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of organisations designed to bridge the gaps between producers and consumers. They are perhaps the most difficult tyoe of marketing team to assemble and to make work effectively. Each organisation in a conventional organisational team is something of a functional specialist. But for conventional channels to succeed, each member still must perform as part of a system, These systems must be properly designed to achieve the continuity that channel members need to convert their special skills into a successful team performance. For this to happen, channel organisations have to agree with what results are being sought through the channel. Channel members must also define their purpose, core competencies, system of rewards and punishments, devices of conflict resolution and behavioural norms. Because they require years to develop, sound manufacturer – intermediary – end user linkages are often barriers to competitive entry. Conventional Marketing Channels : Issues and Answers What is Channel Design ? Channel design refers to those decisions associated with the formation of new marketing channel or the alteration of existing channels. Channel design should be viewed as a strategic decision because a properly executed channel design can provide a differential advantage in the marketplace. Sustainable Competitive Advantages allow firms to gain long-term market advantages relative to their competitors. Why are Channel Design decisions critical ? The type of channel a producer chooses directly influences all of its other marketing decisions. Promotional decisions depend in part, on how much training or motivation their intermediaries or retailers need. Channel design decisions typically involve relatively long-term commitments to other organisations and to the particular markets those channel members serve. Channel design decisions are also critical because a channel system is the key external source to many manufacturers. Channel design decisions represent a commitment to a set of policies and procedures. Because channel design decisions are sometimes easier to get into than to get out of, channel managers should design channels with a forward view based on the likely shape of tomorrow’s market. How do Marketing Functions Factor into The Channel Design decision? Marketing functions performed by channel members in order in which they would normally arise in an automative distribution channel are : (i) Information : The accumulation and distribution of information about current and potential customers, competitors, and others in the marketing environment. (ii) (iii) (iv) Promotion : The construction and distribution of persuasive and/or informative communications designed to attract buyers. Negotiation : The means by which final agreements on price and other terms (financing, features etc) is reached so that transfer of ownership and possession can be completed. Ordering : The communication of an intention to purchase by end-users through the channel members to the producers.
(v) (vi) (vii) (viii) (ix) (x)
Financing : The procurement and allocation of funds required to finance automative inventories at the channels different levels. Risk-taking : The bearing of the risk associated with carrying out channel work. Possession : The successive stages by which the storage and the movement of physical products from the raw materials to final customers occurs. Billing : The forward movement of a detailed list of goods sold or services provided, together with the charges and the terms. Payment : In response to invoices received, payments involves the means by which buyers pay their bills through financial institutions to sellers. Title : The actual transfer of ownership from one organisation to another, or to the final consumer.
Certain channel functions move forward (promotion, possession, billing and title), while others move backwards (ordering and movement). Some functions move up and down the channel (information, negotiation, financing and risk taking). The 10 functions listed above share the following characteristics : They can be performed better through specialisation. They can be shifted among channel members They invariably use someone’s resources If the performance functions are shifted, some or all of the associated costs are also shifted. The total costs and profit margins demanded by each channel member are reflected in the final buyer’s cost price. Channel functions cannot be eliminated – they can only be shifted from one channel member to another. Thus, the key question in the issue of channel design is “Who will perform these functions?” The answer rests on relative efficiency and relative effectiveness. The process by which alternative channel designs are evaluated in terms of their ability to perform a function with minimum expenditure of effort or expense is called a Channel Efficiency Analysis. A Channel Effectiveness Analysis considers the strategic fit of a channel design with the channel member’s overall marketing strategy. Effectiveness relates to a channel design’s ability to perform competently. The evaluation of a channel design system effectiveness involves longer time frames than it efficiency evaluation analysis. Two basic types of intermediaries – those that take title to the goods (resellers) and those who do not (agents) are available to perform channel functions. When is it time to Design or Redesign a Channel? when a new firm is established when the organisation develops a new product or product line when the organisation decides to target a new market when existing channel members change their policies or fail to perform as expectedor engage in practices that cause conflict
