5 SELECTING CHANNEL MEMBERS AND TARGET MARKET

INTENDED LEARNING OUTCOMES

By the end of the learning experience, students must be able to:

1. Appreciate the importance of channel member selection.
2. Know the sources of finding prospective channel members and selection criteria.
3. Recognize the need to offer incentives and secure them as actual channel members.
4. Examine the four market dimensions using framework and discuss its implications for various
phases of the channel design process.

When it comes to selecting employees, most firms are very careful. They may write job
specifications, institute a broad-based search to find applicants and conduct a thorough
screening and interviewing process before selecting people to join the firm. These companies
go to such lengths because they recognize how important good employees are to the success
of their businesses. The same holds true in the selection of channel members. Success in the
marketplace requires strong channel members—those who can efficiently perform the
distribution tasks necessary to implement the channel strategy. Thus the selection of channel
members is a very important undertaking that should not be left to chance or haphazard
methods. In this chapter, we examine the kinds of issues the channel manager needs to address
to make effective channel member selection decisions.

A. CHANNEL MEMBER SELECTION AND CHANNEL DESIGN

The actual selection of firms that will become marketing channel members is the last phase of
channel design (Phase 7; see Chapter 4). The selection decisions are frequently necessary even
when channel structure changes have not been made. That is, selection decisions may or may
not be the result of channel design decisions. For example, suppose a firm need more coverage
in existing territories. Even though its channel structure remains the same in terms of length,
intensity and types of intermediaries, the firm may need additional outlets to allow for growth.
Another common reason for selection, independent of channel design decisions, is to replace
channel members that have left the channel either voluntarily or otherwise.

Two other points about the relationship of channel design to selection should also be
mentioned. First, an obvious point that is sometimes forgotten is that firms with a direct
(manufacturer→user) channel structure do not have to worry about selection decisions.
Because their allocation of the distribution tasks does not specify the use of intermediaries,
they need not select any. Consequently, for firms that have chosen a direct channel structure as
the best alternative, the channel design decision is a six-phase process. Of course, if at a later
point a firm decides to change its channel structure to include channel members, then selection
becomes relevant.

The second point deals with the relationship between the structural dimension of intensity (see
Chapter 3 section on “Intensity at the Various Levels”) and the selection of channel members.
As a general rule, the greater the intensity of distribution, the less the emphasis on selection. As
Pegram points out in his classic study of selection practices: Such companies [those using
intensive distribution] usually place their products in every logical outlet in an attempt to blanket
the market and make their products universally available. They seldom exercise much
discrimination in the selection of resellers other than ensuring that their credit is satisfactory.
Often consumer items are largely “presold” through advertising, so that there is little concern over
selection and choice of resellers is, practically speaking, nonexistent.

Conversely, in referring to firms that emphasize more selective distribution, Pegram points to
the need for a strong emphasis on the selection of channel members: For these manufacturers
[those with more selective distribution], distributor selection is critical, representing the juncture at

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which the manufacturer has greatest control and opportunity in the field for ensuring the
marketing success of his products which move through resellers.
At Goodyear’s Tire and Rubber Co., for example, careful selection of channel members is given
high priority. In its annual report, Goodyear explicitly addresses its channel selection
philosophy: … our philosophy is simple and logical. We win with winners. We align with customers
[dealers] who are outstanding. We then are focused intensely on building their businesses, not
simply on selling tires. We have, by far, the best dealer network in the industry globally.

In general, then, if a channel has been structured to emphasize intensive distribution at the
various levels, those intermediaries who are included as channel members are usually
“selected” only to the extent that they have a reasonable probability of paying their bills. On
the other hand, if the channel structure stresses more selective distribution, the prospective
members should be much more carefully scrutinized and selection decisions become more
critical. With these points in mind, we now turn our attention to the process of selecting
channel members.

B. PROSPECTIVE CHANNEL MEMBERS AND SELECTION CRITERIA

Selection Process
The channel member selection process consists of the following three steps:
1) Finding prospective channel members
2) Applying selection criteria to determine the suitability of prospective channel members
3) Securing the prospective channel members as actual channel members

(1) Finding Prospective Channel Members

The most important sources for finding channel members are listed below in their order of
importance.

