LO5: Distribution Channel Changes

Factors affecting distribution channel structure

Factors that will influence the selection of a distribution channel

Market Product Availability of Organisation

Considerations: considerations: intermediaries: consideration:
 Size of market  Perishability  Availability  Channel control
 Proximity  Value  Services  Services provided
 Order size  Complexity provided  Managerial
 Customer buying  Bulk and weight  Attitudes capability
behaviour  reputation  Financial resources
– costs and profits

The informal sector and distribution channels

Trends in the distribution channels

a) New distribution channels arise to meet new trends in system design.

b) Increased price pressure.
c) Increased interest in buying groups.
d) Increased reliance on independent representatives.
e) Increased reliance on security distributors.
f) Manufacturers drive for greater loyalty.
g) A greater need for training.
h) The rise of a recurring revenue model for access control.
i) More security dealers handling access control.

Growth of franchising

Franchising is a vertical marketing system in which one firm (the franchiser) provides another individual
or firm (the franchisee), for consideration, a licensed privilege to do business in a specified geographic
area, along with assistance in organising, training, merchandising, and management.

Franchising relationships

Legal Relationship. The backbone of the legal relationship is the contract that exists between the
franchiser and franchisee. This legal relationship prescribes that each party must adhere to certain
responsibilities and obligations.
Business Relationship. The business relationship ties the franchise partners together in the day-to-day
activities necessary to provide acceptable products and services to customers. The franchisee operates
the business substantially under the franchiser’s trade name and/or marketing plan.

Non-business Relationship. The non-business relationship is the strong, forward-looking, cooperative

association that exists between two independent channel members – a franchiser and a franchisee –
each acting individually for its own best interests.

Stages in channel relationship building

Stage Key developmental processes

Awareness Cognisance of other party’s existence
Investigate potential relationship benefits

Exploration Attraction
Communication and bargaining
Development and use of power
Norms and expectations development

Expansion Growth of value-added benefits from relationship

Growth of interdependence

Commitment Loyalty
Shared values, objectives, and expectations
Willingness to overlook partner’s temporary shortfalls
Trust
Future orientation

Ways of sustaining channel relationships

Pull promotional campaigns: Might be directed at your partner’s customers.

Warranty, maintenance, and repair agreements: Can be offered to channel partners to reduce the risk
associated with committing to the exchange process.
Cooperative advertising and promotional allowances: Serve the dual purpose of enabling smaller
customers to advertise regularly and coordinating their role relationships with the source firm.
Coordinated cost-reduction programmes: Dramatically pare your channel partner’s real costs of doing
business with your company. Joint material requirements planning systems, computer-to-computer
order entry systems, and statistical process control are a few examples of such programmes.
Joint sales calls: Assist channel partners in developing their and your own new business.
Logistics and delivery systems:
Create value: For instance, a manufacturer of paint pigments discovered through its customer
relationships that offering in pigment in ‘slurry form’ rather than ‘dry bag’ form created greater value
for the customer.
Shared-expertise programmes: In which information is openly shared between supplier and producer
firms strengthen channel relationships. For instance, one marketer of chemicals and plastics not only
shares information on economic trends with customer firms, but also performs market research studies
for those customers who lack in-house research expertise.
Technical assistance: Support channel partner’s technical, product, and application knowledge.
Value-enhancement and co-design programmes: Upgrade the value of current products and make it
possible to jointly design new products. For instance, many steel service centres now perform
the functions of stamping doors and windows for auto makers, lowering overall costs

LO6: Channel Control

Channel leadership and control

A channel leader is that marketing channel institution that formulates marketing policies for other
channel members and therefore controls their marketing decisions.

Distribution channels may be controlled by formal cooperation systems.

Vertical marketing Systems (VMS)

Consists of a producer(s), wholesaler(s), and retailer(s) acting together as a unified system.

A vertical marketing system (VMS) is one in which the main members of a distribution channel—
producer, wholesaler, and retailer—work together as a unified group in order to meet consumer needs.

