The Emergence of Marketing Channels (Definition and Background Development of warehouses, banks, insurance companies, advertising agencies, and

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Marketing Channels)
MARKETING CHANNEL (Distribution Channel)
 An organized network (system) of agencies and institutions which, in
combination, perform all the activities required to link producers with users to
accomplish the marketing task.
 The people, organizations, and activities necessary to transfer the
ownership of goods from the point of production to the point of consumption. It is
the way products get to the end-user, the consumer.
 A set of interdependent organizations involved in the process of making
a product or service available for use or consumption.
This definition points out that:
o Marketing channel is a set of interdependent organization
o Channel members’ job – running a marketing channel is a process
o Purpose of the process – making a product or service available for use
or consumption
THE MARKETING CHANNEL DEFINED
The external contactual organization that management operates to achieve its
distribution objectives.
Four terms in this definition should be especially noted:
o External – This means that the marketing channel exists outside the
firm. It is not part of a firm’s internal organizational structure. Management of the
marketing channel therefore involves the use of interorganizational
management (managing more than one firm) rather than intraorganizational
management (managing one firm).
o Contactual Organization – The term contractual organization refers to
those firms or parties who are involved in negotiatory functions as a
product or service moves from the producer to its ultimate user.
The key members of a marketing channel are manufacturers, intermediaries
Negotiatory functions consist of buying, selling, and transferring title to
(whole retail, and specialized), and end-users (who can be business customers
products or services. Consequently, only those firms or parties who
or consumers). The presence or absence of particular types of channel members
engage in these functions are members of the marketing channel. Other
is dictated by their ability to perform the necessary channel flows to add value to
firms (facilitating agencies such as transportation companies, public
like), which perform functions other than negotiatory, are excluded. The
channel management problems involved when dealing with firms or parties
performing negotiatory functions are often fundamentally different from
those encountered when dealing with agencies that do not perform these
functions.
o Operates – Meant to suggest involvement by management in the affairs
of the channel. This involvement may range from the initial
development of channel structure all the way to day-to-day
management if the channel. When management operated the external
contractual organization it has made a decision not to let this
organization run by itself. This does not mean that management can
have total or even substantial control of the channel. By operating the
channel, management is acting to avoid unwitting control of its actions
by the channel.
o Distribution Objectives – It means that management has certain
distribution goals in mind. The marketing channel exists as a means for
reaching these. The structure and management of the marketing
channel are thus in part of a firm’s distribution objectives. As these
objectives change, variations in the external contractual organization
and the way management attempts to operate it can also be expected
to change.
CHANNEL MANAGER
- Anyone in a firm or organization who is involved in marketing channel
decision making
- Regardless of an individual’s actual job title, when that person is
involved in making channel decisions, he or she is filling the role of
channel manager even though such a position may not formally exist
on the firm’s organizational chart.
WHO BELONGS TO THE MARKETING CHANNEL?
 end-users. Often there is one channel member that can be considered the
"channel captain." The channel captain is an organization that takes the keenest
interest in the workings of the channel for this product or service and that acts as a)
a prime mover in establishing and maintaining channel links. The channel captain b)
is often the manufacturer of the product or service, particularly in the case of
branded products. However, this is not universally true, as the following
examples show.
 Manufacturer - the producer or originator of the product or service being
sold.
 Intermediaries - Any channel member other than the manufacturer or the
end-user (individual consumer or business buyer)
 End-user - (business customer or individual consumer ) are themselves
channel members
THE DEMAND-SIDE AND SUPPLY-SIDE FACTORS
The demand-side and supply-side factors affect the development of
channels and provide reasons to change channels through time. These factors
affect how businesses view distribution channels.
The demand-side factors include:
a) Facilitation of search
b) Adjustment of assortment discrepancy
The process of searching results to uncertainty on the part of buyer and
seller. The buyer is uncertain about where to find the products that they are
looking for while sellers are uncertain about how to reach the needs and wants of
their target customers. Facilitation of search or observing the buyer in searching
the product in the market is necessary in order to sort the categories of the
products such as per brands, packaging, pricing etc. It results to an accumulated
variety of products in one place and providing a one-stop-shopping destination
for buyers to satisfy all their needs.
The assortment of goods made by a manufacturer and the assortment
demanded by the buyer are different because a manufacturer produces a large
quantity of limited variety while consumers demand a limited quantity of variety of
goods. Hence, adjustment of assortment discrepancy is needed to harmonize the
assortments.
