Producing a
product or service and marketing it available to buyers requires building
relationships not just with customers but also with key suppliers and resellers
in the economy’s supply chain. This supply chain consists of upstream and
downstream partners. Upstream from the company is the set of firms that supply
the raw material, components, parts, information, finance and expertise needed
to create a product or service.
Marketers however have traditionally focused on the downstream side of the supply chain on the marketing channel that looks toward the customer. The term supply chain may be too limited because it takes a step by step liner view of purchase production consumption activities. With the advent of the internet and other technologies however companies are forming more numerous and complex relationships with other firms. A value delivery network is made up of the company, suppliers, distribution and ultimately customers who partner with each other to improve the performance of the entire system.
Marketers however have traditionally focused on the downstream side of the supply chain on the marketing channel that looks toward the customer. The term supply chain may be too limited because it takes a step by step liner view of purchase production consumption activities. With the advent of the internet and other technologies however companies are forming more numerous and complex relationships with other firms. A value delivery network is made up of the company, suppliers, distribution and ultimately customers who partner with each other to improve the performance of the entire system.
This chapter
focuses on marketing channels, on the downstream side of the value delivery
network. We examine four major questions concerning marketing channels that
are,
- What is the nature of marketing channels and why they are important?
- How to channel firms interact and organize to do the work of the channel?
- What problems do companies face in designing and managing their channels?
- What role do physical distribution and supply chain managements play in attracting and satisfying customers?
Few products sell
their goods directly to the final users. Instead most use intermediaries to
bring their product to market. They try to forge a marketing channel, a set of
interdependent organizations that help make a product or service available for
use or consumption by the consumer or business user. A company’s channel
decisions directly affect every other marketing decision. Pricing depends on
whether the company works with national discount chains, uses high quality specialty
stores to consumer via the web. The firm sale’s force and communication
decisions depend on how much persuasion, training, motivation and support its
channel partners need. Whether a company develops or acquires certain new
products may depend on how those products will fit the capabilities of its
channel members. Companies often pay to little attention to their distribution
channels sometimes with damaging results. In contrast many companies have used
imaginative distribution systems to gain a competitive advantage.
Distribution channel decisions often involve long term communication to other firms. For example, HP type companies can easily change their advertising, pricing or promotion programs. They can scrap old products and introduce new ones as market tastes demand. Sometimes when they set up distribution channels through contracts with franchisees, independent dealers or large retailers, they cannot readily replace these channels with company owned stores or web sites if condition change. Therefore management must design its channel carefully with an eye on tomorrow’s likely selling environment as well as today’s.
Distribution channel decisions often involve long term communication to other firms. For example, HP type companies can easily change their advertising, pricing or promotion programs. They can scrap old products and introduce new ones as market tastes demand. Sometimes when they set up distribution channels through contracts with franchisees, independent dealers or large retailers, they cannot readily replace these channels with company owned stores or web sites if condition change. Therefore management must design its channel carefully with an eye on tomorrow’s likely selling environment as well as today’s.
Why do
producers give some of the selling job to channel partner? After all doing so
means giving up some control over how and to whom they sell their products.
Producers use intermediaries because they create greater efficiency in making
goods available to target markets. Through their contacts, experience,
specialization and scale of operation, intermediaries usually offer the firm
more than it cans its own. From the economic system’s point of view, the role
of marketing intermediaries is to transform the assortments of products made by
producers into the assortments wanted by consumers. Producers make narrow
assortments of products in large quantities bur consumers want broad assortments
of products in small quantities. Marketing channel members buy large quantities
from many producers and break them down into the smaller quantities and broader
assortments wanted by consumers. In making product and services available to
consumers, channel members add value by bridging the major time, place and
possession gaps that separate goods and services from those who would use them.
Member of marketing channel perform many key function. Some help to complete
transactions.
Gathering and
distribution marketing research and intelligence information about forces in
the marketing environment needed for planning and supporting exchange.