external environmental changes, like political, economic, competitive, sociocultural, technological, etc might also trigger the need to redesign a distribution channel
MAKING THE CHANNEL DESIGN DECISION New organisations often have smaller operations within a restricted market area. Because smaller firms usually have restricted capital resources, they usually use existing intermediaries. Further, the number of intermediaries in a given local market is frequently small, therefore, deciding on a convenient channel design in such an environment is no problem at all. Larger firms, on the other hand, tend to use different kinds of channels in different markets. Large or small, an organisation’s distribution channel may evolve in response to a SWOT analysis, an analysis of the companies’ strengths, weaknesses, opportunities and threats present in the relevant market environment. Information relating to a channel member’s profitability, sales volume, brand associations, product portfolios and lifecycles, and relative costs should be evaluated in SWOT analysis. This analysis should likewise consider an organisation’s employee/managerial attitudes, performance and capabilities along with its current and past marketing strategies. In addition, a SWOT analysis should consider key market success factors, and the market’s attractiveness to new entrants, cost structures, and barriers to entry. Finally, technological issues, key societal/cultural trends and developments, and competitors’ strengths and weaknesses should be evaluated. Channel Design Options Channel designs can vary along three dimensions : Number of levels present in the channel Number of intermediaries operating at various levels Types of intermediaries used at each level Number of Levels in the Channel Each intermediary that performs a function necessary to convey a good service closer to the final users represents a channel level. Since the producer and the final user also perform certain functions, they are part of any channel design. A channel’s length is described by the number of intermediary levels in the channel other than the producer and the user that it contains. A zero level channel or direct marketing channel exists when a producer sells directly to the final user. In consumer channels, door-to-door selling, mail order catalogues, telemarketing, or manufacturer-owned retail outlets, all represent zero-channel levels. One level channel designs feature one channel intermediary, such as a retailer who buys directly from a producer. Two-level channel designs feature some combinations of two selling intermediaries , such as a wholesaler and a retailer. Three-level channel designs feature some combinations of three intermediaries, such as a wholesaler, agent, or a retailer. Consumer channel lengths rarely extend beyond four levels. In zero-level industrial channels, producers use their salesforce to market directly to industrial consumers. However the same salesforce may also market to industrial distributors who then sell to
final industry users. Or, producers can sell directly to industrial users through manufacturer’s representatives or use those reps to market to industrial distributors. While channels usually describe a forward movement of goods, backward flowing channels also exist. In these reverse channels, goods and materials flow from end-users backwards to production centres for use as cost-effective inputs. Reverse channels accommodate backward flows for used goods such as homes, computers, automobiles, and commercial aircrafts. Number of Intermediaries at each level Three basic choices are available : (i) Intensive Distribution : In this design, producers distribute through as many outlets as possible. The decision of whether to use intensive distribution depends on the nature of the product and the consumer characteristics and the level of control desired by the channel designers. When consumers demand location convenience or when a product is low involvement, producers offer a great intensity of distribution. Convenience-oriented consumer goods, such as snack foods, gasoline or razors are usually distributed in this fashion. Exclusive Distribution : This places limits on the number of intermediaries operating at any given channel level. Exclusive distribution is used when producers want to retain control over the quality of service levels provided and involves dealers agreeing to not carrying competitive brands. Intermediaries who enter into exclusive distribution channels are likely to be relationship-oriented. By entering exclusive arrangements, producers hope to secure more aggressive and knowledgeable sales efforts. The image of products distributed in this manner is typically enhanced. Higher mark-ups follow. Most new automobiles, certain major appliances, and a few clothing lines are distributed through exclusive distribution channels. Selective Distribution : This distribution strategy lies between the two extremes. In this case, more than one but fewer than all available intermediaries are used. Manufacturers do not have to spread their limited resources over too many outlets, including many that are possibly marginal. Better relationships with intermediaries who are selected can be developed and producers can logically expect better-than-average marketing efforts. Manufacturers can also gain sufficient marketing coverage with more control and less cost than intensive distribution. Downstream intermediaries benefit from the opportunity to market somewhat more exclusive offerings.