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 1) Field sales organizations 5) Advertising
2) Trade sources 6) Trade shows
3) Reseller inquiries 7) Other sources
4) Customers
1) Field Sales Organizations
Company salespeople are in the best position to know potential channel members, usually
better than anyone else in the firm. Companies may not adequately reward salespeople for
their efforts in finding potential channel members.
2) Trade Sources
Trade sources such as trade associations, trade publications, directories, trade shows, and the
“grapevine” are all valuable sources of information about prospective members.
3) Reseller Inquiries
Many firms learn about potential channel members through direct inquiries from
intermediaries handling their products.
4) Customers
Customers of prospective intermediaries can be a source of information. Using informal or
formal surveys of the views of customers, a firm may well be able to gain insights about the
strengths and weaknesses of a prospective channel member from the customer’s (end user)
point of view.
5) Advertising
Advertisements in trade publications offer another approach to finding channel members.
6) Trade Shows
Trade shows or conventions can be a very fruitful source for finding potential channel
members. Many trade associations, at the industrial and retail levels, hold annual conventions
at which numerous representatives from the various organizations are represented.
7) Other Sources
Some firms also find the following sources helpful in locating prospective members.
a. Chamber of commerce, banks, and e. Independent consultants
local real estate dealers f. List brokers that sell lists of names
b. Classified telephone directories or of businesses
yellow pages g. Business databases
c. Direct-mail solicitations h. The Interne
d. Contacts from previous
applications
(2) Applying Selection Criteria

Having developed a list of prospective channel members, the next step is to appraise these
prospects in light of selection criteria. If a firm has not developed a set of criteria for selecting
channel members, it should develop one. Several channel analysts have developed generalized
lists of criteria. However, no list of criteria, no matter how carefully developed, is adequate for
a firm under all conditions. Changing circumstances may require the firm to alter its emphasis;
so the channel manager should be flexible in the use of selection criteria to allow for such
conditions.

Generalized Lists of Criteria:

Over a half century ago, in one of the first attempts to specify a set of selection criteria for
choosing channel members, Brendel developed a list of 20 key questions for industrial firms to
ask their prospective channel members. Many of these questions are relevant for consumer
products firms as well. Brendel’s list of selection criteria, which has become a classic in
marketing channels’ literature, is as relevant today as it ever was.

This list of 20 selection questions is as follows:

1. Does the distributor really want our line or is he or she after it because of the present-day
shortages? 2. How well established is he or she? 3. What is his or her reputation among his or
her customers? 4. What is his or her reputation among manufacturers? 5. Is he or she
aggressive? 6. What other allied lines does the distributor handle? 7. What is the distributor’s
financial position? 8. Does he or she have the ability to discount his or her bills? 9. What is the
size of his or her plant (facilities)? 10. Will he or she maintain an adequate inventory? 11. To
what important customers does the distributor sell? 12. To which ones does he or she not sell?
13. Does the distributor maintain stable prices? 14. Does he or she provide yearly sales figures
for the past five years? 15. What territory does the distributor actually cover with salespeople?
16. Are the distributor’s salespeople trained? 17. How many field personnel does he or she

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have? 18. How many inside employees does he or she have? 19. Does the distributor believe in
active cooperation, sales training and sales promotion? 20. What facilities does the distributor
have for these activities?

The most comprehensive and definitive list of channel member selection criteria, however, is
still that offered over four decades ago by Pegram. Like Shipley’s list, Pegram’s list is
empirically based; but Pegram used a larger number and broader range of firms (more than
200 U.S. and Canadian manufacturers). Pegram divided the criteria into a number of
categories. We will discuss 10 of these briefly in order to offer an overview of the kinds of
criteria many firms find important to consider.

A) Credit and Financial Condition

The investigation of the credit and financial position of prospective intermediaries is vital.
B) Sale Strength
Not only the quality of the salespeople but also the actual number of salespeople employed.
C) Product Lines
Manufacturers were generally found to consider four aspects of the intermediary’s product
line: (1) competitive products, (2) compatible products, (3) complementary products, and (4)
quality of the lines carried.

1. Manufacturers generally try to avoid intermediaries who carry directly competitive

product lines. Many times both wholesale and retail intermediaries carry directly
competitive products.
2. Manufacturers prefer intermediaries who handle compatible products.
3. Manufacturers look favorably on intermediaries who carry complementary products
because they offer a better overall product mix to their customers.
4. Manufacturers seek intermediaries that carry product lines that are equal to or better
than their own lines. They do not want to be associated with “dog” lines if they can
avoid it.