- Promotion: Developing and spreading persuasive communication about an offer
- Contact: Finding and communicating with prospective buyers
- Matching: Shaping and fitting the offer to the buyer’s needs including activities such as manufacturing, grading, assembling and packaging
- Negotiation: Reading an agreement on price and other terms of the offer so that ownership or possession can be transferred
- Physical distribution: Transporting and storing goods
- Financing: Acquiring and using funds to cover the costs of the channel work
- Risk taking: Assuming the risks of carrying out the channel work
The question
is not whether these function need to be performed, rather who will perform
them. To the extent that the manufacturer performs these functions, its costs
go up and prices must be higher. When some of these functions are shifted to
intermediaries, the producer’s cost and prices may be lower but the
intermediaries must charge more to cover the costs of their work. In dividing
the work of the channel, the various functions should be assigned to the
channel members who can add the most value for the cost.
Companies can
design their distribution channels to make products and services available to
customers in different ways. Each layer of marketing intermediaries that
performs some work in bringing the product and its ownerships closer to the
final buyer is a channel level. Because the producer and the final consumers
both perform some work, they are part of every channel. The business marketers
can use its own sales force to sell directly to business consumers or it can
sell to various types of intermediaries who in turn sell to these customers.
Customers and business marketing channels with even more levels can sometimes
be found but less often. From the producer’s point of view, a greater number of
levels mean less control and greater channel complexity. Moreover all of these
institutions in the channel are connected by the several types of flows and the
promotion flow.
Distribution
channel are more than simple collection of firms tied together by various
flows. They are complex behavioral systems in which people and companies interact
to accomplish individual, company and channel goals. Some channel systems
consist of formal interaction guided by strong organizational structures.
Moreover system channels do not stand still, new types of intermediaries emerge
and whole new channel systems evolve. Here we look at channel behavior and at
how members organize to do the work of the channel.
A marketing
channel consists of firms that have partnered for their common good. Each
channel member depends on the other. Each channel member plays a specialized
role in the channel. For example, Nokia’s role is to produce electronics
products that consumers will like and to create demand through national
advertising. A retailer’s role is to display these Nokia products in convenient
locations to answer buyer’s question and to complete sales. The channel will to
most effective when each number assumes the tasks it can do best.
Success of
individual channel members depends on overall channel success, all channel
firms should work together smoothly. They should understand and accept their
roles, coordinate their activities and cooperate to attain overall channel
goals. However individual channel members rarely take such a broad view.
Cooperating to achieve overall channel goals sometimes means giving up individual
company goals. Although channel members depend on one another, they often act
alone in their own short run best interests. They often disagree on who should
do what and for what rewards. Such disagreements over goals, roles and reward
generate channel conflict.
Vertical conflicts, conflicts between different levels of the same channel are even more common. For example, retailers may not cooperate with a company because of its policies, the trade margin it offers or its behavior. A leading confectionary manufacture had to face the wrath of the trade in South Asia against its aggressive policies and the very low margins it offered. Some conflict in the channel takes the form of healthy competition. Such competition can be good for the channel without it, the channel could become passive but severe or prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel relationships. Companies should manage channel conflict to keep it from getting out of hand.
Vertical conflicts, conflicts between different levels of the same channel are even more common. For example, retailers may not cooperate with a company because of its policies, the trade margin it offers or its behavior. A leading confectionary manufacture had to face the wrath of the trade in South Asia against its aggressive policies and the very low margins it offered. Some conflict in the channel takes the form of healthy competition. Such competition can be good for the channel without it, the channel could become passive but severe or prolonged conflict can disrupt channel effectiveness and cause lasting harm to channel relationships. Companies should manage channel conflict to keep it from getting out of hand.
For channel
as a whole to perform well, each channel member’s role must be specified and
channel conflict must be managed. The channel will perform better if it
includes a firm, agency or mechanism that provide leadership and has the power
to assign roles and manage conflict. Historically, conventional distribution
channel have lacked such dealership and power often resulting in damaging
conflict and poor performance.
