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CHAPTER

7
Marketing Channel Strategy and Management

2010 Pearson Education, Inc. publishing as Prentice Hall

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AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:


1. Describe the nature of a marketing channel and their functions as intermediaries.

2. Distinguish between traditional and electronic marketing channel designs.


3. Identify the factors organizations use to select and manage a single or multiple marketing channel(s).
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AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: 4. Describe the role intermediaries have in the marketing channel selection process.
5. Discuss how organizations modify marketing channel decisions.

2010 Pearson Education, Inc. publishing as Prentice Hall

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MARKETING CHANNELS

A marketing channel consists of individuals and firms involved in the process of making an offering available for consumption or use by consumers and industrial users. Channels link the producer and its buyers:
Producer Marketing Channel Intermediaries Consumers

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MARKETING CHANNELS
Marketing channels affect an organizations:
Segmentation Strategy Communications Strategy Pricing Strategy Offering Strategy Determines whether its chosen target markets are reached Dictates its advertising, sales promotion, direct marketing, etc. activities Influences its markup and discount policies Impacts its:
Branding policies Willingness to stock and customize offerings

Ability to augment offerings


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MARKETING CHANNELS
Go-to-Market Strategy

Marketers use this term to describe how organizations select and employ marketing channels to cost-effectively deliver a value proposition to each of its target markets.

2010 Pearson Education, Inc. publishing as Prentice Hall

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CHAPTER 7: MARKETING CHANNEL STRATEGY AND MANAGEMENT

THE CHANNELSELECTION DECISION

2010 Pearson Education, Inc. publishing as Prentice Hall

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THE CHANNEL-SELECTION DECISION


Marketers must make these marketing channel decisions regarding intermediaries:
Type Location Density Functions

Conduct a market analysis to identify the target markets served and their buying requirements that will be served by prospective marketing channels
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THE CHANNEL-SELECTION DECISION


Marketing Channel Design

The number of levels in a marketing channel is determined by the number of intermediaries between the producer and ultimate buyers or users As the number of intermediaries between the producer and the ultimate buyer increases, the channel increases in length
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EXHIBIT 7.1: TRADITIONAL MARKETING CHANNEL DESIGNS


Producer

Brokers or Agents

Distributors or Wholesalers

Retailers or Dealers

Ultimate Buyers
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THE CHANNEL-SELECTION DECISION


Direct vs. Indirect Distribution

Marketers must decide whether to use:


Intermediaries to reach target markets

Contact buyers directly via either channel strategy:


Producer Producer

Own Sales Force

Own Distribution Outlets

Own Marketing Website

Ultimate Buyers
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Ultimate Buyers
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THE CHANNEL-SELECTION DECISION


Direct vs. Indirect Distribution

Marketers employ direct distribution when:


Buyers of target markets are easily identifiable Personal selling is a major component of the organizations communication program The organization has a wide variety of offerings for the target market Resources are available to satisfy target market requirements normally handled by intermediaries
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THE CHANNEL-SELECTION DECISION


Direct vs. Indirect Distribution

Marketers employ direct distribution when:


Intermediaries are not available for reaching target markets Intermediaries do not possess the capacity to service the requirements of target markets
Offerings possess certain characteristics:
Technically Sophisticated Nonstandardized
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High Unit Value


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THE CHANNEL-SELECTION DECISION


Direct vs. Indirect Distribution

Marketers employ direct distribution when:


The organizations marketing strategy dictates:
An aura of exclusivity An emphasis on buying direct

The organization seeks to differentiate its offering from others distributed through intermediaries

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THE CHANNEL-SELECTION DECISION


Direct vs. Indirect Distribution

The decision to employ direct distribution to ultimate buyers requires the absorption of all functions performed and costs incurred by the intermediaries bypassed Similarly, intermediaries who wish to acquire functions typically performed by channel members above or below them must also absorb their costs
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THE CHANNEL-SELECTION DECISION


Electronic Marketing Channels

Employ some form of electronic communication, including the Internet, to make offerings available for consumption or use by consumers and industrial users Many services can be distributed through electronic marketing channels, while others still involve traditional intermediaries
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EXHIBIT 7.2: REPRESENTATIVE ELECTRONIC MARKETING CHANNELS

Book Publisher

Auto Manufacturer

Commercial Airline

Computer Manufacturer

Book Distributor

Auto Dealer

Amazon.com (Virtual Retailer)

Auto-By-Tel (Virtual Broker)

Travelocity (Virtual Agent)

Ultimate Buyers
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THE CHANNEL-SELECTION DECISION


Marketers ask three questions when selecting the type and location of retail outlets:
Target Market Coverage Buyer Requirement Satisfaction Profitability Which retailers will provide the best coverage of the target market? Which retailers will best satisfy the target markets buying requirements? Which retailers will be the most profitable?
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THE CHANNEL-SELECTION DECISION


