PLACE- THE 3RD P OF MARKETING MIX:Marketing Channel, Channel Behavior

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Principles of Marketing MGT301

margin. The company might believe that it will not lose too much market share, or that it would

lose too much profit if it reduced its own price. It might decide that it should wait and respond

when it has more information on the effects of the competitor's price change. For now, it might be

willing to hold on to good customers, while giving up the poorer ones to the competitor. The

argument against this holding strategy, however, is that the competitor may get stronger and more

confident as its sales increase and that the company might wait too long to act.

If the company decides that effective action can and should be taken, it might make any of four

responses. First, it could reduce its price to match the competitor's price. It may decide that the

market is price sensitive and that it would lose too much market share to the lower-priced

competitor. Or it might worry that recapturing lost market share later would be too hard. Cutting

the price will reduce the company's profits in the short run. Some companies might also reduce

their product quality, services, and marketing communications to retain profit margins, but this

will ultimately hurt long-run market share. The company should try to maintain its quality as it cuts

prices.

Alternatively, the company might maintain its price but raise the perceived quality of its offer. It

could improve its communications, stressing the relative quality of its product over that of the

lower-price competitor. The firm may find it cheaper to maintain price and spend money to

improve its perceived value than to cut price and operate at a lower margin.

Or, the company might improve quality and increase price, moving its brand into a higher-price

position. The higher quality justifies the higher price, which in turn preserves the company's higher

margins. Or the company can hold price on the current product and introduce a new brand at a

higher-price position.

Finally, the company might launch a low-price "fighting brand." Often, one of the best

responses is to add lower-price items to the line or to create a separate lower-price brand. This is

necessary if the particular market segment being lost is price sensitive and will not respond to

arguments of higher quality.

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Lesson 28

Lesson overview and learning objectives:

Channel design begins with assessing customer channel-service needs and company channel

objectives and constraints. The company then identifies the major channel alternatives in terms of

the types of intermediaries, the number of intermediaries, and the channel responsibilities of each.

No system, no matter how well it has been planned, is without conflict. Managing distribution

conflict is a necessity if quality service and low cost is to be delivered. Since distribution

relationships tend to be long-term in nature, the choice of channel partners is very important and

should be taken very seriously these are the all concepts that should be clear after today's Lesson.

PLACE- THE 3RD P OF MARKETING MIX.

Marketing channel decisions are among the most important facing marketing

managers. A

company's channel decisions are linked with every other marketing decision. Companies often

pay too little attention to their distribution channels. This can be very damaging. Distribution

channel decisions often involve long-term commitments to other firms. There are four major

issues or questions that concern distribution channels:

1). What is the nature of distribution channels?

2). How do channel firms interact and organize to do the work of the

channel?

3). What problems do companies face in designing and managing their

channels?

4). what role does physical distribution play in attracting and satisfying

customers?

A. Marketing Channel

A set of interdependent organizations involved in the process of making a product or service

available for use or consumption by the consumer or business user. Figure summarizes the simple

marketing system that consists of customer, producers that are having some thing valuable for

making transactions. These transaction are made in exchange process and creation availability of

products for customers. This availability is created by using networks of distribution channels.

Every product and service,

Sim ple M ark eting

whether an automobile, a

watch, a personal computer,

Syst em

or office furniture, must

somehow be made available

Communication

to billions of people.

Products must also be made

Product/Service

available to millions of

Producer/Seller

Consumer

Money

industrial firms, businesses,

government institutions, and

Feedback

other

organizations

worldwide. Firms try to

realize this goal through the

creation of distribution channels.

Channel structure has three basic dimensions: the length of the channel, the intensity at various

levels, and the types of intermediaries involved. Channel intensity ranges from intensive to

selective to exclusive. Intensive means that there are many intermediaries. Selective means that

there are a smaller number of intermediaries. Exclusive refers to only one.

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B. Why Are Marketing Intermediaries Used?

Why do producers give some of the selling job to intermediaries? After all, doing so means giving

up some control over how and to whom the products are sold. The use of intermediaries results

from their 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

can achieve on its own.