One of the biggest channel developments over the year has been the emergence of vertical marketing systems that provide channel leadership. A conventional distribution channel consists of one or more independent producers, whole sellers and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole. No channel member has much control over the other members and no formal mean exists for assigning roles. In contrast a vertical marketing system consists of producers, wholesalers and retailers acting as a unified system. One channel member owns the others has contracts with them or wields so much power that they must all cooperate. The VMS can be dominated by the producer, wholesaler or retailers.
One of the biggest channel developments over the year has been the emergence of vertical marketing systems that provide channel leadership. A conventional distribution channel consists of one or more independent producers, whole sellers and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole. No channel member has much control over the other members and no formal mean exists for assigning roles. In contrast a vertical marketing system consists of producers, wholesalers and retailers acting as a unified system. One channel member owns the others has contracts with them or wields so much power that they must all cooperate. The VMS can be dominated by the producer, wholesaler or retailers.
We look at
now three major types of VMS, corporate, contractual and administered. Each uses
a different means for setting up leadership and power in the channel.
- A corporate VMS integrates successive stages of production and distribution under single ownerships. Coordination and conflict management are attained through regular organizational channels
- A contractual VMS consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economics or sales impact then each could achieve alone. Channel member coordinate their activities and manage conflict through contractual agreements
- In an administered VMS, leadership is assumed not through common ownerships or contractual ties but through the size and power of one or few dominant channel member. Manufacture of a top brand can obtain strong trade cooperation and support from resellers
Another
channel development is the horizontal marketing system in which two or more
companies at one level join together to follow a new marketing opportunity. By
working together, companies can combine their financial or production and
marketing resources to accomplish more than any one company could alone.
Companies might join forces with competitors or non- competitors. They might
work with each other on temporary or permanent basics or they may create a
separate company.
In the past,
many companies used a single channel to sell to a single market or market
segment. Today with the proliferation of customer segments and channel
possibilities, more and more companies have adopted multinational system, often
called hybrid marketing channel. Such multinational occurs when a single firm
sets up two or more marketing channel to reach one or more customer segments.
The use of multinational system has increased greatly in recent years. These
days almost every large company and many small ones distribute through multiple
channel. Multichannel distribution systems offer many advantage to companies
facing large and complex markets. With each new channel, the company expands
its sales and market coverage and gains opportunities to tailor its products
and services to the specific needs of diverse customer segments. But such
multichannel systems are harder to control and they generate conflict as a more
channels compete for customers and sales.
Changes in
technology and the explosive growth of direct and online marketing are having a
profound impact on the nature and design of marketing channels. One trend is
toward disintermediation, a big term with a clear message and important
consequences. Disintermediation occurs when product or service producers cut
out intermediaries and go directly to final buyers or when radically new types
of channel intermediaries displace traditional ones. Thus in many industries,
traditional intermediaries are dropping by the wayside. For example, airlines
are aggressively using the internet to sell directly to the final buyers,
cutting the role of travel agents from their marketing channel. In others cases,
new forms of reseller are displacing traditional intermediaries.
Disintermediation presents both opportunities and problems for producers and
resellers.
Channel innovators who find new ways to add value in the channel can sweep aside traditional resellers and reap the rewards. In turn, traditional intermediaries must continue to innovate in order to avoid being swept side. Similarly to remain competitive, product and service product must develop new channel opportunities such as the internet and other direct channels. However, developing this new channel often brings them into direct competition with their established channel, resulting in conflict. To ease this problem, companies often look for ways to make going direct a plus for the entire channel.
Channel innovators who find new ways to add value in the channel can sweep aside traditional resellers and reap the rewards. In turn, traditional intermediaries must continue to innovate in order to avoid being swept side. Similarly to remain competitive, product and service product must develop new channel opportunities such as the internet and other direct channels. However, developing this new channel often brings them into direct competition with their established channel, resulting in conflict. To ease this problem, companies often look for ways to make going direct a plus for the entire channel.
Channel Design Decisions
We now look
at several channel decisions manufactures face. In designing marketing channel,
manufactures struggle between what is ideal and what is practical. A new firm
with limited capital usually starts by selling in a limited market area.