Manufacturers often face a decision of whether to move from exclusive or selective distribution to intensive distribution to increase market coverage and sales. Such a move may help short-term performance while actually diminishing long-term prospects because this may adversely affect the degree of control the firm exercises over its display arrangements, service levels, and pricing policies. If a price war ensues, buyers would attach less prestige to the brands. Types of Intermediaries at Each Level Several intermediary options are available ; (i) Manufacturer’s Salesforce : Sales people could be assigned to exclusive territories and charged with the responsibilty of contacting all prospects in the geographic area. Or, the firm could develop separate salesforces that specialise in calling on different industry scetors. Members of a manufacturer’s salesforce perform the promotion function. They are
employees and are paid a salary/commission plus benefits for performing this function. (ii) Manufacturer’s Representatives : The firm can enter into a contractual agreement with existing manufacturer’s representatives who currently do business in the targeted geographic regions or with the targeted industries. These reps would be assigned responsibility and control over the marketing of the product. Manufacturer’s reps are intermediaries who primarily perform the promotion function. They act as agents for manufacturers, and receive a commission for their services. Industrial Distributors : The firm can also seek out prominent distributors that operate in the different regions or end-user industries. The distributors would buy the product for resell. In turn, the firm would probably have to grant these industrial distributors exclusive territorial distribution rights and provide them with acceptable margins. The firm would also be expected to provide these distributors with product training and promotional support. Industrial distributors are intermediaries who take title to the product, and who typically perform promotional, informational, negotiation, risk-taking and possession functions. They recover costs of performing these functions by making profits on whatever price the market will bear and the unit volumes that can be sold to downstream buyers.
Companies seek out innovative intermediaries. Sometimes firms pursue unconventional channels because of problems associated with more traditional channels. The experiences of manufacturers who have gone through the process of starting their own salesforces from scratch suggest that the key to success lies in careful preparation. It is essential that the entire sales programme, including hiring, policies, training, operating procedures, and compensation be mapped out before the first recruit is contacted, in order to avoid indecision during the transition stage. Evaluating Channel design Alternatives Channel design alternatives must be evaluated on three criterai : Expected sales and costs Control and resources Flexibility Expected Sales and Costs Which intermediary option will produce more sales? Most marketers believe usually corporate sales persons sell more. Company salespeople must rely entirely on their own products to succeed. Naturally, they should be better trained to sell those products. Moreover, company salesforce should be more business-oriented because their success ultimately depends on the company’s success. Finally, customers may prefer to deal directly with the manufacturers. Still, the sales agency may sell more. Depending upon the commission structure involved, the agency’s representatives may well be as aggressive as a company’s direct salesforce. Also, customers may prefer dealing with sales agents who represent several producers, rather than corporate salespeople who represent only one. Finally, the agency’s reps presumable have extensive, longstanding relationships with and knowledge of the target market. A third factor to be considered is that often, resellers have little interest in selling unknown products and therefore the firm may have no choice than to use a company-owned salesforce. What are the relative costs of selling different amounts through the two intermediaries?
The costs of using a manufacturer’s representatives rise more quickly than the company’s salesforce. This is because, while the fixed costs of using a sales agency are always lower, costs increase faster because sales agents get higher commissions than corporate reps. At the level where selling costs are the same for each alternative, the manufacturer would be indifferent to using one or the other salesforce type if it were acting strictly on an economic basis. Below that level, a manufacturer’s agency provides the preferred option. Above it, a company salesforce is preferable. Thus, sales agencies tend to be used by smaller firms, by bigger firms when they enter smaller territories, or when sales volume is too small to warrant an internal salesforce. It is important to note that agencies sometimes act like opportunistically by limiting market development. Sales volume then remains below the level necessary to support a company-owned sakesforce. Also, a distributor may demand slotting or promotional allowances, exclusive dealing agreements, or inordinately high margins as a levy for continuing to carry the product. Control and Resources Criteria Organisations are generally not self-sufficient. The fewer an organisation’s intermediaries and the higher its financial resources, the more control the organisation retains. Conversely, the more a firm depends on external resources, the lesser control it retains. Intermediary selection often requires a compromise between the desire to control key functions and the need to develop maximum market coverage for a given expenditure level. Control often provides the decisive factor in this intremediary selection decision. Flexibility Criterai Before an intermediary can be selected, channel members must reach some degree of commitment to the proposed relationship. The commitment inevitably lessens the channel member’s ability to respond to changing environmental opportunities or threats. In highly volatile or uncertain markets, manufacturers seek channel structures that allow them to rapidly shift their channel strategy. On the contrary, if control is not so important, the company would likely use an external agency in a volatile market. That’s because the latter arrangement gives the firm more flexibility to exit if the market has declined. SELECTING THE BEST CHANNEL DESIGN The best channel design is one that offers the highest performance effectivenessat the lowest possible cost. To select an optimal structure, the channel manager would have to calculate the expected revenues and costs associated with each alternative structure. However, most marketers are incapable of precisely specifying all the possible design alternatives. And even when they are, calculating the exact revenues and costs associated with each alternative would be impossible. Several criteria used to estimate an optimal allocation of key market functions (i) Analysing desired channel output utilities To select the best channel design, the organisation first needs to understand why its targeted customers buy. Customers’ purchase decisions can be divided into basic categories called Channel Output Utilities. Different marketing channels provide more or less of these utilities : (a) Convenience (Temporal and Spatial) Utility Waiting time – the time that customers must wait to receive the goods is a direct indicator of temporal convenience. Customers normally prefer fast delivery channels. In turn, faster delivery channels require higher service levels.