The supply-side factors include:
Routinization of transactions
Reduction in number of contacts
The cost of distribution can be minimized if there is a routinization of
transactions. It is about setting up standards and routines in the market
in order to facilitate repetitive business transactions and avoid loss of
efficiency. Reduction in number of contacts reduces the number of
transactions required in the market to distribute the product/service.
Without channel intermediaries, every manufacturer would have to
interact with every potential buyer in order to create all possible market
exchanges.
Both buyer and seller benefits from an efficiently established distribution
channels. It is very helpful in making life easier for everyone.
GROWING IMPORTANCE OF MARKETING CHANNELS
FIVE DEVELOPMENTS
1. Greater difficulty in gaining a sustainable competitive
advantage
2. Growing power of distributors, especially retailers in
marketing channels
3. The need to reduce distribution costs
4. The new stress on growth
5. The increasing role of technology
DIFFICULTY IN GAINING A SUSTAINABLE COMPETITIVE
ADVANTAGE
A sustainable competitive advantage is a competitive edge that
cannot be easily copied by competitors. In recent years, it has become
far more difficult for companies to attain such an advantage through
product, price, and promotion strategies.
With regard to product strategy, rapid technology transfers from
one company to another and global competition have made it much
 easier for competitors to achieve parity in product design, features and
quality. The ability of any company to compete over the long run by
relying on its products being better or different from the other guy’s has
become exceedingly difficult to sustain. Because it can easily be copied.
Gaining a sustainable competitive advantage via pricing strategy in
today’s global economy is even harder to achieve than through product strategy.
The ability of the firms to operate production facilities all over the world has
created fierce price competition. A company whose strategy emphasizes lower
prices than competitors is not likely to hold on to that advantage for too long.
In promotional strategy, the massive barrage of advertising and other
forms of promotion drastically reduces the impact of promotional messages. That
is why holding on to a competitive advantage through promotion has become
impossible today.
After the product, price, and promotional strategy, the fourth P in the
marketing mix is the place or the marketing channel strategy. It has greater
potential for gaining a competitive advantage than other because it is more
difficult for competitors to copy in the short run. There are three reasons why:
 Channel Strategy is long term
 Channel Strategy usually requires a structure
 Channel Strategy is based on relationship and people
Channel Strategy is long term
Setting up and maintaining superior marketing channels for making products and
services available to customers usually involves a relatively long-term period to
plan and implement. When the Saturn Division of General Motors developed its
network of dealers to provide consumers with revolutionary way of buying cars –
no price haggling, no sales pressure, and a 30-day return policy – Saturn had to
plan and organize for the selection and training of dealers over several years to
implement this new channel strategy successfully. In order for competitors to
copy this strategy, they too would have to make a similar long-term effort. This
would represent a much greater commitment on the part of competitors than
simply matching the features of a car (product strategy), offering rebates and
other deals (price strategy) or coming up with a clever advertising campaign
(promotional strategy). Most competitors were not willing to make the long-term
strategic commitment necessary to match Saturn’s channel strategy and hence
Saturn gained a sustainable competitive advantage.
Channel Strategy and Channel Structure
Channel Strategy usually requires a structure consisting of
organization and people to implement. In the case of Saturn Division of
General Motors, an organization consisting of independent dealers had
to be recruited, selected, trained, and supported. The very substantial
effort and investment on the part of Saturn to develop this structure made
competitors think long and hard before they would be willing to make the
kind of commitment needed to develop a competing channel structure.
Channel Strategy is based on Relationship and People
Marketing channel is a collection of people interacting with each
other in different organizations. The success of the channel strategy and
the structure that supports it are directly dependent on how effectively
the people in the various organizations relate to each other in performing
their jobs.
GROWING POWER OF DISTRIBUTORS
Over the past two decades, a shift in economic clout has
occurred from the producers of goods to the distributors of goods. This
shift in economic power has been especially noticeable at the retail level
of marketing channels where giant mass merchandisers have become
dominant players. These power retailers account for large shares of the
commodity lines in which they deal and hence they control the access to
the marketplace. They act as “gatekeepers” wherein they act as buying
agents for their customers rather than as selling agents for
manufacturers. As a result, competition arise on the manufacturers who
supply them. That is why the need for producers and manufacturers to
develop effective marketing channel strategy for dealing with these
powerful and dominant retailers has become very important.
