PowerPoint Slides to Accompany

Marketing Channels, 7 th Edition

Anne T. Coughlan, Northwestern University

Erin Anderson, INSEAD
Louis W. Stern, Northwestern University
Adel I. El-Ansary, University of North Florida
 Chapter 1
Marketing Channels:
Structure and Functions
FIGURE 1-1: CONTACT COSTS TO REACH THE MARKET WITH AND WITHOUT
INTERMEDIARIES

Manufacturers
Selling Directly

40 Contact Lines

Retailers

Manufacturers Selling Through One Wholesaler

Wholesaler

Retailers 14 Contact Lines

Manufacturers Selling Through Two Wholesalers

Wholesalers

28 Contact Lines

Retailers
 FIGURE 1.2: MARKETING FLOWS IN CHANNELS

Physical Physical Physical

Possession Possession Possession
Ownership Ownership Ownership

Promotion Promotion Promotion

Negotiation Negotiation Negotiation Consumers

Producers Wholesalers Retailers Industrial
Financing Financing Financing and
Household
Risking Risking Risking

Ordering Ordering Ordering

Payment Payment Payment

Commercial Channel Subsystem

FIGURE 1-3: FRAMEWORK FOR CHANNEL DESIGN AND IMPLEMENTATION

Channel Design Process: Channel Implementation Process:

SEGMENTATION:
Recognize and respond to target customers’ CHANNEL POWER: CHANNEL CONFLICT:
service output demands Identify sources for all Identify actual and potential
channel members sources

Decisions About
Efficient Channel Response:
MANAGE/DEFUSE
CHANNEL STRUCTURE: CONFLICT:
What kinds of intermediaries are in my Use power sources strategically,
channel? subject to legal constraints
Who are they?
How many of them?
SPLITTING THE WORKLOAD:
With what responsibilities? GOAL:
DEGREE OF COMMITMENT: Channel Coordination
Distribution alliance?
Vertical integration/ownership?
GAP ANALYSIS:
What do I have to change?

INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS:

Retailing, Wholesaling and Logistics, Franchising
 TABLE 1-1: SERVICE OUTPUT DEMAND DIFFERENCES
(an example of segmentation in the book-buying market)

Browser buying best-sellers to take on vacation Student buying textbooks for fall semester at college
Service Output Service Output
Descriptor Demand Level Descriptor Demand Level
Bulk- “I’m looking for some ‘good read’ “I only need one copy of my
Medium High
breaking paperbacks to enjoy.” Marketing textbook!”

Spatial “I have lots of errands to run before

“I don’t have a car, so I can’t
convenienc leaving town, so I’ll be going past Medium High
travel far to buy.”
e several bookstores.”

Waiting “I’m not worried about getting the

“I just got to campus, but classes
and books now… I can even pick up a
Low are starting tomorrow and I’ll High
delivery few when I’m out of town if need
need my books by then.”
time be.”

Assortment “I want the best choice available, so “I’m just buying what’s on my
High Low
and variety that I can pick what looks good.” course reading list.”

Customer “I like to stop for a coffee when book “I can find books myself, and
High Low
service browsing.” don’t need any special help.”
“I value the opinions of a well-read
“My professors have already
Informatio bookstore employee; I can’t always
High decided what I’ll read this Low
n provision tell a good book from a bad one
semester.”
before I buy.”
 FIGURE 1-4: ORGANIZATION OF THE TEXT

Channel Design Channel Implementation

Process: Process:

SEGMENTATION: Chapter 2
CHANNEL POWER: CHANNEL CONFLICT:
 Chapter 6 Chapter 7
Decisions About
Efficient Channel Response:
MANAGE/DEFUSE
CHANNEL STRUCTURE:
CONFLICT:
Chapter 4
Chapters 6, 7, 8, 9, 10
SPLITTING THE WORKLOAD:
Chapter 3
DEGREE OF COMMITMENT:
Chapters 8, 9
GAP ANALYSIS:
GOAL:
Chapter 5
Channel Coordination

INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS:

Chapters 11, 12, 13
 Chapter 2
Segmentation for Marketing
Channel Design: Service
Outputs
TABLE 2-1: ESTIMATED NUMBER OF U.S. CONSUMERS USING ONLINE BILL
PAYMENT, VARIOUS YEARS
YEAR # U.S. CONSUMERS PAYING AT LEAST 1 % OF U.S. POPULATION (est.)
BILL ONLINE (millions, est.)