Figure shows how using intermediaries can provide economies. Figure A shows three

manufacturers, each using direct marketing to reach three customers. This system requires nine

different contacts. Figure B shows the three manufacturers working through one distributor, who

contacts the three customers. This system requires only six contacts. In this way, intermediaries

reduce the amount of work that must be done by both producers and consumers.

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, but consumers want broad assortments

of products in small quantities. In the distribution channels, intermediaries buy large quantities

from many producers and break them down into the smaller quantities and broader assortments

wanted by consumers. Thus, intermediaries play an important role in matching supply and

demand.

The concept of distribution channels is not limited to the distribution of tangible products.

Producers of services and ideas also face the problem of making their output available to target

markets. In the private sector, retail stores, hotels, banks, and other service providers take great

care to make their services conveniently available to target customers. In the public sector, service

organizations and agencies develop "educational distribution systems" and "health care delivery

systems" for reaching sometimes widely dispersed populations. Hospitals must be located to serve

various patient populations, and schools must be located close to the children who need to be

taught. Communities must locate their fire stations to provide rapid response to fires and polling

stations must be placed where people can vote conveniently.

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C. Distribution Channel Functions

The distribution channel moves goods and services from producers to consumers. It overcomes

the major time, place, and possession gaps that separate goods and services from those who would

use them. Members of the marketing channel perform many key functions:

· Information: gathering and distributing marketing research and intelligence information

about actors and forces in the marketing environment needed for planning and aiding

exchange.

· Promotion: developing and spreading persuasive communications 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: reaching an agreement on price and other terms of the offer so that ownership

or possession can be transferred.

Others help to fulfill the completed transactions:

· 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 functions need to be performed--they must be--but rather who

will perform them. To the extent that the manufacturer performs these functions, its costs go up

and its prices have to be higher. At the same time, when some of these functions are shifted to

intermediaries, the producer's costs 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 perform them most efficiently and effectively

to provide satisfactory assortments of goods to target consumers.

D. Number of Channel Levels

Distribution channels can be described by the number of channel levels involved. Each layer of

marketing intermediaries that performs some work in bringing the product and its ownership

closer to the final buyer is a channel level. Because

Figure A

Figure B

Producer

Consumer

Business

Producer

User

Producer

Retailer

Consumer

Agent/

Business

Producer

Broker

User

Producer

Wholesaler

Retailer

Consumer

Business

Producer

Wholesaler

User

Agent/

Business

Producer

Wholesaler Retailer Consumer

Producer

Wholesaler

Broker

User

the producer and the final consumer both perform some work, they are part of every channel. We

use the number of intermediary levels to indicate the length of a channel. Figure A shows several

consumer distribution channels of different lengths.

Channel 1, called a direct marketing channel, has no intermediary levels. It consists of a company

selling directly to consumers. The remaining channels in Figure A are indirect marketing channels.

Channel 2 contains one intermediary level. In consumer markets, this level is typically a retailer.

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For example, the makers of televisions, cameras, tires, furniture, major appliances, and many other

products sell their goods directly to large retailers which then sell the goods to final consumers.

Channel 3 contains two intermediary levels, a wholesaler and a retailer. This channel is often used

by small manufacturers of food, drugs, hardware, and other products. Channel 4 contains three

intermediary levels. In the meatpacking industry, for example, jobbers buy from wholesalers and

sell to smaller retailers who generally are not served by larger wholesalers. Distribution channels

with even more levels are sometimes found, but less often. From the producer's point of view, a

greater number of levels means less control and greater channel complexity.

Figure B shows some common business distribution channels. The business marketer can use its

own sales force to sell directly to business customers. It can also sell to industrial distributors, who

in turn sell to business customers. It can sell through manufacturer's representatives or its own

sales branches to business customers, or it can use these representatives and branches to sell

through industrial distributors. Thus, business markets commonly include multilevel distribution

channels.

All of the institutions in the channel are connected by several types of flows. These include the

physical flow of products, the flow of ownership, the payment flow, the information flow, and the

promotion flow. These flows can make even channels with only one or a few levels very complex.

E. Channel Behavior and Organization

Distribution channels are more than simple collections 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 only of informal

interactions among loosely organized firms; others consist of formal interactions guided by strong

organizational structures. Moreover, channel systems 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.

