Channel Functions and Flows

A marketing channel performs the work of moving goods from

producers to consumers. It overcomes the time, place, and possession gaps that
separate goods and services from those who need or want them. Members of
the marketing channel perform a number of key functions .
Some of these functions (storage and movement, title, and
communications) constitute a forward flow of activity from the company to the
customer; others (ordering and payment) constitute a backward flow from
customers to the company.
A manufacturer selling a physical product and services might require
three channels: a sales channel, a delivery channel, and a service channel. The
question for marketers is not whether various channel functions need to be
performed—they must be—but, rather, who is to perform
 Channel Member Functions
• Gather information about potential and current customers, competitors, and
other actors and forces in the marketing

environment.

• Develop and disseminate persuasive communications to stimulate

purchasing.

• Negotiate and reach agreements on price and other terms so that transfer of
ownership or possession can be made.

• Place orders with manufacturers.

• Acquire the funds to finance inventories at different levels in the marketing

channel.

Assume risks connected with carrying out channel work.

• Provide for the successive storage and movement of physical products.

• Provide for buyers’ payment of bills through banks and other financial
institutions.

• Oversee transfer of ownership from one organization or person to another.

(1) Vertical Marketing System (VMS):
A vertical marketing system is the result of failure of traditional marketing channels where
each of the manufacturer, wholesaler, retailer is independent with separate identity
seeking to achieve its own objectives – producer (maximize market share), wholesaler (to
maximize sale), and retailer (to maximize profits with customer satisfaction).
Thus, conventional marketing system is a highly fragmented network of business persons
who are loosely connected with each other. For example, retailer might wish to retain
every substitute available on his shelf so that customer does not turn away out of his store.
This might limit the shelf space available for a particular manufacturer whose purpose is to
maximize market share of his product.
A vertical marketing system is a kind of integrated distribution system in which producer,
wholesaler(s) and retailer(s) act as a unified system. They all cooperate with each other.
The channel can be dominated by any of the three members of the system.
This system came into effect after the strong channel members’ attempt to control channel
behaviour and eliminate the conflicts that result when independent channel members
pursue their own objectives. It has become the dominant mode of distribution in the
consumer marketplace in the USA.
There are three types of vertical marketing systems, namely:
(i) Corporate VMS;
(ii) Administered VMS; and
(iii) Contractual VMS.
These are discussed below:
(i) Corporate VMS:
This integrated system calls for combining the successive stages of production and distribution
under single ownership. Although they are owned jointly, each member company in the chain
continues to perform separate functions, i.e., production, wholesaling and retailing.
On the basis of the direction in which integration takes place, a VMS can be of forward
integration type or backward integration type. Forward integration takes place when a
producer or manufacturer takes the control of a wholesaler or a wholesaler takes the control
of a retailer. Backward integration is a situation in which a wholesaler acquires the producer or
a retailer acquires a wholesaler.
For example, an auto parts manufacturer might practice forward integration by purchasing a
retail outlet to sell his products. Similarly, the auto parts supplier might practice backward
integration by purchasing a steel plant to have control over the raw materials needed to
manufacture its products. Bata and Woodland own their retail stores all over the country,
Raymond owns both textile producing plans and the retail outlets. Other examples include
Sears, Banana Republic. The Gap, etc.
(ii) Administered VMS:
In an administered VMS, one member of the channel is large and powerful enough to
coordinate the activities of the other members without an ownership stake. For example, the
producers of many leading brands are able to secure strong trade cooperation from the other
channel partners (or members) in terms of shelf space, display and other support activities.
Under this system, various channel members cooperate through the size and power of one of
the members.
For instance, Amul, Parle, Dabur, P&G, Hindustan Unilever, etc. command highest
cooperation from distributors and retailers regarding shelf space, displays,
promotion, etc. Similarly, large retailers like Big Bazar and Wal-Mart can exert strong