NEED TO REDUCE DISTRIBUTION COSTS
 Distribution costs is often account for a significant percentage of
the final price of products. Over the past decade, a massive effort by
companies to drive down costs of manufacturing and internal operations
has taken place. This massive effort to squeeze out costs is now being
extended to the marketing channels that firms use to reach their
customers.
Firms will need to focus much more attention on marketing channel structure and
management in order to reduce the costs of distribution while providing equal or
superior product availability to customers.
THE NEW STRESS ON GROWTH
During much of the 1990s, the number one buzzword in U.S. companies was "re-
structuring" with terms such as "reengineering," "downsizing," "flattening of
organizations," and "lean and mean" also appearing frequently in the business
press.
By the late 1990s a new mantra, growth, replaced the restructuring focus of the
earlier part of the decade. The problem facing corporate leadership is how
individual companies selling mature products in mature markets can grow rapidly
even in slow-growth economies. The answer in this situation is that much of any
given company's growth must come from taking market share away from its
competitors. Channel strategies that get distributors and dealers to focus their
attention and efforts on a particular company's products are the key to building
market share that will result sales growth for the company.
How do these developments relate to marketing channels?
Actually, the relationship is straightforward: Channel strategies that get
distributors and dealers to focus their attention and efforts on a particular
company's products are key to
building market share and hence sales growth for the company. In short, share of
channel members' shelves = share of market = growth.
THE INCREASING ROLE OF TECHNOLOGY
Technology has already had major effects on virtually all areas of business
including the distribution of goods and services in marketing channels. The
Internet, which quite literally links the entire world together in one gigantic
information network, may someday provide highly efficient electronic marketing
channels whereby virtually any producer of goods and services would be
connected electronically with hundreds of millions of potential customers around
the globe who would be able to consummate commercial transactions with a few
key strokes on their computer keyboards. What can be stated is that Internet-
based technology cannot be ignored in the distribution of goods and services.
EVOLUTION OF MARKETING CHANNELS OVER THE LAST 20
YEARS
1.Direct Marketing Channels
In the past, this was a really effective way of marketing. This included
direct mail, targeted print newsletters, and product flyers or catalogs.
These direct marketing channels were supplemented by outbound
telemarketing (Badrikian, T., n.d.).
Unfortunately, these marketing methods are often more expensive, time-
consuming, and are often not as effective as newer forms of marketing.
These forms of marketing have been in use for nearly as long as
Americans have been creating magazines and letters and today people
continue to rely on them. 
2.Television Advertising Moves Online
The 1990s were a huge decade for advertising technology. The Internet
created new marketing channels that were more cost effective and simply
worked better. Television use grew exponentially at that time, too. In the
1990s, television replaced print advertising as the most utilized form of
advertising. Reviews grew from about $2.4 billion during this time to
roughly $8.3 billion (Badrikian, T., n.d.).
Search engines made their appearance in the mid-90s. Internet users
grew by over 50 million people in the two years between 1995 and 1997.
The term "search engine optimization" was also first used during this time.
In 1998, Google created PageRank, which determines how pages should
rank in search results for a specific term. Blogging was also developed
around this time.
3.Moving to Inbound Marketing Channels
 The dot.com bubble burst in 2000. Soon after, inbound marketing became the
marketing tool of choice for those who were advertising online. Inbound marketing
lets the user come to you—which provides better quality customers who are more
likely to make purchases. The focus is on educating the consumer since they have
more and easier access to information. This creates value for the customer
instead of forcing unwanted ads on them (Badrikian, T., n.d.).
4.Social Media as a Marketing Channel
Social media sprang to life in the early 2000s. Facebook, probably the most well-
known and widely-used social media platform today was first launched in 2004.
Twitter was created in 2006. It wasn't until 2012 that social media and blogging
really became recognized as a viable marketing option. In fact, as of 2012, 44
percent of businesses that used Facebook acquired customers through that
particular marketing channel (Badrikian, T., n.d.).
5.Going Mobile
Tablets, eReaders, and smartphone usage increased dramatically in 2012.
Mobile shopping increased to 72.8 million people. Also in 2012, mobile internet
users increased roughly 17 percent to 113.9 million people (Badrikian, T., n.d.).
GROUP 2: ROLES AND STRUCTURE OF MARKETING CHANNEL
FUNCTIONS OF MARKETING CHANNELS
The goal of Marketing channels is the availability of products or services to
potential customers.
Distribution channels perform a number of functions that make possible the flow
of goods from the producer to the customer. These functions must be handled by
someone in the channel.
