You are on page 1of 55

Marketing Channels- Structure and Functions

• Book Name: Marketing Channels


– Author: Anne T. Coughlan, Erin Anderson, Louis W. Stern, Adel
I. El-Ansary
• The need to learn about marketing channels

– Gatekeeper role of marketing channel

– Channel can act as an important differentiator

– Channel experience affects end user perception

– Need to create an effective channel


Marketing Channels- Structure and Functions
• Definition of Marketing Channel
– It is a set of interdependent organizations who make a product
or service available to the end user for consumption

– Examples
• Clothes (US)
– Department stores
– Focused Specialty stores
– Factory outlets
– Online??
– Difference in India ???
Marketing Channels- Structure and Functions
– Examples
• Books (US)
– Book Store chains, Barnes & Noble
– Online, Amazon
– Discount Stores, 1 dollar store
– India Example????
– Evolution of Channels

• Demand Side Factors

– Facilitation of Search (end user & seller)

– Adjustment of Assortment Discrepancy


» Manufacturer : large quantity of a limited variety of goods
» End User: Limited quantity of a wide variety of goods
Marketing Channels- Structure and Functions
– Demand Side Factors

• Adjustment of Assortment Discrepancy


– Manufacturer : large quantity of a limited variety of goods
– End User: Limited quantity of a wide variety of goods

– Assortment functions
» Sorting, breaking a heterogeneous supply into separate
homogeneous stocks e.g. Wheat by quality
» Accumulation: bringing similar stocks together
» Allocation: breaking down a homogeneous supply into smaller lots
» Assorting: collecting related goods for resale
– Utilities created: Possession, Place and Time
Marketing Channels- Structure and Functions
• Supply Side Factors

– Routinization of Transactions
• Order, value and payment
• Leads to efficiencies
• Inventory replenishment programs
– Reduction in No. of Contacts
• Manufacturer only to
• Manufacturer , wholesaler and retailer
• Online – disintermediation but also leads to competing with retail
chains, important in experience goods
Marketing Channels- Structure and Functions

• Role of Marketing Channel


– Manages several Flows between Producers,
wholesaler and retailers
• Physical Possession
• Ownership
• Promotion
• Negotiation
• Financing
• Risking
• Ordering
• Payment
Marketing Channels- Structure and Functions

• Key Members of a Marketing Channel


– Manufacturers
– Intermediaries
• Wholesalers
• Retailers
• Specialized
– End Users
• Individual Consumers
• Business organizations
– Channel Captain
Marketing Channels- Structure and Functions

• Key Members of a Marketing Channel


– Manufacturers
• Branded
• Private Label
• Products and Services (insurance)
• Role of manufacturer
– Intermediaries
• Wholesale
– Distributors, Manufacturer’s reps, agents and brokers
• Retail
– Department stores, specialty stores, franchises etc.,
• Specialized
– Insurance, finance, credit card, logistics, ad firms etc.
Marketing Channels- Structure and Functions

• Key Members of a Marketing Channel


– End Users
• Role as a financer, stockist, risk of spoilage etc.
• Channel Formats
– Manufacturer based Channel Formats
• Manufacturer direct
• Manufacturer Outlets
• Licensing (Importing)
• Broker
Marketing Channels- Structure and Functions

• Channel Formats
– Retailer based channel formats
• Franchise
• Cataloguers
• Food Courts
• Department stores, shoppers stop
• Mass Merchandisers . Wal Mart
• Specialty Stores
• Convenience stores
Marketing Channels- Structure and Functions

• Channel Formats
– Service Provider based channel formats
• Contract warehousing
• Direct Mailer
• VARs
• Finance Companies
Marketing Channels- Structure and Functions

• Framework for Channel Analysis


– Designing the right channel
– Implementing the design

– Channel Design: Segmentation


• Service Outputs
– Bulk breaking (allocation), Spatial Convenience, waiting and
delivery time, assortment and variety, customer service,
information
– Example of a book buyer as vacationer and as a student having
different needs
Marketing Channels- Structure and Functions

