Justification for Using Intermediaries Improve exchange efficiency.

There are certain costs associated with an exchange, therefore need to try to reduce the number of transactions (exchanges):


*Customer1 With 1 intermediary---10 transactions


*Customer2 With no intermediaries---25 transactions








Without an intermediary, each buyer has to negotiate and exchange with each seller. With one intermediary, each buyer negotiates with one intermediary (as opposed to 5 sellers), and each seller negotiates with one intermediary (as opposed to 5 buyers).

Number 2 Reason Intermediaries are specialists in the exchange process, provide access to and control over important resources for the proper functioning of the marketing channel. Division of labor.

Still need services that intermediaries (wholesalers, retailers etc.) provide; if they were eliminated then someone else would have to assume the tasks (either producer or customer). Functions can be shifted and shared among channel members, but cannot be eliminated, unless the buyer assumes them.

"you can eliminate the middle man, but you can't eliminate their functions"-a well accepted maxim in marketing.

Return to Contents Functions of Intermediaries Primary role of middlemen is to transform the assortment of products made by producers in the assortments desired by consumers. Producers make narrow assortments in large quantities, consumers want broad assortments in small quantities, discrepancy in quantity and assortment.

Match Supply and Demand:

*Chicken *Potatoes *Carrots *Plates *Silverware

*Customer1 *Customer2 *Customer3 *Customer4 *Customer5

PRODUCER Specialization in production, economies of scale etc., therefore wants to produce large quantities but narrow product mixes. efficiently CUSTOMER Wants a broad assortment (products produced by many manufacturers) of products made available conveniently (within easy reach).

Other functions of intermediaries include:

* assuming risk--Provide working capital by paying for goods before they are sold.

* information Flow * financing * payment and title flow. Return to Contents Types of Channels of Distribution Consumer Channels Channels for Consumer Products. Channel A: Producer | | | | | | v Consumer . * negotiation * contacts * promotion A producer will use an intermediary when it believes that the intermediary can perform the function(s) more economically and efficiently than it can. Vertical dimensions. determined by the # in the channel.

Fruit picking orchards.. * Internet.Microsoft's Ali Baba Software-Selling Plan Has Rivals Boiling. must be there to provide the service. Services often use direct channels since the service provider.. Discusses Microsoft's method of distributing its software directly from its Window's CD. LL Bean etc. Simplest method. Unsought products IE Encyclopedias. Credit Cards etc..IE door to door purchases. not necessarily the most effective.1-800#s. Channel B: Producer | | | | v Retailer | | . Handout.. Technological developments are making the direct channel more common: * TV Homeshopping * CDs * Catalogs. in most cases. WWW When you can use the media of communication to effect exchange.

KMart.. Popular for shopping products. Automobiles.. no discrepancy in quantity supplied and demanded. Channel C: Producer | | | v Wholesaler | | | v Retailer | | | v Consumer . JC Penney.| | v Consumer Large retailers. clothing.cost of transportation and inventory is high.

convenience products.Smaller retailers. widely distributed products. Channel D: Producer | | | v Agent | | | v Wholesaler | | | v Retailer | | | v .

Business to Business Channels Channel E: Producer | | | | | V Buyer Very popular.Convenience products. IE processed food. especially for high cost items that need after sale support. also when there are a number of small producers etc. Horizontal dimensions. Channel F: Producer | | | .Consumer Mass distribution. This is a more common structure than the direct channel in consumer markets. Fewer customers clustered geographically. May be the most efficient distribution channel for consumer products.IE Chevrolet much wider distribution than Rolls Royce. the # of channel members at the same level.

Channel H: . Used when there are many customers. the agent performs those tasks. IE consumable supplies etc. Channel G: Producer | | | v Agent | | | v Buyer When a company does not have a marketing department or sales force.v BB distributor | | | V Buyer Distributor takes title.

Set up 2 or more Marketing channels to attract the same target market or different target markets. IE exporting. . Return to Contents Multiple Marketing Channels Dual Distribution Use several types of channels simultaneously. Using two or more channels to attract the same target market can lead to channel conflict.Producer | | | v Agent | | | v Distributor | | | v Buyer Used as above. IE when you have consumer and business to business markets. with many customers.