D) Reputation
Most manufacturers will flatly eliminate prospective intermediaries who do not enjoy a good
reputation in their community. For retail intermediaries, store image is an especially critical
component of the retailer’s overall reputation.
E) Market Coverage
The adequacy of the intermediary in covering the geographical territory that the manufacturer
would like to reach is known as market coverage. Manufacturers will attempt to get the best
territory coverage with a minimum of overlapping.
F) Sales Performance
The main consideration here is whether the prospective intermediary can capture as much
market share as the manufacturer expects.
G) Management Succession
Many intermediaries are managed by the firm’s owner/founder and many are small businesses.
Therefore, the continuity of management is a critical factor.
H) Management Ability
Many manufacturers feel that a prospective channel member is not even worth considering if
the quality of management is poor. One of the key determinants of management’s ability is
their ability to organize, train, and retain salespeople.
I) Attitude
This criterion applies mainly to a prospective intermediary’s aggressiveness, enthusiasm, and
initiative. These qualities are believed to be closely related to long-term success in handling
the manufacturer’s product.
J) Size
Sometimes a prospective intermediary is judged on sheer size. The belief is that the larger the
organization and sales volume, the larger will be the sales of the manufacturer’s products. In
general, it is usually a safe assumption that large intermediaries are more successful, more
profitable, better established, and handle better product lines.

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Using Lists of Selection Criteria
While checklists such as those described above are not applicable to all firms under all
conditions, they are still valuable because they help to point to many of the key areas of
consideration for selecting channel members.

C. SECURING CHANNEL MEMBERS

(3) Securing the Channel Members as Actual Channel Members

It is important to remember that the selection process is a two-way street. It is not only the
producer or manufacturer who does the selecting, but also the intermediaries at both the
wholesale and retail levels. Those who are large and well-established can be very selective
about whom they represent.

Producers and manufacturers, except for those with truly extraordinary reputations and
prestige, cannot expect quality intermediaries to stand in line to become channel members.
Rather, most producers and manufacturers still need to do an effective selling job to secure the
services of good intermediaries.

The channel manager in producing and manufacturing firms can use a number of specific
incentives when attempting to secure channel members. All of these, however, should be
aimed at conveying the firm’s commitment to support prospective channel members so that
these prospects are more likely to be successful with the line. In other words, the manufacturer
or producer should make it clear to the prospective intermediary that the partnership will be
mutually beneficial if each of the parties does the job. Pegram captures this point succinctly:
The keystone of many supplier sales policies is this concept: the supplier produces, the distributor
sells and each is dependent upon the other. Together they form a team and teamwork is essential
if the association is to prove mutually beneficial.

Specific Incentives for Securing Channel Members:

Generally, the more specific the manufacturer can be in spelling out what kinds of support and
assistance will be offered to channel members, the better. Prospective channel members want
to know at the outset precisely “what is in it for them” if they decide to join the manufacturer’s
marketing channel. While there are many possible incentives that the manufacturer might
offer, most of them would fit within one of the following four areas:
(1) good, profitable product line;
(2) advertising and promotional support;
(3) management assistance and
(4) fair dealing policies and friendly relationships.

D. FRAMEWORK FOR MARKET ANALYSIS

Markets, whether consumer or industrial, are complex. A myriad of factors4may have to be

considered in analyzing particular markets, so it is useful to have a framework to help provide
some order to this complexity. Four basic dimensions for discussing markets:
1. Market geography
2. Market size
3. Market density
4. Market behavior

The analysis is structured around these four basic dimensions. Each major section discusses
one of the dimensions. The emphasis will be on showing how these market dimensions
influence channel design strategy. The fourth dimension, market behavior, is the most
complex. Accordingly, a larger portion of this chapter will be devoted to the market behavior
dimension than to any of the other three dimensions.

Figure 5.1. A Framework for Analyzing Market Dimensions in Relation to Channel Design

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Market geography refers to the geographical extent of markets and where they are located. If
the channel manager asks the questions “What do our markets look like geographically?” and
“How distant are our markets?” the concern is with the market geography dimension. The
channel manager is charged with the task of evaluating market geography relative to channel
structure to make sure that the structure is able to serve the markets effectively and efficiently.
Changing market locations resulting from expanding geographical boundaries of existing
markets or the opening up of new, more distant markets should signal the channel manager
that modifications in channel structure may be needed.