Channel Behavior

A distribution channel consists of firms that have banded together for their common good. Each

channel member is dependent on the others. Each channel member plays a role in the channel and

specializes in performing one or more functions. The channel will be most effective when each

member is assigned the tasks it can do best.

Ideally, because the 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 goals and activities, and cooperate to attain overall channel goals. By cooperating,

they can more effectively sense, serve, and satisfy the target market.

However, individual channel members rarely take such a broad view. They are usually more

concerned with their own short-run goals and their dealings with those firms closest to them in the

channel. Cooperating to achieve overall channel goals sometimes means giving up individual

company goals. Although channel members are dependent on one another, they often act alone in

their own short-run best interests. They often disagree on the roles each should play--on who

should do what and for what rewards. Such disagreements over goals and roles generate channel

conflict.

Horizontal conflict occurs among firms at the same level of the channel. Vertical conflict, conflicts

between different levels of the same channel, is even more common. 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 and non innovative. But sometimes conflict can damage the

channel. For the channel as a whole to perform well, each channel member's role must be specified

and channel conflict must be managed. Cooperation, role assignment, and conflict management in

the channel are attained through strong channel leadership. The channel will perform better if it

includes a firm, agency, or mechanism that has the power to assign roles and manage conflict.

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F. Vertical Marketing Systems

Historically, distribution channels have been loose collections of independent companies, each

showing little concern for overall channel performance. These conventional distribution channels

have lacked strong leadership and have been troubled by damaging conflict and poor performance.

One of the biggest recent channel developments has been the vertical marketing systems that have

emerged to challenge conventional marketing channels. Figure contrasts the two types of channel

arrangements. A conventional distribution channel consists of one or more independent

producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own

profits, even at the expense of

Vertical

Conventional

profits for the system as a whole.

M arketing

Marketing

No channel member has much

Channel

control over the other members,

Channel

and no formal means exists for

assigning roles and resolving

channel conflict. In contrast, a

Manufacturer

Vertical Marketing System (VMS)

consists of producers, wholesalers,

Wholesaler

and retailers acting as a unified

system. One channel member owns

the others, has contracts with them,

Retailer

or wields so much power that they

must all cooperate. The VMS can be

Consumer

dominated by the producer,

Consumer

wholesaler, or retailer. Vertical

marketing systems came into being to control channel behavior and manage channel conflict.

We look now at three major types of VMSs: corporate, contractual, and administered. Each uses a

different means for setting up leadership and power in the channel. We now take a closer look at

each type of VMS.

a. Corporate VMS

A corporate VMS combines successive stages of production and distribution under single

ownership. Coordination and conflict management are attained through regular organizational

channels.

b. Contractual VMS

A contractual VMS consists of independent firms at different levels of production and distribution

who joins together through contracts to obtain more economies or sales impact than each could

achieve alone. Coordination and conflict management are attained through contractual agreements

among channel members. There are three types of contractual VMSs: wholesaler-sponsored

voluntary chains, retailer cooperatives, and franchise organizations.

In wholesaler-sponsored voluntary chains, wholesalers organize voluntary chains of independent retailers

to help them compete with large chain organizations. The wholesaler develops a program in which

independent retailers standardize their selling practices and achieve buying economies that let the

group compete effectively with chain organizations. In retailer cooperatives, retailers organize a new,

jointly owned business to carry on wholesaling and possibly production. Members buy most of

their goods through the retailer co-op and plan their advertising jointly. Profits are passed back to

members in proportion to their purchases. In franchise organizations, a channel member called a

franchiser links several stages in the production-distribution process. There are three forms of

franchises. The first form is the manufacturer-sponsored retailer franchise system, as found in the

automobile industry. The second type of franchise is the manufacturer-sponsored wholesaler franchise

system, as found in the soft drink industry.. The third franchise form is the service-firm-sponsored retailer

franchise system, in which a service firm licenses a system of retailers to bring its service to

consumers. The fact that most consumers cannot tell the difference between contractual and

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corporate VMSs shows how successfully the contractual organizations compete with corporate

chains.

c. Administered VMS

An administered VMS coordinates successive stages of production and distribution, not through

common ownership or contractual ties but through the size and power of one of the parties. In an

administered VMS, leadership is assumed by one or a few dominant channel members.