Handout. Wholesalers will be eliminated from a channel if they do not perform valuable functions effectively and efficiently..94 trillion industry in the US 300.. If over 50% of sales is with the consumer. This article discusses Time Warner developing additional distribution channels. Firms can engage in wholesaling activities without being wholesalers. * Record Stores * TV Shopping * Catalogs * Columbia House It is very important however to avoid Return to Contents Wholesale Intermediaries Wholesale transactions are all transactions except the transaction with the ultimate consumer. The idea is to find efficient ways to make your product available to your customers.Time Warner to Launch. Classification of a wholesaler or retailer is determined by the purchaser.. down from 6. then the intermediary is a retailer. . Return to Contents Nature and Importance of Wholesaling Approximately a $1. not by the price. adopting dual distribution. If over 50% of sales is with other intermediaries then the intermediary is a wholesaler.5 million people.57 million in 1989 Very competitive.000 wholesaling establishments in the US Employ 6..

Follow regular routes. limited depth. o Limited Line-only few products but an extensive assortment. Categorized as: o General Merchandise-wide mix (unrelated). compensated by fees and/or commission. o Cash and Carry wholesaler-customers pay and furnish their own transportation. * Functional intermediaries --do not take title. Merchant Wholesalers Take title. Account for approximately 83% of wholesalers. they expedite exchanges among producers and resellers. No credit.5 million people. * Limited Service Merchant Wholesalers-only provide some marketing functions. primarily perishable products. 50% of wholesale sales. Employ 4. take back unsold products. o Specialty Line-narrowest range of products.Return to Contents Types of Wholesale Intermediaries 2 Types of intermediaries: * Merchant intermediaries --buy products and resell them. . Two types: * Full Service Wholesalers-offer widest possible range of functions. o Rack Jobbers-are specialty line that own and maintain display racks. o Truck Wholesalers-Operate rolling warehouses and sell a limited line of products directly from their trucks to their customers.

* Auction Companies-provide storage for inspection. that bring buyers and sellers together. Represent two or more sellers and offer customers complete lines. Perform every wholesaling activity except taking title of the product. Used in place of a marketing department. Compensated with commission. Written agreements. negotiate sales but do not take possession. 10. Functional middlemen. * Manufacturers Agent-over half of all agents. . Receive goods on consignment from local sellers and negotiate sales in large central markets. Assume no risk. Handle non. Manufacturers Sales branches and offices Resemble merchant wholesalers operations. 9% of wholesale establishments and generate 31% of wholesale sales. * Selling Agent-market either all specified line or manufacturers entire output. * Brokers-negotiate exchanges-perform the fewest intermediary functions.o Drop Shippers (desk jobbers)-take title. Agents and Brokers Negotiate purchases. Agents represent buyers and sellers on a permanent basis. Sales made to the highest bidder. Represent non-competing product lines.competing (complementary) products.4% of wholesalers total sales volume. o Mail Order Wholesalers-use catalogues instead of sales force to sell. expedite sales but do not take title. Manufacturer owned. * Commission Merchant-focus primarily on the selling task. Brokers represent buyers and sellers on a temporary basis.

IE supermarket chains that own processing plants and large retailers that purchase wholesaling and production facilities. Examples: * Sears * Sherwin Williams * Giant Foods * Gallo * Banana Republic * Hallmark * The Gap * Oil Companies . like sales branches located away from a manufacturing plant-carry no inventory. Corporate VMS More than one stage of the distribution channel under one ownership. low cost distribution aimed at satisfying the target market customers. IE don't look beyond the next level. Return to Contents Vertical Marketing Systems The traditional view of channels focuses on buyers and sellers in direct contact. The channel member manages channel activities to achieve efficient. * Sales Office-serves normally associated with agents. There are three types of Vertical Marketing Systems.* Sales Branches-sell product and provide support services to manufacturers sales forces. The systems view focuses on a framework for the whole distribution system. Administered and Contractual. A Vertical Marketing System (VMS) is a marketing channel that a single channel member coordinates. Corporate.

. has a channel leader. Leader must possess channel power.Administered VMS Channel members are independent with a high level of interorganizational management by informal coordination. One Channel member dominates. Power can come in the following forms: * Reward--provide financial benefits * Expert--be the expert compared with other members * Referent--strongly identify with leader * Coercive--punish members . and promotional activities. Agree to adopt uniform accounting policies etc. Examples: * Wal Mart * Toys R Us * Kellog * Pepsi * Coke * GE * P&G * McKesson Corp * JC Penney * Campbell Channel Leader-Effectiveness of channel hinges on channel leadership.