The second dimension of the market framework, market size, refers to the number of buyers
or potential buyers (consumer or industrial) in a given market. Bucklin developed a model
relating market size to channel structure, which provides some insight for using market size
data. For example, if market forecast data were to indicate a substantial increase in the number
of buyers in a particular market, questions such as the following should emerge: 1. Will the
increase in the number of buyers’ increase or decrease the average cost of serving our buyers?
2. If an increase in average costs is likely, can our present channel structure be changed to
reduce these costs before the market reaches its forecasted size? 3. If such structural changes
could be made, would this yield a differential advantage to our firm?
Market density refers to the number of buyers or potential buyers per unit of geographical
area. This market dimension should also be considered in channel design strategy because of
its relationship to channel structure. A useful concept that helps to illustrate the relationship is
that of efficient congestion. According to this concept, congested (high-density) markets can
promote efficiency in the performance of several basic distribution tasks, particularly those of
transportation, storage, communication and negotiation. With respect to transportation and
storage, a high geographical concentration of customers enables goods to be transported in
large lots to the concentrated markets and stored in a relatively small number of inventories
capable of adequately serving the compact markets. For markets characterized by low levels of
density, smaller quantities of goods have to be transported and smaller inventories are needed.
In terms of communication and negotiation tasks, dense markets facilitate the flows of
communication and negotiation. This is especially true when face-to-face information and
negotiation are necessary. For example, if a manufacturer’s salesperson must call on 50
accounts, it will take much less sales time and effort to call on these accounts if they are
located within an area of 100 square miles instead of 500.
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This fourth dimension, market behavior, consists of four sub dimensions: when the market
buys, where the market buys, how the market buys and who buy.

When Customers Buy

Neither consumer nor industrial markets buy products on a precisely predictable time schedule
that remains constant per time period. Frequently there are seasonal, weekly and daily
variations. Far more skis are sold to consumers in the winter than in the summer. Air
conditioners, snow tires, antifreeze, eggnog, short-sleeve shirts and garden supplies are other
obvious examples of products generally purchased seasonally.

Where Customers Buy

The types of outlets from which customers choose to make their purchases and the location of
those outlets should be an important driver of channel design strategy. This sub dimension is
closely related to the market geography dimension discussed earlier in this chapter. This is
because the types of outlets chosen by customers and their locations ultimately determine the

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actual geographic locations of the markets that the channel manager seeks to serve. Our focus
in this section will be on briefly examining underlying behavioral patterns of buyers that affect
market locations and, in turn, channel design.

How Customers Buy

Customer preferences reflected in purchase behavior indicate how the market buys (see Table
5.2 for examples). Each of the ten behaviors shown in the table can vary across different
market segments and over time for any given product category. For example, with respect to
food purchases, middle-income consumers who shop mainly in supermarkets buy in larger
quantities than do lower-income consumers patronizing smaller neighborhood stores. More
affluent consumers are also likely to demand more assistance from salespeople than less
affluent consumers who are amenable to more self-service in many product categories.

Although there has been tremendous growth in online shopping in recent years, consumers
still expect conventional channels to be readily available as well. In fact, more and more
consumers have become “channel surfers” because they shop in multiple channels—in a
retailer’s stores, from its catalogs and from its web site. Some industry observers have referred
to this phenomenon as threetailing (in-store, catalog, online).

Who Buys
The sub dimension of who does the buying has two aspects: (1) who makes the physical
purchase and (2) who takes part in the buying decisions.

(1) Who Makes the Purchases.

From a channel design standpoint, who actually buys the product can affect the type of
retailers chosen in the consumer market and may also influence the kinds of channel members
used to serve industrial markets. For example, women traditionally shop in department stores
far more heavily than men. Consequently, products that are known to be purchased mainly by
men should not rely on department stores as the primary retail outlet. Product purchase,
however, should not be confused with product usage. Many products used6 by men (such as
shirts, ties, underwear, toiletries, jewelry and even some consumer electronics) are purchased
for them by their wives or girlfriends in department stores. Care should therefore be taken to
distinguish between who uses the product and who makes the actual purchase.