Spatial Convenience reflects the ease with which a product or service may be acquired. (b) Lot Size Utility The number of product units that a customer acquires during a transaction is the lot size. The smaller the lot size, the greater the service utility the channel design must provide. (c) Selection Utility : Selection is the product assortment breadth (variety) provided by the marketing channel. Business and household consumers normally prefer greater selection because the chances of their needs being exactly satisfied are then improved. (d) Service Utility Service utility is the value-added dimensions of a market offering (eg. Easy credit, free delivery, installation, repairs) provided by a channel. The greater the service the higher the number of marketing functions provided by the channel. Marketing channels can be designed to provide more or less of these four channel output utilities. When organisation’s channel designs provide more of an output desired by end-users, they will enjoy a competitive advantage. But providing increased level of an output means increased channel costs and usually higher prices for end-users. The trade-off between prices charged and channel utilities received is an important competitive weapon. Many consumers place little importance on some channel outputs, and therefore, will not pay for them. But certain outputs are highly valued by consumers and they are willing to pay for them. When important outputs are delivered at little or no expense through a channel design, customers receive extra value. Competitors then feel the pressure to follow suit with their own design. Analysing Channel objectives and Product Characteristics Distribution goals are outcomes towards which the distribution efforts are directed. These goals should be consistent with the firm’s overall marketing strategy. Distribution goals must be expressed in terms of channel output utilities sought. In competitive markets, organisations should arrange their functional tasks in ways that minimise total costs while achieving the desired channel output utilities. Distribution goals change depending upon several product characteristics that include : (i) Unit Value : Generally, the lower a product’s unit value, the longer its distribution channel will be. The product’s lower value leaves only a small margin to cover each intermediary’s costs. High value products are normally sold through a company salesforce rather than through intermediaries.
Standardisation : Non-standardised products are usually sold directly because intermediaries often lack the required specialised knowledge. Products requiring installation and/or heavy maintenance service are sold directly to end-users Standardised products are typically sold through channels featuring more than one intermediary. Bulkiness : Bulky or heavy products often have high handling and shipping costs relative to their value. Such products demand channels that minimise distance and the amount of handling that occurs on the path between producers and consumers. Channels for perishable
products should also be shortened to accommodate the need for timely delivery.
Complexity : Highly complex products are usually distributed to consumer and industrial markets through direct channels. Complex products need salespeople who are capable of conveying the product’s technical features to potential users, and service peoplewho provide continuing value after the sale. Stage of Product Lifecycle : Many new products require extensive and aggressive promotional efforts during their introductory stage to establish demand. The longer the channel, the more difficult it is to attain this type of effort from each intermediary. As products progress through their lifecycle, their channels are generally lengthened.