Deciding on the best channel might not be a problem. The problem might simply
be how to convince one or a few good intermediaries to handle the line. If
successful the new firm can branch out to new markets through the existing
intermediaries. In smaller markets the firm might sell directly to the
retailers, in larger markets it might sell through distributors. In one part of
the country, it might grant exclusive franchises, in another it might sell
through all available outlets. Then it might add a web store that sell directly
to hard to reach customers, in this way channel systems often evolve to meet
market opportunities and conditions. For maximum effectiveness however channel
analysis and decision making should be more purposeful.
Marketing
channels are part of the overall customer value delivery network. Each channel
member and level adds value for the customers. Designing the market channel
starts with finding out what target consumers want from the channel. Do
consumers want to buy from nearby locations or are they willing to travel to
more distant centralized location? Do they value breadth of assortment or do
they prefer specialization?
Do consumers want many add-on services or will they obtain this elsewhere. Providing the fastest delivery, greatest assortment and most service may not be possible or practical. The company and its channel members may not have the resources or skills needed to provide all the desired services also providing higher levels of service results in higher costs for the channel and higher prices for consumers. The company must balance consumer needs not only against the feasibility and costs of meeting these needs but also against customer price preferences. The success of discount retailing shows that consumers will often accept lower service levels in exchange for lower prices. Companies should state their marketing channel objectives in terms of targeted levels of customer service.
Usually a company can identify several segments wanting different levels of service. The company should decide which segments to serve and the best channels to use in each case. In each segment the company wants to minimize the total channel cost of meeting customer service requirements. The company’s channel objectives are also influenced by the nature of the company, its products, marketing intermediaries, competitors and the environment. For example the company’s size and financial situation determine which marketing functions it can handle itself and which it must give to intermediaries.
Companies selling perishable products may require more direct marketing to avoid delays and too much handling. In some cases, a company may want to complete in or near the same outlets that carry competitor products. In other cases companies may avoid the channels used by competitors. Finally environmental factors such as economic conditions and legal constraints may affect channel objectives and design. In a depressed economy, products want to distribute their goods in the most economical way, using shorter channels and dropping unneeded services that add to the final price of the goods.
Do consumers want many add-on services or will they obtain this elsewhere. Providing the fastest delivery, greatest assortment and most service may not be possible or practical. The company and its channel members may not have the resources or skills needed to provide all the desired services also providing higher levels of service results in higher costs for the channel and higher prices for consumers. The company must balance consumer needs not only against the feasibility and costs of meeting these needs but also against customer price preferences. The success of discount retailing shows that consumers will often accept lower service levels in exchange for lower prices. Companies should state their marketing channel objectives in terms of targeted levels of customer service.
Usually a company can identify several segments wanting different levels of service. The company should decide which segments to serve and the best channels to use in each case. In each segment the company wants to minimize the total channel cost of meeting customer service requirements. The company’s channel objectives are also influenced by the nature of the company, its products, marketing intermediaries, competitors and the environment. For example the company’s size and financial situation determine which marketing functions it can handle itself and which it must give to intermediaries.
Companies selling perishable products may require more direct marketing to avoid delays and too much handling. In some cases, a company may want to complete in or near the same outlets that carry competitor products. In other cases companies may avoid the channels used by competitors. Finally environmental factors such as economic conditions and legal constraints may affect channel objectives and design. In a depressed economy, products want to distribute their goods in the most economical way, using shorter channels and dropping unneeded services that add to the final price of the goods.
When the
company has defined its channel objectives, it should next identify its major
channel alternatives in terms of types of intermediaries, the number of
intermediaries and the responsibilities of each channel member. A firm should
identify the types of channel members available to carry out its channel
network. Most companies face many channel member choices. Using many types of
resellers in a channel provides both benefits and drawbacks. For example by
selling through retailers and value added resellers in addition to its own
direct channel; Dell can reach more and different kinds of buyers.