This article is an excellent example of channel conflict. own and operate their own wholesalers. or increasing the size of the contracts. Other issues include distributors using mail order wholesale clubs to sell CDs. Want to maximize profits and autonomy. or even taking some form of ownership stake (corporate VMS). IE McDonald's and KFC. Channel members belong to different channel systems. Retailer sponsored cooperatives which set up. since they receive no revenue from this product. They retaliate by removing advertising monies etc. NBC and CBS. Handout. largest food wholesaler in the US. Inevitable when individual short run goals are not compatible. or between firms at different levels. creating potential conflicts... Return to Contents VMSs try to overcome: Channel Conflict Channel members may disagree on the best methods to attain goals. Supervalue Stores. which is a form of Dual Distribution since they compete directly with .Whats wrong with selling used CDs. Wholesaler sponsored. IGA stores-independent retailers band together under contractual leadership of a wholesaler. Producers may try to circumvent intermediaries. The networks are losing their channel power. interorganizational relationships formalized through contracts that spell out each members rights and obligations. and it competes with their product.Focusing on the Distribution of TV Programming Moving from an administered VMS to a contractual/corporate VMS system. since there are now six of them competing for the same amount of affiliates as when it was only ABC. and the distributors are not happy. The retailers are selling used CDs. Now the networks are contracting (Contractual VMS) with the affiliates in the hope they will stay loyal to them.Contractual VMS Most popular VMS. Handout... Can occur between firms at the same level.000 outlets. Franchise organizations 1/3 retail sales and 500. offers a broad package of services to 2800 independent food retailers that voluntarily enter into a buying contract.

Organizational Goals. Objectives (same day delivery). Gas station vs convenience store Convenience products have a high replacement rate and require no servicing. Marketing Oriented!! Determined by: 1. storage requirements. size (reduce handling). IE Need to provide a service... intensity of distribution.this is also a source for used CDs.000 drug stores and thousands of other stores. Companies with wide product mixes can sell more directly to the retailers. L'Eggs 3. Product Attributes. and sell their product very inexpensively. greater distance use more intermediaries. Environmental Forces. P&G rely on intensive distribution. Return to Contents Selection of Distribution Channels Should determine what the final buyer wants and determine the best way to reach them. Technology Need to determine the # of Intermediaries Determine the channel width. complexity. fashion. industrial vs. the products market exposure.. space. clustering.the traditional retailers. have more promotional skills etc. consumer. Availability more important than the nature of the outlet. market size etc. Where?/How?/ May need creativity . standard. Used for convenience products. (P&G) 2. as is the return policies of the retail stores etc. Buyer Behavior. Timex sells through 45. IE Competition. market density.THAT A CONSUMER WOULD PURCHASE THAT TYPE OF PRODUCT.. resources and capabilities. * Intensive Distribution: All available outlets are chosen for maximum exposure (within reason). Market Characteristics. 4. Geography.. Perishability-short channels. PLACE UTILITY .. especially when sales have a direct relationship to availability. Good for consumer package goods.

Typically shopping products. Taco Bell have quintrupled its "points of access" to nearly 25. Customer service important. last a long time and require service.who services these additional points of access. This article focuses on the importance of intensive distribution in the fast-food industry. Easier to get retailers to carry a complete inventory and to provide service and repair facilities. * Exclusive Distribution: One outlet in a relatively large area. Buyers prefer to spend time searching. Products purchased infrequently.make the product (i. or the franchisee.e. shopping mall carts etc.500 the end of 1992. Selective distribution motivates retail support... Used as an incentive to sellers. Producers have more control. Taco Bell) available where a customer may want to purchase fast-food. * Selective Distribution: Only some available outlets (usually geographic) are chosen. in the gas station. the franchisor (Taco Bell). Retailer promotional support. Issues of Dual Distribution must be covered that may lead to channel conflict. Horizontal Channel Conflict .000 from 4... Handout..Manufacturer promotional support. (Place Utility) Allows for the highest control.Food Franchisers Expand by Pursuing Customers Into Every Nook and Cranny. No one to undercut them.. May be used to introduce new products.. then change when market is more competitive (Move from introduction to the growth stage of the product life cycle.

retailers' support for a product typically deceases. In most instances. when multiple channels are employed and distribution intensity increases. Invariably. margin dilution. More specifically. the likelihood of horizontal channel conflict increases between and among organizations operating in the same "layer" of the distribution network . and types of stores are added). stores. as a product's distribution base is broadened (more accounts. While channel conflict can rarely be eliminated completely. horizontal channel conflict boils down to a question of economics: retailer profits are pushed below acceptable levels as a result of direct or indirect competitive behavior. Horizontal channel conflict is increasingly common in real life as companies attempt to reach different customer segments by utilizing multiple distribution channels (including direct from the manufacturer). and customer diversion .The implication is that the intensity of competition among retailers is a major driver of retailer support (or lack thereof). it is critical to contain it. As channel conflict increases. Consider the following cases: . three profit threats may confront a retailer: sales cannibalization.