 Channels provide time, place, and ownership utility.
 They make products available when, where and in the sizes and
quantities that customers want.
 It provides a number of logistics or physical distribution functions that
increase the efficiency of the flow of goods from producer to costumers.
Creating efficiencies by reducing the number of transactions necessary
for goods to flow from many different manufacturers to large numbers of
customers.
These occurs in two ways:
1. Breaking Bulk- Wholesalers and retailers purchase large quantities of
goods from manufacturers but sell only one or a few at a time to many
different customers.
2. Channel Intermediaries reduce the number of transactions by creating
assortments providing a variety of products in one location so that customers
can conveniently buy many different items from one seller at one time.
 The transportation and storage of goods is another type of physical
distribution function. Retailers and other channel members move the goods
from the production site to other locations where they are held until they are
wanted by customers.
 Channel intermediaries also performs a number of facilitating functions,
functions that make the purchase process easier for customers and
manufacturers.
 Intermediaries often provide customer services such as offering credit to
buyers and accepting customer returns. Customer Services are oftentimes
more important in B2B markets in which customers purchase larger
quantities of higher-priced products.
 Some wholesalers and retailers assist the manufacturer by providing
repair and maintenance service for products they handle. Channel members
also perform a risk-taking functions. If a retailer buys a product from a
manufacturer and it does not sell, it is “stuck” with the item and will lose
money. Last, channel members perform a variety of communication and
transaction functions. Wholesalers buy products to make them available for
retailers and sell products to other channel members. Retailers handle
transactions with final consumers. Channel members can provide two-way
communication for manufacturers. They may supply the sales force,
advertising and other marketing communications necessary to inform
consumers and persuade them to buy. And the channel members can be
 invaluable sources of information on consumer complaints, changing tastes,
and new competitors in the market.
ROLES OF MARKETING CHANNEL
1) Information Provider:
Middlemen have a role in providing information about the market to the
manufacturer. Developments like changes in customer demography,
psychography, media habits and the entry of a new competitor or a new brand
and changes in customer preferences are some of the information that all
manufacturers want.
2) Price Stability:
Maintaining price stability in the market is another function a middleman
performs. Many a time the middlemen absorb an increase in the price of the
products and continue to charge the customer the same old price.
3) Promotion
Designing own sales incentive programmes, aimed at building customers traffic
at the other outlets.
4) Financing:
Middlemen finance manufacturers’ operation by providing the necessary working
capital in the form of advance payments for goods and services. The payment is
in advance even though the manufacturer may extend credit, because it has to
be made even before the products are bought, consumed and paid for by the
ultimate consumer.
5) Title:
Most middlemen take the title to the goods, services and trade in their own name.
This helps in diffusing the risks between the manufacturer and middlemen. This
also enables middlemen to be in physical possession of the goods, which in turn
enables them to meet customer demand at very moment it arises.
6) Help in Production Function:
The producer can concentrate on the production function leaving the marketing
problem to middlemen who specialize in the profession. Their services can best
utilized for selling the product. The finance, required for organising marketing can
profitably be used in production where the rate of return would be greater.
7) Pricing:
In pricing a product, the producer should invite the suggestions from the
middlemen who are very close to the ultimate users and know what they can
pay for the product. Pricing may be different for different markets or products
depending upon the channel of distribution.
8) Standardizing Transactions:
Standardizing transactions is another function of marketing channels. Taking
the example of the milk delivery system, the distribution is standardized
throughout the marketing channel so that consumers do not need to
negotiate with the sellers on any aspect, whether it is price, quantity, method
of payment or location of the product.
9) Matching Buyers and Sellers:
The most crucial activity of the marketing channel members is to match the
needs of buyers and sellers. Normally, most sellers do not know where they
can reach potential buyers and similarly, buyers do not know where they can
reach potential sellers. From this perspective, the role of the marketing
channel to match the buyers’ and sellers’ needs becomes very vital. For
example, a painter of modern art may not know where he can reach his
potential customers, but an art dealer would surely know.
STRUCTURE OF MARKETING CHANNELS
Channels of distribution can be divided into the direct channel and the
indirect channels. Indirect channels can further be divided into one-level, two-
level, and three-level channels based on the number of intermediaries
between manufacturers and customers.
Direct Channel
 Producer → Customer (Zero-level Channel)
Direct selling is one of the oldest forms of selling products. It doesn’t involve
the inclusion of an intermediary and the manufacturer gets in direct contact
with the customer at the point of sale.