• Framework for Channel Analysis


– Channel Design: Channel Structure Decisions
• Who are the channel members
• Whether to use independent distributors, financing
companies, credit card tie-ups etc.
• Exact identity of the channel member
• How many also known as channel intensity decision
Marketing Channels- Structure and Functions

• Framework for Channel Analysis


– Channel Design: Splitting the Workload
• ABC analysis
– Channel Design: Degree of Commitment
• Vertical integration
– Channel Design: Gap Analysis
• Managerial Bounds
• Environmental bounds, cigarettes
• Competitive benchmarks
• Difference between optimal channel and existing channel:
gap
Marketing Channels- Structure and Functions
• Framework for Channel Analysis

– Channel Implementation: Identifying Power Sources


• Inducing all the channel members to perform
• Using channel power
– Channel Implementation: Identifying Channel Conflicts
• Channel members goals and objectives (Goal conflict)
• Domain of action and responsibility in the channel
• Differences in the perceptions of the market place
• Differentiate between poor channel design and design conflict
leading to underperformance
• Use power to resolve: give discount or increase pull
Marketing Channels- Structure and Functions

• Framework for Channel Analysis


– Channel Implementation: Channel Coordination
• Coordination of interests and actions
• Coordination of performance
Marketing Channels: Segmentation & Service Outputs

• Bucklin’s model for determining channel structure

– Service Outputs
• Bulk Breaking
• Spatial Convenience
• Waiting or Delivery time
• Product Variety

– Two additional
• Customer service
• Information Provision
Marketing Channels: Segmentation & Service Outputs

• Bulk Breaking
– Reduces storage costs, increases convenience, per unit cost
– More the bulk breaking, higher the costs
– When more or less bulk breaking is required
– Home v/s Travel
– BPL class would require what??

• Spatial Convenience
– Reduces transportation, time taken, and search costs
– ATMs
– Cars for service to be picked up from home
– Does high traffic, bad roads affect this service output
Marketing Channels: Segmentation & Service Outputs

• Waiting Time:
– Objective is to reduce waiting time for sale or service
– Faster the delivery more the costs and vice versa
– Requirements vary

• Product variety
– Greater the product variety higher the service output & higher the costs
– Breadth & Depth parameters, varying requirements
– Assortment
– Right Assortment & Quick delivery could be a potent combination
Marketing Channels: Segmentation & Service Outputs

• Customer Service
– Eases the whole process
– Increases costs, sales and satisfaction
– Absence ?? Ginger??

• Information Provision
– Educates end users about product attributes, usage capabilities, pre-
purchase and post-purchase services
– Product demos
– Increases costs
– Online option
Marketing Channels: Segmentation & Service Outputs

• Factors in play while meeting service output demands

– Cost,
• high cost leads to profit reduction or customer loss
• Low cost leads to less profit and customer gain

– Competition
• At same service output level, price needs to better
• At same prices, better service output is required
Marketing Channels: Segmentation & Service Outputs

• Ease of Entry

– Music CDs from shops


– Music Online
• Assortment
• Spatial Convenience
• Quicker delivery

• Other Marketing Mix elements


Channel Flows & Efficiency Analysis
• Market Flows • Costs Represented

• Physical Possession • Storage & delivery costs


• Ownership • Inventory Carrying Costs
• Promotion • Selling, advertising, sales
promotion, publicity, PR
• Negotiation • Time & Legal Costs
• Financing • Credit, terms & conditions of sale
• Risking • Price guarantees, warranties,
insurance, repair, after sale
service, spoilage etc.
• Ordering
• Order processing costs
• Payment
• Collections, bad debt cases
Channel Flows & Efficiency Analysis
• Reverse Logistics (Difference between Forward &
Reverse Logistics)
• Factor