Analysing Market Behaviours and Segments Analysing current and potential buyer behaviours is the primary job of many key employees in conventional marketing systems. The question of who is doing the buying is particularly crucial. This implies that direct distribution is preferable, since it allows for greater control over the salesforce. The use of a company salesperson can ensure that all parties who have an inputin the buying decision are contacted. Other questions pertaining to when, how and where end-users buy are also relevant and need to be answered. For example, if the buying patterns are seasonal, intermediaries that can perform the storage purpose should be added to the channel. The storage function flattens what are otherwise peaks and valleys in production. Consumers are increasingly shopping for products from their homes. This trend implies that producers should eliminate intermediaries such as wholesalers and retailers and sell direct. By contrast, for those products that consumers typically buy in small quantities, long channels involving several intermediaries are usually needed. Many manufacturers think primarily in terms of geographic coverage before considering the coverage of distinct market segments. Finally, customers prefer to deal with intermediaries that know their industry’s language. Thus, wise manufacturers design different types of marketing channels to serve specialised market segments. EVALUATING CHANNEL STRUCTURE PERFORMANCE Once a channel arrangement has been established, firms should periodically review the performance of their intermediaries. Channel systems inevitably require changes to meet new or changing conditions in the marketplace. Channel members should first review the sales growth that the intermediaries allow them to achieve and consider eliminating intermediaries whose sales fall below expectations. By performing a thorough evaluation, firms occasionally discover that they are paying channel members too much in relation to what they receive in return. Underperforming intermediaries should be counselled, retrained or remotivated. Channel members should terminate their dealings with intermediaries who do not respond satisfactorily to recommended modifications. MODIFYING EXISTING CHANNELS Channel Adjustments – purposeful modifications to intermediary relationships – become necessary when consumer buying patterns change, markets expand, new competition arises, or as newer, innovative distribution channel options become available. The relationship marketing approach championed by the CRM counsels channel members to consider how changes in channel structure
will impact relationships at every level of the distribution system. Channel adjustments generally involve one of the three possible moves : add or drop individual intermediaries add or drop particular marketing channels develop a totally new way of distributing and selling goods within a particular market The most difficult adjustments are those whose implementation necessitates revising the overall channel strategy. Such decisions would require changes in at least three of the four marketing mix decision areas; that is, product, promotion, and of course, distribution. Price will probably be changed, as well. The consequences associated with each channel adjustment would also be significant. Three specific types of channels modification are those associated with product lifecycles, customer-driven refinement, and the need for multi-channel systems. Product Lifecycle Changes Many companies either fail to recognise or do not act on the fact that the distribution and selling requirements for a product change over its lifecycle. No single channel design will be appropriate during the entire product lifecycle. Products that are ‘new to the world’ require a specialised channel design that can provide technical assistance as bugs are worked out and missionary efforts as new users are developed within the marketplace. To justify all these educational efforts, distributors may demand an exclusive arrangement. As a product matures, becoming more standardised and better known, less specialised knowledge and efforts are needed to sell it. Manufacturers can then expand the number of intermediaries distributing the item, as buyers invariably switch to lower-cost channels. Introductory Stage : Service utility, eg. Boutiques Growth Stage : Selection utility, eg. Better department stores Maturity Stage : Lot size utility, eg. Merchandisers Decilne Stage : Convenience utility , eg. Offprice outlets Customer-Driven Refinement of Existing Chanels The capability of any channel that is not modified decreases as time passes. Gaps inevitably arise between an existing channel and an ideal system. Eventually, customers will switch to those distribution systems that deliver the sought-after benefits and services. To be successful, marketing organisations must be aware of these customer-driven changes and be willing to switch as well. Yet, channels of distribution are difficult to change. Proposed changes often meet resistance and implemented changes sometimes encounter outright subversion. A customer – driven approach to channels system modification Step 1 : Determine what target customers would like to have in the way of a channel services if no constraints existed. Step 2 : Conceptualise alternative channel structures (designs) that would provide the types of channel services referred to in Step 1. Step 3 : Measure and classify the feasibilty and cost of these alternative channel designs. Step 4 : Collect the manufacturing firm’s’ executives’ objectives for the firm’s distribution system. At this point, it is likely that certain principles which must be observed will be brought to attention. Step 5 : Compare the available channel design options given management’s criteria on the