However the new channel will be more difficult to manage and control. And the direct and indirect channels will compete with each other for many of the same customers, causing potential conflict. In fact, Dell is already finding itself stuck in the middle with its direct sales reps complaining about new competition from retail stores while at the same time value added resellers complain that the direct sales reps are undercutting their business. By contrast some producers purposely limit the number of intermediaries handling their products. The extreme form of this practice is exclusive distribution in which the producer given only a limited numbers of dealers the exclusive right to distribute its products in their territories.
Exclusive distribution is often found in the distribution of luxury automobiles and prestige women’s clothing. Exclusive distribution also enhances the brand’s image and allows for higher markups. Between intensive and exclusive distribution lies selective distribution. Most television, furniture and home appliance brands are distributed in this manner. By using selective distribution they can develop good working relationships with selected channel members and expect a better than average effort. Selective distribution gives producers good market coverage with more control and less cost than does intensive distribution.
However the new channel will be more difficult to manage and control. And the direct and indirect channels will compete with each other for many of the same customers, causing potential conflict. In fact, Dell is already finding itself stuck in the middle with its direct sales reps complaining about new competition from retail stores while at the same time value added resellers complain that the direct sales reps are undercutting their business. By contrast some producers purposely limit the number of intermediaries handling their products. The extreme form of this practice is exclusive distribution in which the producer given only a limited numbers of dealers the exclusive right to distribute its products in their territories.
Exclusive distribution is often found in the distribution of luxury automobiles and prestige women’s clothing. Exclusive distribution also enhances the brand’s image and allows for higher markups. Between intensive and exclusive distribution lies selective distribution. Most television, furniture and home appliance brands are distributed in this manner. By using selective distribution they can develop good working relationships with selected channel members and expect a better than average effort. Selective distribution gives producers good market coverage with more control and less cost than does intensive distribution.
The producers
and intermediaries need to agree on the terms and responsibilities of each
channel member. They should agree on price policies, conditions of sale,
territorial rights and specific services to the performed by each party. The
producer should establish a list price and a fair set of discounts for
intermediaries. It must define each channel member’s territory and it should be
careful about where it places new resellers. Mutual services and duties need to
be spelled out carefully, especially in franchise and exclusive distribution
channels.
Suppose a
company has identified several channel alternatives and wants to select the one
that will best satisfy its long run objectives. Each alternative should be
evaluated against economic, control, and adaptive criteria. Using economic
criteria company likely sales, costs and profitability of different channel
alternatives. What will be the investment required by each channel alternative
and what returns will result? The company must also consider control issues.
Using intermediaries usually means given them some control over the marketing
of the products and some intermediaries take more control than others. Other
things being equal, the company prefers to keep as much control as possible.
Finally the company must apply adaptive criteria. Channel often involve long term commitments yet the company wants to keep the channel flexible so that it can adapt to environmental changes. Thus to be considered a channel involving long term commitments should be greatly superior on economic and control grounds.
Finally the company must apply adaptive criteria. Channel often involve long term commitments yet the company wants to keep the channel flexible so that it can adapt to environmental changes. Thus to be considered a channel involving long term commitments should be greatly superior on economic and control grounds.
International
marketers face many additional complexities in designing their channel. Each
country has its own unique distribution system that has evolved over time and
changes very slowly. These channel systems can vary widely from country to
country. Thus global marketers must usually adapt their channel strategies to
the existing structures within each country. In some markets the distribution
system is complex and hard to penetrate, consisting of many layers and large
numbers of intermediaries. At the other extreme distribution systems in
developing countries may be scattered, inefficient or altogether lacking. For
example, china is huge markets. It’s made up of more than two dozen distinct
markets sprawling across 2000 cities. Each has its own culture. It’s like
operating in an asteroid belt. China’s distribution system is so fragmented
that logistics costs amount to fifteen percent of the nation’s GDP, far higher
than in most other countries. International marketers face a wide range of
channel alternatives. Designing efficient and effective channel systems between
and within various country markets poses a difficult challenge.