• Volume Forecasting Difficult for returns


• Transportation Forward: Bulk shipping
Reverse: Variable
• Product Quality Forward: Uniform
Reverse: Variable
• Product Packaging Forward: Uniform
Reverse: Variable
Channel Flows & Efficiency Analysis
• Reverse Logistics (Difference between Forward &
Reverse Logistics)
• Factor

• Destination Forward: Clear cut


Reverse: Variable
• Cost Transparency Forward: High
Reverse: Less Transparent
Channel Flows & Efficiency Analysis
• Reverse Logistics Channel Flows

• Physical Possession Issues


• Ownership Issues
• Promotion Issues
• Negotiation Issues
• Financing Issues
• Risking Issues
• Payment Issues
Channel Flows & Efficiency Analysis
• Zero Based Channel Design

• Equity Principle: Profit Shares


– See efficiency template on page 95, figure 3.3
Channel Structure & Intensity
• Channel Structure Description
– Type of Members
– Intensity or Number of Members of each type
– Number of distinct channels
• Channel Design Challenges
– Level of intensity
– How many different forms to pursue, web, stores,
third party etc.
– Should manufacturer have its own or third party
channels
Channel Structure & Intensity
• Coverage & Assortment
– Low involvement purchases (tissue papers etc.) & for
convenience goods, higher the coverage, better it is for the
manufacturers
– For downstream, more coverage is not considered positive as it
leads to intra-brand competition. Is it desirable???
– Channel members Tactics to combat intensive distribution
• Go in for a substitute less intensely distributed
• May discontinue a product category
• Keep a token presence but Attempt to convert the customer
to another brand
Channel Structure & Intensity
• Intensive Coverage issues
– Bait & Switch marketing technique
– Free Riding ( a renowned store example)

– Can be combated by generating pull


Channel Structure & Intensity
• Threat of Complacency in limiting intensity
• Nature of Product Category

– Convenience goods
– Shopping goods like small appliances
– Specialty Goods like Home Theaters

• What happens when a product category is new??


Channel Structure & Intensity
• Relationship between brand positioning on quality
dimension and intensity

• Artificial Scarcity strategy (Nike)

• Can Restrictive Contracts (like ambitious goals etc.)


work??

• What would a niche product require??


Channel Structure & Intensity
• How can manufacturer create influence over
channel members?
– Selective distribution

• Reverse influence
Channel Structure & Intensity
• Manufacturer specific investments by Channel
Members
– Idiosyncratic Knowledge: Unique
– Unusual handling or storage
– Brand specific parts and know-how
– Customer Training
– Installation and post warranty handling knowledge
Channel Structure & Intensity
• Dependence Balancing: Trading territory
exclusivity for category exclusivity
• Influence of Web on buyers: knowledge thru web
& buy at the best bargain
Gap Analysis
• Environmental bounds
– Electric Supply
– Malls to close on Tuesday
• Managerial bounds
– Indifference of personnel to new techniques
– Expertise & Knowledge levels
• Types of Gaps
– Demand side
• When a service output supplied is greater than amount
demanded
• When a service output supplied is less than amount
demanded
Gap Analysis
• Types of Gaps
– Supply side
• Cost of providing a service output is high when it can be
lower (particularly in reverse logistics) , a cable manufacturer example
• Bucklin’s principle of postponement & speculation
(manufacturer v/s consumer, books case, retail sale of CDs v/s downloads)

• Closing the Gaps


– Demand side gaps
• Expand/ Retract the level of service output
• Offer multiple/ tiered service output levels for different
segments
• Altering the list of segments targeted
Gap Analysis
– Supply Side Gaps
• Changing the roles of current channel members
• Investing in new distribution technologies to reduce cost
• Improve the functioning of the channel
– Tackle managerial bounds
• Managerial indifference to change (Product Returns)
• bring in experts to augment expertise
Channel Power
• How to define Dependence

– B depends more heavily on A if,

• B gets some Utility (value, benefits etc.) from A

• B has fewer alternative sources for that utility

– Are both requirements essential??