. (b) A broadly distributed. lower sales. prices. front-end consultive selling) not price. branded product becomes a "traffic builder" for some retailers. (d) A manufacturer that has traditionally sold its products through full-service specialty retailers decides to have its sales force call directly on particularly large customers.(a) A mature.e.e. which may result in a reduction of aggregate support for the products. they price the product at or below cost to attract customers to their stores. complex product is introduced though a select group of specialized retailers who compete on service (i. In all of the above cases. and decides to hop on the eCommerce bandwagon by selling to price-sensitive customers via the internet at "factory direct" prices. As volume builds for the product. That is. there is the potential for significant channel conflict that is virtually certain to deteriorate retail economics (i. similar versions are offered through "category killer" discounters who offer no in-store service and compete based on low prices. bypassing the retailers. heavily advertised. commodity-like product is sold through traditional grocery stores that attempt to maintain margins at roughly 30%. The manufacturer makes a comparable product available through warehouse club stores that price to operate at 5% margins by maintaining a very bare bones overhead structure. hoping that the customers will also purchase other higher margin merchandise. (c) A new. and profits).

but then buy at the low price outlet. In case (c). slow / no growth).e.In case (a). The specialty store may be hit by a profitability triple threat: some sales will cannibalized by the manufacturer's direct sales force. Or the stores may suffer margin dilution if they accede to customers who benchmark against "low-balling" competitors and negotiate lower prices This customer practice is commonly referred to as "bestballing".e. all retailers are likely to suffer margin dilution to the extent that they cut prices (either on an everyday or promotional basis) in an attempt to maintain their market shares. Case (d) is often the most controversial and emotional of the channel conflict situations since the manufacturer is involved. some full-service customers will be diverted to buy directly from the manufacturer. That is. i. if the grocery stores don't narrow the price spread. . In case (b). negotiating based on the lowest price found in the market. the full service stores may have some of their customers diverted to the discounters. they will have some of their sales cannibalized by the warehouse stores and will likely lose market share since the market is mature (i. and margins will be diluted if prices are reduced to match the factory direct prices. . customers may take advantage of the pre-sales service.

it can be (and should be) mitigated. companies need to embrace distribution philosophies that: (1) Adopt a long-run perspective and refrain from opportunistic initiatives that may jeopardize established channel relationships for the sake of potentially transient short-term gains. the dominating distribution objective. As the above cases illustrate. While a company may want broad rather than selective distribution. result in horizontal channel conflict. especially as products mature. the full service retailers are likely to become economically demotivated and shift their sales attention to more profitable products. deteriorating retail economics. is somewhat at odds with the other two . and may want to attack different market segments though multiple channels of distribution. .enlisting product support and avoiding channel conflict. increasing customers' convenience). broadening market coverage (i. As a result. the stark reality is that intensive hybrid distribution may. Mitigating Channel Conflict While some level of channel conflict is inevitable.e. the product may lose its primary sources of market support. In order to contain the level of conflict. if not very carefully managed. and eventual loss of critical retail-level product support.In both cases (c) and (d).

(2) Are respectful of system economics. recognizing that channel partners must earn fair financial returns to stay motivated. . On a more tactical level. (3) Stay open and flexible by avoiding restrictive long-run agreements (formal or "common law") that foreclose adaptation to changing markets. companies should: (1) Avoid premature distribution through margin-crunching channels despite their sometimes alluring potential to satisfy the "thrill of volume". (2) Delineate clear rules for territorial coverage and "account ownership" so that competing channels (including the manufacturer direct channel) avoid fighting over the same set of customers.

. or offer derivative models that are similar to. Channel conflict occurs because now there is another type of distribution channel that is perceived by the existing channels to be chasing after the same customers with the same brand. that match the needs of different channels (e. older "stripped down" models to discounters). and telecommunication services are exploding.com). As a result. but different from their base products. A new channel. Therefore the objective of conflict management should not be to eliminate channel conflict but rather manage it so that it does not escalate to destructive levels. reverse auctions (Freemarkets. Welcome to a world where an infinite number of distribution channels are chasing a finite number of customers. and C2C formats (Ebay.g. an emerging low cost indirect channel. For example. newest full featured models to specialty stores. B2C operations (Amazon). music industry. From the manufacturer's perspective.com). many companies market different brands to different intermediaries. regardless of whether it is the Internet.com). or a new manufacturer sales force will increase channel conflict. channel conflict becomes destructive when the existing distribution channels react to channel migration by reducing support or shelf space for the manufacturer. The addition of new distribution channels brings with it the potential for additional sales volume at the cost of greater channel conflict.com).(3) Build and maintain "fences" between competing channels to minimize leakage. The emergence of the Internet has added considerable complexity to distribution channels by offering a variety of e-market places such as B2B auctions (PEFA. and that "shelter" retailers from head-to-head price competition. financial services. C2B auctions (Priceline. And manufacturers who took pride in the integrity of their distribution channels with specific channels reaching specific customer segments are suddenly facing a dizzying array of choices. the various types of distribution channels available in industries such as airlines. The fear of conflict with existing channels can paralyse a company. But on the other hand much of what channel members call channel conflict is healthy channel competition. publishing.