The producer sells the goods or provides the service directly to the consumer with
no involvement with a middle man such as an intermediary, a wholesaler, a
retailer, an agent, or a reseller. The consumer goes directly to the producer to buy
the product without going through any other channel. This type of marketing is
most beneficial to farmers who can set the prices of their products without having
to go through the Canadian Federation of Agriculture. Typically, goods are that
consumed by a smaller segment of the market has influence over producers and,
therefore, goods that are produced in the response on the order of a few
consumers are taken into account. Normally goods and services of this channel
are not utilized by large market segments. Moreover, the price of the goods may
be subject to significant fluctuations. For example, high demand dictates an
increase in the price.
On the other hand, technological innovations, the aid of the internet and
convenient smartphones are now changing the way that commerce works
significantly. The proliferation of internet-direct channels means that internet
companies will be able to produce and directly trade and services and goods with
consumers. It can be distributed directly through the internet, for example,
services in the sphere of gambling or software such as antivirus programs as
such.
Indirect Channel
When a manufacturer involves a middleman/intermediary to sell its product to the
end customer, it is said to be using an indirect channel. Indirect channels can be
classified into three types:
Producer → Retailer → Consumer (One-level Channel)
Retailers, like Walmart and Target, buy the product from the manufacturer and sell
them directly to the consumer. This channel works best for manufacturers that
produce shopping goods like, clothes, shoes, furniture, tableware, and toys. Since
consumers need more time with these items before they decide to purchase them,
it is in the best interest of the manufacturer to sell them to another user before it
gets into the hand of the consumers. It is also a good strategy to use another
dealer to get the product to the end-user if the producer needs to get to the market
more quickly by using an established network that already has brand loyalty. In
accordance with the form of the retail property, operators can be an independent
company, owned by a different owner or to engage in the retail network.
Intermediaries (retail service) are essential and useful due to its professionalism,
an ability to offer products to the target market, using their connections in the
industry, experience, the advantages of specialization and the high quality of
work.
Producer → Wholesaler → Retailer → Customer (Two-level Channel)
Wholesalers, like Costco, buy the products from the manufacturer and sell
them to the consumer. In this channel, consumers can buy products directly
from the wholesaler in bulk. By buying the items in bulk from the wholesaler
the prices of the product are reduced. This is because the wholesaler takes
away extra costs, such as service costs or sales force costs, that customers
usually pay when buying from retail; making the price much cheaper for the
consumer. However, the wholesaler does not always sell directly to the
consumer. Sometimes the wholesaler will go through a retailer before the
product gets into the hands of the consumer. Each dealer (the manufacturer,
the wholesaler, and the retailer) will be looking to make a decent profit
margin from the product. So each time the buyer purchases the merchandise
from another source, the price of the product has to increase, in order to
maximize the profit each person will receive. This raises the price of the
product for the end-user. Due to the simultaneous and joint work of
wholesaler and retailer, a trade can only be beneficial if; a market is situated
on a larger area, the supply of goods and products is carried out small but
urgent consignments (products), it can be cost-effective and profitable by
supplying bigger consignments (products) to fewer customers. Industrial
factories are in the seek of using advantages of mass production in order to
produce and sell big lots (batches) while retailers look and prefer purchasing
smaller consignments. This method for factories could lead to instant sales,
high efficiency, and cost-effectiveness.
 Producer → Agent/Broker → Wholesaler or Retailer → Customer (Three-
level Channel)

This distribution channel involves more than one intermediary before the product
gets into the hands of the consumer. This middleman, known as the agent, assists
with the negotiation between the manufacturer and the seller. Agents come into
play when the producers need to get their product into the market as quickly as
possible. This happens mostly when the item is perishable and has to get to the
market fresh before it starts to rot. At times, the agent will directly go to the retailer
with the goods, or take an alternate route through the wholesaler who will go to a
retailer and then finally to the consumer. A mutual cooperation normally occurs
when parties, in particular, the last channel of marketing chain of distribution meet.
Due to the fact that producers, agents, retailers/wholesalers and consumers of this
channel aid each other and benefit from each other. Their cooperation generates
a greater output in terms of further profitability, by discernment and exploring
newer markets of sales and building a better business relationship. However, he
can maintain a competitive advantage over other firms in the form of a particular
brand if he has obtained the right to exclusive representation of the manufacturer
and can profit from it more.