Target Market Coverage

Three degrees of distribution density are:


Intensive Distribution Exclusive Distribution Selective Distribution

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TARGET MARKET COVERAGE: DISTRIBUTION DENSITY


Intensive Distribution
The firms offerings are sold through as many retail outlets as possible One retail outlet in a geographic area or one retail chain sells the firms offerings
Is the defined trade area of the retailer Some retailers sign exclusive distribution agreements with manufacturers

Exclusive Distribution

Franchising

A marketer gives a retailer exclusive rights to sell its offerings in a defined area in return for performing specific marketing functions The marketer selects a few retail outlets in a specific area to carry its offerings
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Selective Distribution

THE CHANNEL-SELECTION DECISION


Target Market Coverage: Distribution Density

Effective distribution means that a limited number of outlets at the retail level account for a significant fraction of the market potential Example: A marketer distributes the product through 40% of available retail outlets, but these outlets account for 80% of the market
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THE CHANNEL-SELECTION DECISION


Target Market Coverage: Distribution Density

Distribution density selection rests on:


How buyers purchase the manufacturers offering
The amount of control over resale desired by the manufacturer

The degree of exclusivity intermediaries seek


The contribution of intermediaries to the manufacturers marketing effort
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THE CHANNEL-SELECTION DECISION


Target Market Coverage: Distribution Density
This strategy is chosen when:

Intensive Distribution

The offering is purchased frequently

Buyers wish to expend little effort purchasing it


Example: Convenience goods

Exclusive Distribution
Selective Distribution

These limited-distribution strategies are chosen when:


The offering requires personal selling at the point of purchase Example: Shopping/specialty goods
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THE CHANNEL-SELECTION DECISION


Buyer Requirement Satisfaction

Marketers must select channels that satisfy the interests buyers want fulfilled when purchasing a firms offerings These interests fall into four categories:
Information Convenience Variety Attendant Services
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2010 Pearson Education, Inc. publishing as Prentice Hall

THE CHANNEL-SELECTION DECISION


Buyer Requirement Satisfaction
Information

Is important when buyers:


Have limited knowledge Desire specific data about an offering

Communicate with buyers through in-store displays, demonstrations, and personal selling
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THE CHANNEL-SELECTION DECISION


Buyer Requirement Satisfaction
Convenience

Has different meanings for buyers at outlets:


Proximity Driving time Minimal time and hassle

For Internet purchases, it means:


Websites are easy to locate and navigate The 8-second rule
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THE CHANNEL-SELECTION DECISION


Buyer Requirement Satisfaction
Variety

Reflects buyers interest in having numerous competing and complementary items from which to choose Is evident in both the breadth and depth of products and brands carried by intermediaries
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THE CHANNEL-SELECTION DECISION


Buyer Requirement Satisfaction
Attendant Services

Are an important buying requirement for products such as large household appliances that require delivery, installation, and credit

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THE CHANNEL-SELECTION DECISION


Profitability

Profitability is determined by the:


Margins earned (revenues costs) for each channel member Channel as a whole Extent to which channel members share costs

Costs include distribution, advertising, and selling expenses associated with different types of marketing channels
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THE CHANNEL-SELECTION DECISION: SECOND-LEVEL INTERMEDIARIES


Wholesalers Brokers
Industrial Distributors

Specialty General Merchandise

Carries a limited line of items within a product line Carries a wide assortment of products

General Line

Carries a complete assortment of items in a single retailing field

The issue to resolve for marketers is which of these wholesalers sell to the desired retail outlets
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THE CHANNEL-SELECTION DECISION


Wholesalers The location of wholesalers is based on:
Transportation costs The requirement for fast delivery service

The density of wholesalers is influenced by:


The density of the retail network Wholesaler service capabilities

As retail outlet density increases, wholesaler density necessary to service them also increases
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CHAPTER 7: MARKETING CHANNEL STRATEGY AND MANAGEMENT

DUAL DISTRIBUTION AND MULTI-CHANNEL MARKETING

2010 Pearson Education, Inc. publishing as Prentice Hall

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DUAL DISTRIBUTION

Dual distribution occurs when an organization distributes its offering through two or more different marketing channels that may or may not compete for similar buyers.