influence on the producers that supply them the products they sell.
(iii) Contractual VMS:
Under this system, one channel member enters into contract with other channel
members that ensures the smooth running and coordinated distribution system. In
this system, one can find wholesaler-sponsored voluntary chains, retailer
cooperatives, and franchise organisations.
(2) Horizontal Marketing System (HMS):
Joining of two or more corporations normally dealing in unrelated or non-
competing products on the same level for the purposes of pursuing a new
marketing opportunity is known as horizontal marketing system.
Products from each member can be marketed and/or distributed together allowing
the two companies to combine their marketing resources and accomplish much
more than either one might accomplish alone. Corporations in a horizontal
marketing system also have the option of combining their capital and production
capabilities. Horizontal marketing system is also known as symbiotic marketing
system.
Under Horizontal Marketing System, two or more businesses, which are otherwise
unrelated, put together their efforts to exploit an emerging marketing opportunity.
Thus, a customer can buy Wagon R from a Maruti Suzuki dealer and get it financed
by HDFC Bank. The important point to be noted is that Maruti Suzuki manufactures
cars. Car financing is not their business. But, Maruti Suzuki has joined hands with a
financial institution which gives loans to the buyers.
Apple’s Tie Up With Starbucks:
Apple’s tie up with Starbucks can be cited as an example of HMS. Apple and
Starbucks announced music partnership in 2007. The purpose of this partnership
was to allow Starbucks customers to wirelessly browse, search for, preview, buy, and
download music from iTunes Music Store onto their i-Pod touch, i-Phone, or PC or
Mac running iTunes. Apple’s leadership in digital music together with the unique
Starbucks experience synergized a partnership to offer customers a world class
digital music experience.
Apple benefits from this partnership with higher iTunes sales because Starbucks has
a lot of loyal customers who have time to visit, relax and enjoy the unique Starbucks
experience. When Apple first introduced its iTunes Music Store, it hoped to sell one
million songs in six months, but to the surprise of everyone, Apple sold one million
songs within six days of the launch of iTunes Music Store.
With such loyal online music customers, Starbucks benefits from increase in market share
and stronger customer loyalty. This example demonstrates how two unrelated companies can
join forces to exploit a new market opportunity.
A vertical marketing system, by contrast, comprises the producer, wholesaler and retailer
acting as a unified system. One channel member owns the others or franchises them (for
example, Coca-Cola company gives licenses and controls the operations through supply of
ready-made formula mixes), or has so much power that they all cooperate (For example,
Bata, Liberty, BPL Gallery, Onida Arcade, Philips dealers).
Third Party “Delivery”:
In this case, the producer outsources the delivery of goods to a company which specialises in
the delivery of goods. Thus, the manufacturer does away with investment in logistics and
concentrates on the other functions. For example, Godrej locks manufactured in Vikhroli
(Mumbai) are delivered through ACE, the door-to-door cargo division of the courier
company, Airfreight Ltd.
Multi-Channel Marketing System (MMS):
The origin of MMS can be traced to the need of the manufacturer to satisfy customers and
earn profits. This can be achieved directly (by direct selling) or indirectly (through channel
members). Thus, Raymond sells its products at its chain stores as well as its factory premises.
But, Philips does not sell directly to the customers. Even if a customer goes to the company, it
redirects the customer to purchase its products from the authorised dealers.
The MMS has several advantages:
(i) Increased Market Coverage:
The products can reach a place where channels don’t exist. For example, Bata may not be
able to open its showrooms in rural areas because of cost consideration. If its shoes are
available even there, then customer has the choice to buy Bata. Thus, not only through
showrooms or authorised dealers, the product can be made available through retailers who
keep various brands.
(ii) Lowest channel cost is involved in distribution.
(iii) More customised selling because the company directly deals with the customer and
therefore product can be made available as per customer-specific requirements. At the same
time, the manufacturer sells through different authorised dealers, showrooms/wholesalers
the standardised products which need no specific modification.
LOGISTICS DECISIONS:
http://www.yourarticlelibrary.com/marketing/marketing-functions/market-logistics-
objectives-and-decisions/29789