. In extreme cases. Gap decided to stop stocking Levis and concentrate on their own Gap brands. As described below. in 2002. boycotted some Unilever brands for sometime in order to retaliate against the manufacturer. when Estée Lauder set up a website to sell its Clinique and Bobbi Brown brands. Dedicated products: Many designers who have pushed for sales through outlet stores have managed the conflict with their existing retailers by developing special products for these outlet stores. Of course. the brand owner should ensure that the number of distribution points that they have within a particular type of distribution channel is balanced against the size of the segment that the channel reaches. but the judicious use of them can help avoid destructive conflict. an existing distributor may drop the brand as happened when Levi's began expanding its distribution. Clear segmentation: The rationale for having multiple types of channels should always be built on a clear end user segmentation strategy. They serve two different segments and each should be encouraged to specialise on its target segment. it was an action that could have potentially hurt both parties. These are part of the arsenal of any multi-channel marketer. When the convenience store complains to the manufacturer about the prices at which Wal-Mart is selling their products. several channel conflict management strategies exist. the department store Dayton Hudson reduced space on Estée Lauder products. shopping and transaction processing. While this was resolved quickly. it has to be explained that there is no way that a convenience store can compete with Wal-Mart on prices for the price seeking customer. Instead the convenience store has to compete on saving the consumer time vis-à-vis travel. the largest Dutch supermarket chain. For example. Channel conflict becomes particularly destructive when parties take actions that hurt themselves in order to hurt the other party. Albert Heijn. Albert Heijn would have lost some brands such as Bertoli mayonnaise and Cif cleaning products that have very high brand loyalty amongst Dutch consumers. all at a reasonable price premium. none of which is a panacea.For example.

sometimes referred to as channel brands. it can be useful if the existing distribution is given a role to perform in support of the new channel. Expanding sales: Having a new 'hit' product helps facilitate channel migration. Using the existing channel partner can be a useful complement. At the extreme. It is easier to expand channels when revenues are growing as existing dealers are less likely to see absolute declines in sales and profits. Yet. higher value. While it may be perceived as just buying off the support of the existing channels for the channel migration. like Camus Cognac and Guylian chocolates. Aquatredtyre. However. offer special pack sizes and products that are attractive to travellers at duty-free airports in order to minimise the conflict with their regular high street retailers. when Allstate started selling insurance directly off the Web. On the Internet. Dual compensation and role differentiation: Some manufacturers agree to compensate the existing channels for sales through the new channel. it does help lower the negative backlash. For example. they agreed to pay agents 2% commission if they provided face-to-face service to customers who get their quotes off the web. Goodyear managed the migration to the mass merchandisers with only a reasonable amount of conflict by simultaneously restricting the distribution of its new Aquatredtyre to the independent dealers.Similarly. . manufacturers can offer those SKUs which retailers are usually not willing to carry. since this was lower than the 10% commission that agents typically received for offline transactions. some manufacturers dedicate different brands to different channels. many luxury brand companies. many agents did not like it. This allowed the independent dealer to protect their profit-ability and sales volume through the higher margin.

Tesco and Wal-Mart receive lower prices. the best antidote is to treat channels equitably and in a transparent manner. If the manufacturer's prices differ across channels. this can have a deleterious impact on sales as well as brand image. not demanding in-store help and promotions) that lower the manufacturer's cost to serve them. While one may never fully be able to overcome these concerns. There is often the feeling that the manufacturer is favoring other channels at their expense. Final thoughts The temptation for manufacturers is always to expand the number of distribution points as it usually results in an immediate increase in sales. having too many channels chase too few consumers results in channels dropping the level of support to the brand. yes. Traditional industry leaders have frequently neglected the fastest growing new distribution channels. However. . On the other hand changing customer preferences modify industry structures. it should be based on the functions that the particular channel member performs.Equitable treatment: Some retailers will be upset that the prices at which they purchase from the manufacturer are higher than those charged to other retailers or the direct sales force. but it is because they engage in practices (buying large quantities. So. A delicate balance must be maintained between moving too quickly and unleashing destructive channel conflict versus clinging too long to declining distribution networks. In the long run.

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