one hand and the customer’s ideal system on the other. Step 6 : have selected outside experts review management’s key assumptions. This step allows management to understand the costs of their assumptions and constraints as well as the gains and risks of changing them. Step 7 : Close the gaps between the ideal system, the management-bound system, and the current system so that the channel will be more customer-driven. This task is “on” management, which has to agree on what changes it is willing to make. Step 8 : Develop a plan describing how the agreed-upon changes will be implemented. Growth of Multi-channel Marketing Systems This type of channel modification relates the recent growth of multichannel marketing systems. In the past, many manufacturers sold through a single channel. Today, with the growth of more precise segmentation methods, many firms are adopting multichannel marketing. Multichannel marketing occurs when a single firm uses two or more marketing channels to reach one or more segments. This practice is also known as Dual Distribution. By pursuing more segments, firms usually achieve increased market coverage, lower distribution cost, and more specialised marketing efforts. Firms often add a channel to reach customer segments that their current channel cannot reach. On othe occassions, organisations add distribution channels to reduce their costs of goods sold. (eg. Telemarketing). Or, channels may be added because the intermediary’s marketing strengths fit the firm’s needs. Companies also establish different channels to sell to different-sized customers. Direct sales may be best for handling larger customers. By contrast, a telemarketing company that features a field sales force supplement on an as-needed basis may prove best for dealing with smaller customers and prospects. Such a solution is often attractive because the producing firm can contact and service more customers at a cost and customisation level that is appropriate to each. New channels typically introduce more conflict and control problems into the distribution system. Conflicts can arise when two or more channels end up vying for the same customers, and control problems can arise when new channels are more independent than older ones. DESIGNING CHANNELS TO CAPTURE CHANNEL POSITIONS A channel position is reflected in the reputation a channel member earns among its current and potential intermediaries for supplying market offerings, financial returns, programmes and systems that are better than those offered by competing channel members. To succeed in today’s market, marketers must gain a reputation for providing their customers superior value. A reputation for furnishing such value is reflected in the position firms enjoy in the marketplace. Intermediaries may easily carry a hundred lines, sometimes even those of direct competitors. Therefore, manufacturers and wholesalers should strive to provide intermediaries with superior value relative to outcomes offered by competing channel members. Value may come from the resale of products, from support programmes and incentives, or perhaps, the channel relationship itself. This is known as the pursuit of a Sustainable partnership advantage. Over time, channel partnership advantages make intermediaries more dependant on their channel partner. In turn, intermediaries themselves will be more willing to contribute to a partnership/relationship orientation through improved marketing efforts on the producer’s behalf. Turning Industrial Channel Intermediaries into Channel Partners Making Multilevel Calls Working the Counter : Here, the sales reps spend an entire day with each distributor,
working behind the counter in order to understand the distributor’s concerns, problems and opportunities. Distributor Marketing steering Committee : This group meets on a regular basis to discuss problems, trends and opportunities. Annual retreats : Here, several young or relatively inexperienced distributor managers and a similar group of the firm’s salespeople are chosen to attend and interact together in educational seminars and social outings. Annual Mail Surveys : In these surveys, the distributors are asked to rate the firm’s performance on key dimensions. Feedback is provided to the distributor respondents. Newsletters and Videotapes : Distributors could also be informed about new products and new product modifications through newsletters and videotapes. Photocopies of distributor invoices are also collected and analysed. From this analysis, customised advice on how various distributors might improve their sales is provided. Formal Distributor Marketing Plans : A distrbutor marketing manager may be appointed who works with distributors to produce formal distributor marketing plans.
REAL WORLD CHANNEL DESIGN The typical channel institution’s owner or manager makes decisions and evaluates options in a much narrower context and shorter time frame than most channel design theories would allow. Such circumstances, in fact, reinforce the reasons why channel managers should carefully weigh and continuously evaluate their channel design. Better designed channels invariably enjoy advantages. Less intensive and more harmonious contacts among channel members, fewer duplications of efforts, greater standardisation of those activities performed at different market levels, less reliance on fewer product lines, faster and better communications, lower-risk operations, more introduction of advanced technologies, and higher productivity all emerge from effective design. Each advantage leads directly to greater efficiency and profitability for the better-designed and more effectively coordinated channel. Selecting the right intermediaries, assigning them the proper functions, and formulating the channel structures necessary to ensure that everyone fulfils their responsibilities will go a long way toward allowing a firm to capture – and hold onto – a channel position.
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