Manufacturers of a top brand can obtain strong trade cooperation and support from resellers.

G. Horizontal Marketing Systems

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 capital, production capabilities, or 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 a temporary or permanent basis, or they may

create a separate company. Such channel arrangements also work well globally.

H. Hybrid Marketing Systems

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 multichannel distribution systems--often called hybrid marketing channels.

Such multichannel marketing occurs when a single firm sets up two or more marketing channels to

reach one or more customer segments. The use of hybrid channel systems has increased greatly in

recent years.

Figure shows a hybrid channel. In the figure, the producer sells directly to consumer segment 1

using direct-mail catalogs and telemarketing and reaches consumer segment 2 through retailers. It

sells indirectly to business segment 1 through distributors and dealers and to business segment 2

through its own sales force.

Hybrid Marketing Channel

Hybrid channels offer many advantages 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 hybrid

channel systems are harder to control, and they generate conflict as more channels compete for

customers and sales

I. Channel Design Decisions

We now look at several channel decisions manufacturers face. In designing marketing channels,

manufacturers 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 channels might not be a

problem: The problem might simply be how to convince one or a few good intermediaries to

handle the line.

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If successful, the new firm might branch out to new markets through the existing intermediaries.

In smaller markets, the firm might sell directly to 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. In this way, channel systems often evolve to meet market

opportunities and conditions. However, for maximum effectiveness, channel analysis and decision

making should be more purposeful. Designing a channel system calls for analyzing consumer

service needs, setting channel objectives and constraints, identifying major channel alternatives,

and evaluating them.

a. Analyzing Consumer Service Needs

As noted previously, marketing channels can be thought of as customer value delivery systems in which

each channel member adds value for the customer. Thus, designing the distribution channel starts

with finding out what targeted consumers want from the channel. Do consumers want to buy from

nearby locations or are they willing to travel to more distant centralized locations? Would they

rather buy in person, over the phone, through the mail, or via the Internet? Do they value breadth

of assortment or do they prefer specialization? Do consumers want many add-on services

(delivery, credit, repairs, installation) or will they obtain these elsewhere? The faster the delivery,

the greater the assortment provided, and the more add-on services supplied, the greater the

channel's service level.

But providing the fastest delivery, greatest assortment, and most services 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 service needs

not only against the feasibility and costs of meeting these needs but also against customer price

preferences. The success of off-price and discount retailing shows that consumers are often willing

to accept lower service levels if this means lower prices.

b. Setting Channel Objectives and Constraints

Channel objectives should be stated in terms of the desired service level of target consumers.

Usually, a company can identify several segments wanting different levels of channel 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 compete in or near

the same outlets that carry competitors' products. In other cases, producers may avoid the

channels used by competitors. Finally, environmental factors such as economic conditions and

legal constraints may affect channel objectives and design. For example, in a depressed economy,

producers 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.

c. Identifying Major Alternatives

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.

d. Types of Intermediaries

A firm should identify the types of channel members available to carry out its channel work. For

example, suppose a manufacturer of test equipment has developed an audio device that detects

poor mechanical connections in machines with moving parts. Company executives think this

product would have a market in all industries in which electric, combustion, or steam engines are

made or used. The company's current sales force is small, and the problem is how best to reach

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these different industries. The following channel alternatives might emerge from management

discussion:

Company sales force: Expand the company's direct sales force. Assign outside salespeople to

territories and have them contact all prospects in the area or develop separate company sales forces

for different industries. Or, add an inside telesales operation in which telephone salespeople

handles

small

midsize

companies.

Manufacturer's agency: Hire manufacturer's agents--independent firms whose sales forces handle

related products from many companies--in different regions or industries to sell the new test

equipment.

Industrial distributors: Find distributors in the different regions or industries who will buy and

carry the new line. Give them exclusive distribution, good margins, product training, and

promotional support.

e. Number of Marketing Intermediaries

Companies must also determine the number of channel members to use at each level. Three

strategies are available: intensive distribution, exclusive distribution, and selective distribution.