(2) Who Participates in the Buying Decision.

The more difficult aspect to analyze than who actually makes the physical purchase is who
decides to make the purchase in the first place. Indeed, this has been a topic of substantial
research in the consumer behavior literature and in industrial marketing as well. At the
consumer level, the question of who takes part in the buying decision is usually in the context
of a family unit. Influence on buying decisions revolves around the roles played by the husband,
wife and, sometimes, the children.

In the industrial market, it is not at all unusual to have several people in the buying firm
involved in the purchase decision. This phenomenon is sometimes referred to as multiple
influences on the buying decision. Webster and Wind refer to the sets of people who
participate in industrial buying decisions and who are responsible for the consequences
resulting from the decision as buying centers.
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The buying center has six distinct roles that various individuals in the organization fill.

1. Users—the members of the organization who will use the product or service. In many cases,
the users initiate the buying proposal and help define the product specifications.

2. Influencers—people who influence the buying decision. They often help define specifications
and also provide information for evaluating alternatives. Technical people are especially
important as influencers.

3. Deciders—people who have the power to decide on product requirements and/or on

suppliers.

4. Approvers—people who must authorize the proposed actions of deciders or buyers.

5. Buyers—people with formal authority for selecting the supplier and arranging the terms of
purchase. Buyers may help shape product specifications, but they play their major role in
selecting vendors and negotiating. In more complex purchases, the buyers might include high-
level executives as participants in the negotiations.

6. Gatekeepers—people who have the power to prevent sellers or information from reaching
members of the buying center. For example, purchasing agents, receptionists and telephone
operators may prevent salespeople from talking to users or deciders.

SUMMARY

Just as the selection of good employees is critical to the success of a firm, so, too, is the
selection of channel members because most firms need both to succeed in the marketplace.
The selection of channel members is the last (seventh) phase of channel design. Selection
decisions can also be made independently of channel design decisions when new channel
members are added to the channel or when those who have left are replaced. Only those
manufacturers who sell directly to users are not faced with the selection of channel members.
In general, the more selective the intensity of distribution, the more emphasis the firm needs
to place on selection and vice versa.

The selection process consists of three basic steps: (1) finding prospective channel members;
(2) applying selection criteria to determine whether they are suitable and (3) securing the
prospective members for the channel.

Finding prospective channel members generally poses few problems because many sources
can be used for locating them: (1) the field sales organization; (2) trade sources; (3) reseller
inquiries; (4) customers; (5) advertising, (6) trade shows and (7) other sources such as chambers
of commerce, telephone directories, independent consultants, list brokers, databases and the
Internet. Applying selection criteria is a more difficult problem because no single list of criteria
is appropriate for all firms. Each firm must develop its own list reflecting its particular
objectives and policies. Moreover, these criteria must be flexible enough to allow for changing
conditions. 7

However, 10 general criteria are useful as a starting point for most firms to use when
developing their own specialized set of selection criteria: (1) credit and financial condition; (2)
sales strength; (3) product lines; (4) reputation; (5) market coverage; (6) sales; performance; (7)
management succession; (8) management ability; (9) attitude and (10) size.

Market (customer) considerations are the key determinant of channel strategy and structure
because when all is said and done, marketing channels must reflect the needs and wants of
customers. In short, marketing channels must be customer-centric—reflecting how, when and
where customers choose to acquire products and services as well as which customers make
purchasing decisions and do the actual buying.

Consequently, market variables are of fundamental importance in channel design decisions.

The channel manager should attempt to analyze markets with a view toward gaining a
sustainable competitive advantage through channel designs that serve those markets better
than the competition. In order to analyze markets effectively for channel design purposes, a

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framework consisting of four basic dimensions was used in this chapter. These are: (1) market
geography, which deals with the physical location of markets and their distance from the
producer or manufacturer; (2) market size, the number of buyers in a given market; (3) market
density, the number of buyers per unit of geographical area and (4) market behavior, which
breaks down into four subdimensions of when, where and how the market buys as well as who
buys.

The channel manager must attempt to understand how these dimensions and sub dimensions
operate in various markets and develop channel strategies and structures that will enable the
firm to serve these markets effectively and efficiently. The channel manager must also be
sensitive to changes in these dimensions and, if necessary, be able to make appropriate
modifications in the channel structure to adapt to such changes.

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