Types of VMS

a) Corporate vertical systems

A corporate system is where one member of the distribution channel owns all of the others, and they
effectively combine all the elements of the distribution channel under the leadership of a single
business. A corporate system eliminates the middleman, so all business is done in-house. Utilizing a
corporate system allows the company complete control over the products and the direction the
company wants to go.

b) Administered vertical systems

An administered vertical marketing system is one in which one member of the production and
distribution chain – due to its sheer size – is dominant and organizes the nature of the vertical
marketing system informally. An example of this type of system could include a large retailer such as
Game establishing standards for makers of smaller products, such as a generic type of laundry
detergent.

c) Vertical contractual systems

The contractual system is a vertical marketing system where all parties maintain their independence
and operate as individual companies, but they work together to help achieve greater efficiency. They are
also called 'value-added partnerships' because they work together to help create values for all parties
involved. Producers, wholesalers, and distributors meet to contribute to achieving more efficiency.
Businesses develop contracts with various large distributors to help sell more of their product and stay
competitive. A franchise is an example of a contractual system.

Conventional and Vertical marketing systems compared

Conventional marketing systems Vertical marketing systems

Each channel member is a separate business
attempting to maximise its own profits.
Independent
Separate, autonomous members
Aggressive intrachannel negotiations
Conflict not controlled
Sometimes fail to see big picture
Consists of a producer(s), wholesaler(s), and
retailer(s) acting together as a unified system.
Unified
Linked as a single competitive unit
One clear leader with legitimate or contractual
power
Conflict controlled; stable structure and
membership
Channel-wide perspective

Advantages of VMS

1. Economies of scale: making things in bulk could always be a profitable thing. It could be
economical for the clubbed entity as all the middle-men costs involved are now removed. There is
only one chain.
2. Profit margins increase: when three independent workers club into one, the profit margin which
was earlier at the cost of one another shrinks to the firm as a whole. This increases the profit
margins.
3. Brand image expansion: It creates a feeling of security, authenticity and builds a sense of trust
amongst the customers. Since they know that it is the only outlet sporting products right from the
maker, they will associate with the brand in more numbers. This expands the brand image.
4. Enhanced customer base and satisfaction: every customer wants to buy at the cheapest rate
possible. Even they are smarter to know that buying from the clubbed entities could cost them
less. This certainly gets in more number of customers and enhances the customer satisfaction.
5. Tracking becomes easier: when there is a single system working it is easy to keep things
organized. This, in turn, makes the tracking easy for the main owner. This also leads to settling
disputes if any.
Disadvantages of VMS

1. Bad for small firms: it is not possible for small firms to manage all that is required to keep the
clubbed entity perfectly functional. They also might face issues and competition but cant employs
this marketing strategy to overcome them.
2. Focus hazed out: when things get clubbed probably the dominant partner might lose focus on
his/her areas of improvement. This could happen for any of the levels and get the ideas faded.
3. Personality issues: usually the business fails due to changed behavior of one or the other partners.
There could be personality issues for the ownership which may get the desired outcome.

Coordination/cooperation in the distribution channel

1. Joint promotional programmes

 Wholesaler- retailer joint participation in cooperative advertising campaigns
 Manufacturer providing demonstrators for wholesalers and retailers
 Manufacturers including names of distributors in its advertisements
2. Joint inventory management assistance
 Manufacturer –wholesaler-retailer joint participation in electronic data inter-change
(automatic reorder systems)
 Manufacturers or wholesaler involvement in emergency shipments to resellers
 Manufacture assistance in financing inventory for wholesalers and retailers.
3. Exclusive products and territory protection
 Manufacturer providing different model designs to different channel members to
reduce price competition among channels
 Manufacturer offering protected territories to wholesalers and retailers
4. Information sharing
 Through electronic data interchange
5. Training
 Wholesaler-retailer joint participation in manufacturer’s sales training programmes
 Wholesaler-retailer joint participation in manufacturer’s product training programmes

Assessing channel performance

4 Metrics for measuring channel performance

Effectiveness – A goal oriented measure of how well the channel or any of its members meet the
demand for service outputs placed on it by the consumption sector.

Equity – The extent to which channels serve problem ridden market segments such as disadvantaged,
immobile or geographically isolated consumers
Productivity – the efficiency with which output is generated from resources and inputs are used or
expended.

Profitability – a general measure of the financial efficiency of channel members, i.e. return on
investment, liquidity, leverage, growth patterns and potential in sales and profits

Quantitative Vs Qualitative measures of channel performance

Quantitative measures Qualitative measures

Total distribution costs per unit Degree of channel coordination
Transportation cost per unit Degree of cooperation
Warehousing cost per unit Degree of conflict
Production cost per unit Degree of commitment to the channel
Percentage of stock outs Degree of flexibility
Percentage of bad debts Relations with trade associations
Number of errors in order filling Relations with consumer groups