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DUAL DISTRIBUTION
A firm uses dual distribution because it:
Produces its own brand (for resellers) as well as a private store brand (for a specific retailer) May distribute directly to a large-volume retailer and use wholesalers for small-volume retailers Considers geography:
Uses it own sale force in concentrated markets Uses intermediaries elsewhere

Employs a multibrand strategy


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DUAL DISTRIBUTION
The viability of dual distribution is situational and depends on the relative strengths of manufacturers and retailers If a manufacturer decides to distribute directly to ultimate buyers in a retailers territory:
The retailer may drop the firms offering lines or May not drop them if they too important to it or

May not drop them if competitive offerings have a strong presence in the market

If a retailer accounts for a significant sales volume, dropping the lines will negatively affect the firm
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MULTI-CHANNEL MARKETING

Multi-channel marketing involves the blending of an electronic marketing channel and a traditional channel in ways that are mutually reinforcing in attracting, retaining, and building customer relationships.
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MULTI-CHANNEL MARKETING
Electronic Marketing Channels

A firm uses multi-channel marketing because:


The addition of an electronic marketing channel can provide incremental revenue
An electronic marketing channel can leverage the presence of a traditional channel It can satisfy buyer requirements
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MULTI-CHANNEL MARKETING
Electronic Marketing Channels

Multi-channel marketing is viable if an electronic marketing channel:


Generates incremental revenue Doesnt cannibalize sales from traditional intermediaries Reaches a different market segment than the traditional channel Reinforces with traditional channels in attracting, retaining, and building customer relationships
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MULTI-CHANNEL MARKETING

Disintermediation is the practice whereby a traditional intermediary member is dropped from a marketing channel and replaced by an electronic storefront.
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MULTI-CHANNEL MARKETING
Disintermediation

Is considered more serious than cannibalization by intermediaries it affects reseller survival May cause firms to avoid multi-channel marketing due to complaints and threats by intermediaries, particularly retailers, to discontinue carrying their products and delivering their services
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CHAPTER 7: MARKETING CHANNEL STRATEGY AND MANAGEMENT

SATISFYING INTERMEDIARY REQUIREMENTS AND TRADE RELATIONS


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SATISFYING INTERMEDIARY REQUIREMENTS


Intermediaries

Choose the suppliers they want to deal with

Are concerned with the adequacy of a firms offerings in improving the assortment for its own target markets Seek marketing support from manufacturers:
Wholesalers Industrial Distributors Want promotional assistance Want technical assistance
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SATISFYING INTERMEDIARY REQUIREMENTS


The following contribute to long-term exchange relationships between a manufacturer and their intermediaries:
Trade Discounts Fill-Rate Standards Cooperative Advertising

Lead-Time Requirements

Offering Exclusivity

Profit Margins

2010 Pearson Education, Inc. publishing as Prentice Hall

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SATISFYING TRADE RELATIONS


Channel Conflict

Marketing managers recognize that conflicts often occur in trade relations

Channel conflict arises when one channel member (such as a manufacturer or an intermediary) believes another channel member is engaged in behavior that is preventing it from achieving its goals
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SATISFYING TRADE RELATIONS


Channel Conflict Occurs when:
A channel member bypasses another member and sells or buys direct There is a dispute over how profit margins are distributed among channel members

Manufacturers believe wholesalers or retailers are not giving their offerings adequate attention
A manufacturer engages in dual distributionparticularly when different retailers or dealers carry the same brands
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SATISFYING TRADE RELATIONS


Channel Power

A channel captain is a member of a marketing channel who seeks to coordinate, direct, support, and influence the behavior of other channel members to reduce the likelihood of conflict.
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CHANNEL POWER
Channel Power

Can take these forms:


Economic

The ability of a firm to reward or coerce other members due to its strong financial position or consumer franchise A distinctive competence that provides a value-added service to channel members Resellers compete with others to carry a firms highly valued brand offerings The ability of one channel member to legally dictate how another behaves
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Expertise Channel Member Identification Legitimate Right

CHAPTER 7: MARKETING CHANNEL STRATEGY AND MANAGEMENT

CHANNEL MODIFICATION DECISIONS

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CHANNEL-MODIFICATION DECISIONS
Bases of the channel modification decision:
Provide the best target market coverage Satisfy the target markets buying requirements Maximize revenue and minimize cost

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CHANNEL-MODIFICATION DECISIONS: QUALITATIVE FACTORS


When modifying existing or adding new channels, ask :
1. Will the change improve the effective coverage of the target markets sought? 2. How will the change improve the satisfaction of buyer needs? 3. Which marketing functions must be absorbed in order to make the change? 4. Does the firm have the resources to perform the new functions? 5. What effect will the change have on other channel members? 6. What will be the effect of the change on the achievement of long-range organizational objectives?
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CHANNEL-MODIFICATION DECISIONS: QUANTITATIVE FACTORS


Consider the financial impact of a channel modification decision If a firm eliminated its wholesalers, it would have to assume the costs of:
Sales to retail accounts Sales administration

Carrying the inventory


Delivery and storage Carrying the accounts receivable
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CHANNEL-MODIFICATION DECISIONS: QUANTITATIVE FACTORS


Cost of Wholesalers
Margin to wholesalers Service expense Total cost $5,000,000 500,000 $5,500,000

Cost of Distribution Centers


Sales to retailers Sales administration Inventory cost Delivery and storage Accounts receivable Total cost $1,500,000 250,000 935,000 1,877,000 438,000 $5,000,000

Which alternative should be selected? What factors could affect revenues?


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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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