1998 3.4 1.3%

… … …

2001 20.4 7.3%

2002 25.5 9.1%

2003 35 12.5%

2004 65 23%

Notes:
1998: in 1998, just 2% of U.S. households used online bill payment, according to Tower Group (Bielski 2003). From U.S. Census data, in 1998, there were 100
million households in the U.S., with an average of 1.7 adults per household; thus, 2 million households or 3.4 million adults were using online bill payment in
1998.
2001: A Forrester Research report said that nearly 17 million U.S. households will pay bills online in 2002, up 41 percent from 2001 numbers (Higgins 2002).
Thus, in 2001, 12 million U.S. households paid bills online. From U.S. Census data, there were 108 million households in the U.S., with an average of 2.58
adults per household; thus, there were 20.4 million adults using online bill payment in 2001.
2002: The same Forrester Research report said that nearly 17 million U.S. households will pay bills online in 2002 (Higgins 2002), while a Tower Group report
said that 13.7% of U.S. households did pay bills online in 2002 (Bielski 2003). The table therefore reports the numbers from Bielski. There were 109 million
households in the U.S. in 2002; thus, 15 million households paid bills online. Further, there were an average of 2.58 adults per household in the U.S. in 2002
(from U.S. Census data), yielding the estimate of 25.5 million adult online bill payers in 2002.
2003 and 2004: A Gartner study cites 65 million U.S. consumers paying at least some bills online, and reports this is almost twice as many as in 2003 (Park,
Elgin et al. 2004). We therefore estimate that 35 million U.S. consumers paid bills online in 2003.
 TABLE 2-2: ONLINE BILL PAYMENT: THE CONSUMER
EXPERIENCE
OPTION: Paper Bill Payment Direct Biller Online Pay Third-Party Online Bill Payer (e.g. bank,
Quicken)
SET-UP None Consumer logs on to biller’s website; Consumer logs on to third-party website;
PROCESS: Enters information about account, name, bank Enters information about each account
account fr/which payment will be made, etc.; individually;
Picks a password, specific to this website, to Picks a password, specific to this site but common
gain access in future; across all bills paid at this site, to gain access in
Activation usually occurs within 24 hours future
BILL PRESENT- Consumer receives bill through Either through U.S. mail (see paper bill) or Arrival of electronic bill noted through e-mail
MENT TO U.S. mail in envelope containing electronic bill presentment through e-mail alert;
CONSUMER: summary of bill charges & due alert; both note payment due date Third party may/may not offer actual bill
date, payment stub, & payment presentment
envelope
CONSUMER Consumer reconciles bill with Consumer reconciles bill with receipts; Consumer visits third party’s website to view bill
BILL REVIEW paper receipts; fills out payment Visits biller website’s payment page; (if no presentment by third party) and reconcile;
AND PAYMENT stub; writes paper check; inserts Enters amount and date of payment; Enters amount and date of payment (may need up
AUTHOR- check and stub in envelope; puts [website indicates how fast payment will be to 5 days to clear payment)
IZATION: U.S. first-class stamp on made]
envelope; mails payment
CONFIRMA- Only when next bill is received Typically, e-mail confirmation of payment Typically, e-mail confirmation that payment was
TION OF does consumer learn if previous receipt the day payment is recorded made
PAYMENT TO payment was received in time
CONSUMER: (unless consumer telephones
biller)
COST TO Cost of first-class stamp; No stamp; No stamp;
CONSUMER: No cost to learn system; Initial learning time, for each biller’s system; Initial learning time, once for whole system;
Cost of time to process bill & Cost of time to check bill’s accuracy; Cost of time to check bill’s accuracy;
write check; No check writing or cost; No check writing or cost;
Cost of paper check; Risk-adjusted cost of late payment (perceived Risk-adjusted cost of late payments (moderate: up
Risk-adjusted cost of late payment low); to 5 days to clear payment)
(perceived very low) No monthly fee for payment processing May be a monthly fee (e.g., Quicken: $9.95/month
No monthly fee for payment for up to 20 bills, plus $2.49 per 5 bills thereafter;
processing but many banks now do not charge for service);
May be low cost to integrate with home financial
records (e.g., Quicken financial software program)
 TABLE 2-3: BUSINESS-TO-BUSINESS CHANNEL SEGMENTS FOR A
NEW HIGH-TECHNOLOGY PRODUCT
Respondents allocated 100 points among the following supplier-provided service outputs according to their importance to their company:

= Greatest Discriminating Attributes = Additional Important Attributes

Possible Service Lowest Total Cost/ Responsive Support/ Full-Service References and
Pre-Sales Info Post-Sales Segment Relationship Segment Credentials Segment
Output Priorities Segment
References and Credentials 5 4 6 25
Financial Stability and 4 4 5 16
Longevity
Product Demonstrations & 11 10 8 20
Trials
Proactive Advice & Consulting 10 9 8 10
Responsive Assistance During 14 9 10 6
Decision Process
One-Stop Solution 4 1 18 3