Producers of convenience products and common raw materials typically seek intensive

distribution--a strategy in which they stock their products in as many outlets as possible. These

goods must be available where and when consumers want them. For example, toothpaste, candy,

and other similar items are sold in millions of outlets to provide maximum brand exposure and

consumer convenience. 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 gives only a limited number of dealers the exclusive right to distribute its products in

their territories. Exclusive distribution is often found in the distribution of new automobiles and

prestige women's clothing. Exclusive distribution also enhances the car's image and allows for

higher markups.

Between intensive and exclusive distribution lies selective distribution--the use of more than one,

but fewer than all, of the intermediaries who are willing to carry a company's products. Most

television, furniture, and small-appliance brands are distributed in this manner. They can develop

good working relationships with selected channel members and expect a better-than-average selling

effort. Selective distribution gives producers good market coverage with more control and less cost

than does intensive distribution.

J. Channel Management Decisions

Once the company has reviewed its channel alternatives and decided on the best channel design, it

must implement and manage the chosen channel. Channel management calls for selecting and

motivating individual channel members and evaluating their performance over time.

a. Selecting Channel Members

Producers vary in their ability to attract qualified marketing intermediaries. Some producers have

no trouble signing up channel members. In some cases, the promise of exclusive or selective

distribution for a desirable product will draw plenty of applicants.

At the other extreme are producers who have to work hard to line up enough qualified

intermediaries..

When selecting intermediaries, the company should determine what characteristics distinguish the

better ones. It will want to evaluate each channel member's years in business, other lines carried,

growth and profit record, cooperativeness, and reputation. If the intermediaries are sales agents,

the company will want to evaluate the number and character of other lines carried and the size and

quality of the sales force. If the intermediary is a retail store that wants exclusive or selective

distribution, the company will want to evaluate the store's customers, location, and future growth

potential.

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b. Motivating Channel Members

Once selected, channel members must be motivated continuously to do their best. The company

must sell not only through the intermediaries but to them. Most companies see their intermediaries

as first-line customers. Some use the carrot-and-stick approach: At times they offer positive

motivators such as higher margins, special deals, premiums, cooperative advertising allowances,

display allowances, and sales contests. At other times they use negative motivators, such as

threatening to reduce margins, to slow down delivery, or to end the relationship altogether. A

producer using this approach usually has not done a good job of studying the needs, problems,

strengths, and weaknesses of its distributors.

More advanced companies try to forge long-term partnerships with their distributors to create a

marketing system that meets the needs of both the manufacturer and the distributors. In managing

its channels, a company must convince distributors that they can make their money by being part

of an advanced marketing system.

c. Evaluating Channel Members

The producer must regularly check the channel member's performance against standards such as

sales quotas, average inventory levels, customer delivery time, and treatment of damaged and lost

goods, cooperation in company promotion and training programs, and services to the customer.

The company should recognize and reward intermediaries who are performing well. Those who

are performing poorly should be assisted or, as a last resort, replaced. A company may periodically

"requalify" its intermediaries and prune the weaker ones.

Finally, manufacturers need to be sensitive to their dealers. Those who treat their dealers lightly

risk not only losing their support but also causing some legal problems.

Changing Channel Organization

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 major trend is toward

disintermediation--a big term with a clear message and important consequences.

Disintermediation means that more and more, product and service producers are bypassing

intermediaries and going directly to final buyers, or that radically new types of channel

intermediaries are emerging to displace traditional ones.

Thus, in many industries, traditional intermediaries are dropping by the wayside. Disintermediation

presents problems and opportunities for both producers and intermediaries. To avoid being swept

aside, traditional intermediaries must find new ways to add value in the supply chain. To remain

competitive, product and service producers must develop new channel opportunities, such as

Internet and other direct channels. However, developing these new channels often brings them

into direct competition with their established channels, resulting in conflict. To ease this problem,

companies often look for ways to make going direct a plus for both the company and its channel

partners:

However, although this compromise system reduces conflicts, it also creates inefficiencies.

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