Channel Power
• Approximate Methods to measure power

– %age of sales and profits retailer derives from your


product

– How well you perform your role vis-à-vis competitors


(utility may be missing but excellent service being rare is unique)
Channel Power
• French & Raven Approach
– Five Sources of Power

• FIRST Reward Power (two conditions)

– Has the ability to reward


– Will Reward and share the benefits
– Requirements
» Manufacturer must offer a quality service that is valued by end
user
» At a price that end user is willing to pay
» Saleable in enough quantities for financial rewards to be valued
» Backed by a minimum required producer reputation
» And should be delivered reliably
» CASE STUDY
Channel Power
• Second: Coercive Power
– If B Fails to perform as per A’s requirement, A can
punish B
• Slowing down of shipment
• Remove exclusivity either territory or category
• Reduce margins etc.
• Wal Mart forces bulk breaking on its suppliers e.g. Socks
• Wal Mart forces suppliers to accept EDI
– Leads generally over long run to
» Target will get less satisfied by money returns
» Target will become less satisfied by non-financial side
» Target will see relationship as conflict driven
Channel Power
• Should influencer care about target’s reactions?

– Short Term: Target is less cooperative


– Medium Term: Target is less trusting
– Long Term: Target feels less committed

– Should coercion power not be used at all


• EDI??
Channel Power
• THIRD: Expert Power
– Once expertise is transferred, this power weakens considerably

• Dole out expertise in small quantities periodically


• Invest in continually new learning
• Transmit only customized information

– Using expertise power


• Channel member must be trusted
• Difficult to form relationships with experts
• Independence mindedness of channel members
Channel Power
• Legitimate Power has two sources
– Law or legal legitimate power
• Patents, trademarks, franchise agreements etc.
– Norms or values, traditional legitimate power
• Solidarity
• Role Integrity
• Mutuality
– Cost benefit analysis before enforcing
Channel Power
• Referent Power
– When A can act as a standard of reference for B and hence B
may seek association with A
– A shares its prestige by allowing B to carry its goods

• Balance of Power
• Net Dependence
• Imbalanced Dependence – Strategies
– Develop alternatives
– Organize a coalition
– Exit the situation
Channel Power
• Converting Latent power to exercised power
– Promise Strategy
– Threat Strategy
– Legalistic Strategy
– Request Strategy
– Information exchange strategy
– Recommendation strategy
Channel Conflict
• Conflict v/s Competition

• Measuring Conflict
– Count the issues of relevance, car dealer
– Assign importance to each issue, (Im)
– Frequency of discussion & disagreement, (Fr)
– Intensity of dispute, (In)
• Conflict = Im x Fr x In for each issue
• Index of Conflict = Sum of Conflicts on each issue
Channel Conflict
• Conflict is desirable, Functional Conflict
– Increases performance levels

• Intense Conflict needs to be resolved


Channel Conflict
• Major Sources of Conflict

– Competing Goals,
• CEOs V/s Owners
• Principals V/s Channel Partners
– Margin Per unit
– Inventory
– Marketing costs sharing
Channel Conflict
• Major Sources of Conflict

– Differing Perceptions of Reality


• The attributes of product/service
• Applications it serves and segments
• Competition
• Manufacturer is away from customers and reseller is away
from manufacturing
Channel Conflict
• Major Sources of Conflict

– Clash over Domains


• Market Research
• Quantum of Pre & Post sales support
• Inventory
Channel Conflict
• Major Sources of Conflict

– Clash over Market Domains


• Intra-channel Competition
– Intensive Distribution
– Reseller representing Competitors

• Multiple Channels Clash


– Biggest threat : Web

• Unwanted Channels
– Gray marketing
Channel Conflict
• Dangers of Conflict

– Conflict begets More Conflict


– Coercive power gets utilized

• Conflict Resolution Strategies

– Information Intensive Mechanisms


– Third party mechanisms, Mediators and Arbitrators
– Building relational norms
Channel Conflict
• Styles of Conflict Resolution
– Avoidance
– Accommodation
– Competition