Lowest Price 32 8 8 6

Installation and Training 10 15 12 10

Support
Responsive Problem Solving 8 29 10 3
After Sale
Ongoing Relationship with a 1 11 15 1
Supplier
Total 100 100 100 100

% Respondents 16% 13% 61% 10%

Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates, 2000.
FIGURE 2-1: IDEAL CHANNEL SYSTEM FOR BUSINESS-TO-BUSINESS SEGMENTS
BUYING A NEW HIGH-TECHNOLOGY PRODUCT

Manufacturer
(New High Technology Product)

Associations,
Pre-Sales Events,
Awareness
Efforts
Third-
Dealers Party
VARs TeleSales/ Supply
Sales TeleMktg Out-
source
Internal Support
- Install, Training &
Post-Sales Service Group

Lowest
Responsive References/
Full-Service Total
Segment Support Credentials
Cost

Source: Reprinted with permission of Rick Wilson, Chicago Strategy Associates, 2000.
 TABLE 2-4: SHIPPING CHARGES FOR $150 PURCHASE OF SHIRTS
FROM LAND’S END

Buyer’s Location Shipping Method Shipping Charge Time to Delivery

United States Standard UPS $11.95 3 to 5 business days

Mexico Surface Mail $20.00 8 to 12 weeks

Mexico Priority Air $30.00 2 to 4 weeks

Mexico UPS $50.00 1 to 2 weeks

Source: www.landsend.com website.

 FIGURE 2-2: ADVERTISING COPY FOR AN AD FOR BN.COM

Advertising Copy Service Output Offered

“Really free shipping”: offers free shipping if 2 or more items Customer service
are purchased. “We make it easy and simple.”

“Fast & easy returns”: end-user can return unwanted books to a Quick delivery (for returns), spatial convenience; note implicit
bricks-and-mortar Barnes & Noble bookstore. “Just try and comparison with amazon.com, the pure-play online bookseller
return something to a store that isn’t there.”

“Books not bait”: promises no additional sales pitches to buy Assortment/variety: just books (targeting the book lover). Again,
non-book products. note implicit comparison with amazon.com.

“Same day delivery in Manhattan”: delivery by 7:00 p.m. on any Quick delivery: the offer is possible because of Barnes &
item(s) ordered by 11:00 a.m. that day. “No other online Noble’s warehouses in New Jersey, near Manhattan. Note direct
bookseller offers that.” comparison with other online booksellers (notably, amazon.com)

“The gift card that gives more”: can be used either online or in Spatial convenience, assortment/variety: when buying a gift for a
the bricks-and-mortar bookstores, nationwide. friend, this provides virtually limitless assortment, and does so
anywhere the recipient lives in the United States.

“bn.com – 1,000,000 titles; amazon.com – 375,000 titles” Assortment/variety: direct comparison with amazon.com,
offering a broader assortment of titles to the consumer

Source: advertisement for bn.com in Wall Street Journal, November 20, 2002, p. A11.
 TABLE 2-5: THE SERVICE OUTPUT DEMANDS (SOD) TEMPLATE

SERVICE OUTPUT DEMAND:

SEGMENT BULK BREAKING SPATIAL DELIVERY/ ASSORTMENT/ CUSTOMER INFORMATION

NAME/ CONVENIENCE WAITING TIME VARIETY SERVICE PROVISION
DESCRIPTOR

1.

2.

3.

4.

5.

INSTRUCTIONS: If quantitative marketing-research data are available to enter numerical ratings in each cell, this should be done. If
not, an intuitive ranking can be imposed by noting for each segment whether demand for the given service output is high, medium, or
low.
 Chapter 3
Supply Side Channel Analysis:
Channel Flows and Efficiency
Analysis
 FIGURE 3-1: MARKETING FLOWS IN CHANNELS

Physical Physical Physical

Possession Possession Possession
Ownership Ownership Ownership

Promotion Promotion Promotion

Negotiation Negotiation Negotiation Consumers

Producers Wholesalers Retailers Industrial
Financing Financing Financing and
Household
Risking Risking Risking

Ordering Ordering Ordering

Payment Payment Payment

Commercial Channel Subsystem

The arrows above show flows of activity in the channel (e.g. physical possession flows from producers to wholesalers to retailers to
consumers). Each flow carries a cost. Some examples of costs of various flows are given below:

Marketing Flow Cost Represented

Physical possession Storage and delivery costs

Ownership Inventory carrying costs
Promotion Personal selling, advertising, sales promotion, publicity,
public relations costs, trade show costs
Negotiation Time and legal costs
Financing Credit terms, terms and conditions of sale
Risking Price guarantees, returns allowances, warranties,
insurance, repair, and after-sale service costs
Ordering Order-processing costs
Payment Collections, bad debt costs
 TABLE 3-1: CDW’S PARTICIPATION IN VARIOUS CHANNEL FLOWS
Channel Flow CDW’s Investment in Flow
Physical possession (a) CDW has a 400,000 sq. ft. warehouse.
(b) CDW ships 99 percent of orders the day they are received.
(c) For CDW’s gov’t buyers, CDW has instituted an “asset tagging” system that lets buyer track what product
is going where; product is scanned into both buyer and CDW databases, for later ease in tracking products (e.g.
for service calls)
(d) CDW buys product in large volumes from mfgrs., taking in approximately eight trailer-loads of product
from various suppliers every day. Loads are received in bulk, with few added services.

Promotion (a) CDW devotes a salesperson to every account (even small, new ones!), so that an end-user can talk to a real
person about technology needs, system configurations, post-sale service, etc.
(b) Salespeople go through 6½ weeks of basic training, then 6 months of on-the-job coaching, then a year of
monthly training sessions.
(c) New hires are assigned to small-business accounts to get more opportunities to close sales.
(d) Salespeople contact clients not through in-person sales calls (too expensive), but through phone/e-mail.
(e) CDW has longer-tenured salespeople than its competitors.

Negotiation (a) CDW-G started a small-business consortium in 2003 to help small firms compete more effectively for
federal IT contracts. What CDW-G gives the small biz partner: lower prices on computers than they could
otherwise get; business leads; and access to CDW’s help desk and product tools; CDW also handles shipping
and billing, reducing the small biz partner’s channel flow burden. What the small biz partner provides: access
to contracts CDW could not otherwise get.

Financing (a) CDW collects receivables in just 32 days;

CDW turns its inventories 2x per month;
CDW has no debt.
Risking (a) “We’re a kind of chief technical officer for many smaller firms”:
(b) In April 2004, CDW was authorized as a Cisco Systems Premier (CSP) partner, in serving the commercial
customer market.
 TABLE 3-2: PRODUCT RETURNS: A LARGE-SCALE PROBLEM
Product Returns: A Large-Scale Problem
The value of returned goods is close to $60-100 billion annually in the U.S.

Web returns alone had value between $1.8 and $2.5 billion in 2002

Estimates are that the cost of processing those Web returns is twice as high as the merchandise value
itself!
U.S. companies are estimated to spend $35 billion to more than $40 billion per year on reverse logistics

The average company takes 30-70 days to move a returned product back into the market

The estimated number of packages returned in 2004 is 500 million

Furthermore, returns are very significant in many industries. In a survey of over 300 reverse logistics managers in 1998, researchers found the
following ranges for return percentages:
TABLE 3-3: PRODUCT RETURNS: PERCENTAGE RANGES
Industry Return % Ranges
Magazine Publishing 50%
Catalog Retailers 18-35%
Book Publishers 20-30%
Greeting Cards 20-30%
CD-ROMs 18-25%
Computer Manufacturers 10-20%
Book Distributors 10-20%
Mass Merchandisers 4-15%
Electronic Distributors 10-12%
Printers 4-8%
Auto Industry (Parts) 4-6%
Consumer Electronics 4-5%
Mail Order Computer Manufacturers 2-5%
Household Chemicals 2-3%
TABLE 3-4: DIFFERENCES BETWEEN FORWARD AND REVERSE LOGISTICS

Factor Difference Between Forward and Reverse Logistics

Volume forecasting More difficult for returns than for original sales of new product

Transportation Forward: ship in bulk (many of one SKU), with economies of scale. Reverse: ship many
disparate SKUs in one pallet, no economies of scale.

Product quality Forward: uniform product quality. Reverse: variable product quality, requiring costly evaluation
of every returned unit.

Product packaging Forward: uniform packaging. Reverse: packaging varies with some like-new, some damaged –
no economies of scale in handling.

Ultimate destination Forward: clear destination – to retailer or industrial distributor. Reverse: many options for
ultimate disposition of product, necessitating separate decisions.

