CHAPTER- 8

Marketing Channels
8.1. THE NATURE AND IMPORTANCE OF
MARKETING CHANNELS
 Some producers sell their marketing offers directly to final
consumers.
 On the other hand, most companies use marketing
intermediaries to bring their products into the target market.
 Marketing intermediaries are independent business
organizations involved in the process of making the
product available and accessible for users.
 channel of distribution refers to the route through which
products move and change hands between and among the
participants in the value delivery network.
HOW CHANNEL MEMBERS ADD VALUE

 Through their contacts, experience, specialization,

intermediaries usually offer the firm more than it can
achieve on its own
 Marketing intermediaries buy large quantities from
many producers and break them down into smaller
quantities and broader assortments wanted by
consumers
 Channel members add value by bridging the major
time, place and possession gaps
 SOME KEY FUNCTIONS PERFORMED BY MARKETING CHANNEL
MEMBERS ARE THE FOLLOWING.

 Information- gathering and distributing information about actors and

forces in the market environment.
 Promotion- developing and spreading persuasive communications about
an offer.
 Contact- finding and communicating with prospective customers
 Matching – shaping and fitting the offer to the buyer’s needs including
activities such as grading, assembling and packaging.
 Negotiation- reaching an agreement on price and other terms of the
offer so that the ownership can be transferred.
 Physical distribution – transporting and storing commodities
 Financing – acquiring and using funds to cover the costs of the channel
work
 Risk taking–assuming the risks of carrying out the channel work
 7.1.2. NUMBER OF CHANNEL LEVELS

 The number of intermediary levels indicates the length of

the channel.
1. Producer Consumers (one level channel)
2. Producer Retailers Consumers
(two level channel)
1. Producer Wholesalers Retailer
Consumers (three level channel)
2. Producer Agents Retailers Consumers
(three level channel) based on physical handling
transfer
3. Producer Agents Consumers
(two level channel)
4. Producer Agents wholesalers Retailers
Consumers (four level channel
7.1.3. CHANNEL BEHAVIOR AND
ORGANIZATIONS

 A marketing channel consists of firms that have

partnered for their common goal
 Each channel member depends on others. Each
channel member plays a specialized role in the
channel.
 Since individual channel member’s success relies on
overall channel success, all channel firms should
understand and accept their roles, coordinate their
activities and operate to attain overall channel goals.
 However, individual channel members rarely take
such a broader view. Channel members often disagree
on who should do what and for what rewards. Such
disagreements generate channel conflict.
 Horizontal conflict – occurs among firms at the
same level of the channel. E.g. some Ford dealers in
Chicago might complain the other dealers in the city
for pricing too low or advertising outside their
assigned territories.
 Vertical conflict – conflicts between different levels
of the same channel. For example, if Ford opens its
own sales branches in its dealers’ territories, those
dealers complain Ford for sharing their market.
7.2. CHANNEL DESIGN DECISIONS

Designing a channel system calls for

1. Analyzing consumer needs
2. Setting channel objectives
3. Identifying major channel alternatives and

4. Evaluating those alternatives.

A. ANALYZING CONSUMER NEEDS
 Designing the marketing channel starts with finding
out what target customers want from the channel.
The following questions may arise;
 do consumers want to buy from nearby locations or
are they willing to travel more distant centralized
location?
 would consumers buy in person, over the phone,
through mail or via email?
 do consumers want many add-on services (credit,
repair, installation, etc) or will they obtain these
elsewhere?
B. SETTING CHANNEL OBJECTIVES

 Companies should state their marketing channel objectives

in terms of targeted levels of customer service. Usually a
company can identify different levels of service. The
company should decide which segments to serve and the
best channels to use in each case.
 The company’s channel objectives are influenced by the
nature of the company, its products, its marketing
intermediaries, its competitors and the environment.
 The company’s size and financial situation determines
which marketing functions it can handle itself and which it
must give to intermediaries.
 Companies selling perishable products may require direct
or shorter channels to avoid delays or changes of many
hands.
 Environmental factors such as economic conditions and
legal constraints may affect channel objectives and design.
For example, in a depressed economy, producers want to
distribute their goods using shorter channels and dropping
unneeded services that add to the final price.
 C. IDENTIFYING MAJOR CHANNEL ALTERNATIVES
 Identify its major channel alternatives in terms of types
of intermediaries, the number of intermediaries and the
responsibilities of each channel member.
Types of intermediaries
(1) Manufacturers’ representatives – are independent
firms whose sales forces handle related products from
many companies in different regions or industries.
(2) distributors/resellers – independent organizations
which purchase merchandises for reselling to other
customers.
 Responsibilities of channel members
 The producer and intermediaries should agree on terms
like price policies, conditions of sales, territorial rights
and specific services to be performed by each party.
NUMBER OF CHANNEL MEMBERS

 A company’s product may reach to final consumers

through intensive distribution, selective distribution or
exclusive distribution.
 Intensive distribution means stocking the product in
as many outlets as possible. Producers of convenience
items and common raw materials typically seek intensive
distribution. The products must be available where and
when consumers want them.
 Selective distribution – it is the use of more than one
but less than all, of intermediaries who are willing to
carry a company’s products. By using selective
distribution, companies can develop good working
relationships with selected channel members.
 Exclusive distribution – the producer gives only a
limited number of dealers the exclusive right to
distribute its products in their territories.
D. EVALUATING THE MAJOR ALTERNATIVES

 Each alternative should be evaluated against

economic, control and adaptive criteria.
 Economic criteria: a company compares the likely
sales, costs and profitability of different channel
alternatives.
 Control criteria: using intermediaries usually means
giving them some control over the marketing of the
product.
 Adaptive criteria: channels often involve long-term
commitments, yet the company wants to keep the
channel that it can adapt the environmental changes.
CHANNEL MANAGEMENT DECISIONS
 Once the company has reviewed its channel
alternatives and decided on the best channel design, it
must implement and manage the chosen channel.
 Channel management calls for selecting, managing
and motivating individual channel members and
evaluating their performance over time.
1. Selecting channel members
 When selecting intermediaries, the company should
determine what characteristics distinguish the best
ones. It will want to evaluate each channel member’s
years of business, other lines carried, growth and
profit records, size and quality of sales force,
cooperativeness and reputation.
2. Managing and motivating channel members
 Once selected, channel members must continuously
be managed and motivated to do their best. Most
companies see their intermediaries as first line
customers and partners.
 In managing its channels, a company must convince
distributors that they can succeed better by working
together as a part of a cohesive value delivery system.
3. Evaluating channel members
 The producer must regularly check channel member
performance against standards such as sales quotas,
average inventory levels, customer delivery time,
treatment of damaged and lost goods, cooperation in
company promotion and services to customers.
 The company should recognize and reward
intermediaries who are performing well and adding
good value for consumers. Those who are performing
poorly should be assisted or as a last option replaced.