduce cost• Improve the functioning of the channel

– Tackle managerial bounds• Managerial indifference to change (Product Returns)• bring in experts to augment expertise

Channel Power

• How to define Dependence

– B depends more heavily on A if,

• B gets some Utility (value, benefits etc.) from A

• B has fewer alternative sources for that utility

– Are both requirements essential??

Channel Power

• Approximate Methods to measure power

– %age of sales and profits retailer derives from your product

– How well you perform your role vis-à-vis competitors (utility may be missing but excellent service being rare is unique)

Channel Power

• French & Raven Approach– Five Sources of Power

• FIRST Reward Power (two conditions)

– Has the ability to reward– Will Reward and share the benefits– Requirements

» Manufacturer must offer a quality service that is valued by end user

» At a price that end user is willing to pay» Saleable in enough quantities for financial rewards to be valued» Backed by a minimum required producer reputation» And should be delivered reliably» CASE STUDY

Channel Power

• Second: Coercive Power– If B Fails to perform as per A’s requirement, A can

punish B• Slowing down of shipment• Remove exclusivity either territory or category• Reduce margins etc.• Wal Mart forces bulk breaking on its suppliers e.g. Socks• Wal Mart forces suppliers to accept EDI

– Leads generally over long run to

» Target will get less satisfied by money returns

» Target will become less satisfied by non-financial side

» Target will see relationship as conflict driven

• Should influencer care about target’s reactions?

– Short Term: Target is less cooperative– Medium Term: Target is less trusting– Long Term: Target feels less committed

– Should coercion power not be used at all• EDI??

Channel Power

Channel Power

• THIRD: Expert Power– Once expertise is transferred, this power weakens considerably

• Dole out expertise in small quantities periodically

• Invest in continually new learning

• Transmit only customized information

– Using expertise power• Channel member must be trusted

• Difficult to form relationships with experts

• Independence mindedness of channel members

Channel Power

• Legitimate Power has two sources– Law or legal legitimate power

• Patents, trademarks, franchise agreements etc.

– Norms or values, traditional legitimate power• Solidarity• Role Integrity• Mutuality

– Cost benefit analysis before enforcing

Channel Power

• Referent Power– When A can act as a standard of reference for B and hence B

may seek association with A– A shares its prestige by allowing B to carry its goods

• Balance of Power• Net Dependence• Imbalanced Dependence – Strategies

– Develop alternatives– Organize a coalition– Exit the situation

Channel Power

• Converting Latent power to exercised power– Promise Strategy– Threat Strategy– Legalistic Strategy– Request Strategy– Information exchange strategy– Recommendation strategy

Channel Conflict

• Conflict v/s Competition

• Measuring Conflict– Count the issues of relevance, car dealer– Assign importance to each issue, (Im)– Frequency of discussion & disagreement, (Fr)– Intensity of dispute, (In)

• Conflict = Im x Fr x In for each issue• Index of Conflict = Sum of Conflicts on each issue

Channel Conflict

• Conflict is desirable, Functional Conflict– Increases performance levels

• Intense Conflict needs to be resolved

Channel Conflict

• Major Sources of Conflict

– Competing Goals,• CEOs V/s Owners• Principals V/s Channel Partners

– Margin Per unit

– Inventory

– Marketing costs sharing

Channel Conflict


– Differing Perceptions of Reality• The attributes of product/service• Applications it serves and segments• Competition• Manufacturer is away from customers and reseller is away

from manufacturing

Channel Conflict


– Clash over Domains• Market Research• Quantum of Pre & Post sales support• Inventory

Channel Conflict


– Clash over Market Domains• Intra-channel Competition

– Intensive Distribution

– Reseller representing Competitors

• Multiple Channels Clash– Biggest threat : Web

• Unwanted Channels– Gray marketing

Channel Conflict

• Dangers of Conflict

– Conflict begets More Conflict– Coercive power gets utilized

• Conflict Resolution Strategies

– Information Intensive Mechanisms– Third party mechanisms, Mediators and Arbitrators– Building relational norms

Channel Conflict

• Styles of Conflict Resolution– Avoidance– Accommodation– Competition

marketing channels as on 24.03.2008

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