Accounting cost Forward: high. Reverse: low, because activities are not consistently tracked on a unified basis.
transparency
FIGURE 3-2: POSSIBLE PATHWAYS FOR RETURNED PRODUCT

Poor quality product, ships as spare parts to manufacturer

Return for sale Manufacturer-run

Manufacturer Return/Sorting
Inspect, grade Facility
Return for credit
In
sp
ec Re
t, pa
gr ir
ade ab
le
pr
od
uc
t
Retailer
Ins
pec
Return for refund

t, gra
de
Repairable product Repair/
Third-Party Returns/ Refurbishment
Reverse Logistics Firm Facility
Hig
h-q
ua lity
pro
duc
t
Consumer
Secondary Market,
Broker, Jobber

Charity

Key: solid lines denote product to be salvaged for subsequent revenue. Dotted lines denote
non-revenue-producing product flows.
 FIGURE 3-3: THE EFFICIENCY TEMPLATE

WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF

CHANNEL MEMBER:
COSTS* BENEFIT FINAL 1 2 3 4 TOTAL
POTENTIAL WEIGHT (end-user)
(High, *
Medium, or
Low)
PHYSICAL 100
POSSESSION**
OWNERSHIP 100
PROMOTION 100
NEGOTIATION 100
FINANCING 100
RISKING 100
ORDERING 100
PAYMENT 100
TOTAL 100 N/A 100 N/A N/A N/A N/A N/A
NORMATIVE N/A N/A N/A 100
PROFIT
SHARE***

* Entries in column must add up to 100 points.

** Entries across row (sum of proportional flow performance of channel members 1 through 4) for each channel member must add up
to 100 points.
*** Normative profit share of channel member i is calculated as: (final weight, physical possession)*(channel member i's proportional
flow performance of physical possession) + … + (final weight, payment)*(channel member i's proportional flow performance of
payment). Entries across row (sum of normative profit shares for channel members 1 through 4) must add up to 100 points.
 FIGURE 3-4: THE BULLWHIP EFFECT q

Consumption Customer Retailers Wholesalers Manufacturers Suppliers

Source: Based on the lecture notes of Enver Yücesan at INSEAD.

 TABLE 3.APP3A-1
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILIERS:
UNDISGUISED DATA
WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:

COSTS BENEFIT FINAL Mfgr. Retailer End-user TOTAL

POTENT WEI
IAL GHT
(High,
Medium,
or Low)

PHYSICAL 30 High 35 30 30 40 100

POSSESSIO
N
OWNERSHIP 12 Medium 15 30 40 30 100
PROMOTION 10 Low 8 20 80 0 100
NEGOTIATION 5 Low/Medium 4 20 60 20 100
FINANCING 25 Medium 29 30 30 40 100
RISKING 5 Low 2 30 50 20 100
ORDERING 6 Low 3 20 60 20 100
PAYMENT 7 Low 4 20 60 20 100
TOTAL 100 N/A 100 N/A N/A N/A N/A
NORMATIVE N/A N/A N/A 28% 39% 33% 100
PROFIT
SHARE
 TABLE 3.APP3A-2
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILERS: RANK-
ORDER DATA
WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF
CHANNEL MEMBER:

COSTS BENEFIT FINAL Mfgr. Retailer End-user TOTAL

POTENTIAL WEIGHT
(High, Medium,
or Low)

PHYSICAL 30 High 35 2 2 2 100

POSSESSION
OWNERSHIP 12 Medium 15 2 2 2 100
PROMOTION 10 Low 8 1 3 0 100
NEGOTIATION 5 Low/Medium 4 1 2 1 100
FINANCING 25 Medium 29 2 2 2 100
RISKING 5 Low 2 2 2 1 100
ORDERING 6 Low 3 1 2 1 100
PAYMENT 7 Low 4 1 2 1 100
TOTAL 100 N/A 100 N/A N/A N/A N/A
NORMATIVE N/A N/A N/A ? ? ? 100
PROFIT SHARE
 TABLE 3.APP3A-3
BUILDING MATERIALS COMPANY EFFICIENCY TEMPLATE FOR
CHANNEL SERVING END-USERS THROUGH RETAILERS :
TRANSFORMED RANK-ORDER DATA

WEIGHTS FOR FLOWS: PROPORTIONAL FLOW PERFORMANCE OF

CHANNEL MEMBER:

COSTS BENEFIT FINAL Mfgr. Retailer End-user TOTAL

POTENTIAL WEIGHT
(High, Medium,
or Low)

PHYSICAL 30 High 35 33 33 33 100

POSSESSION
OWNERSHIP 12 Medium 15 33 33 33 100
PROMOTION 10 Low 8 25 75 0 100
NEGOTIATION 5 Low/Medium 4 25 50 25 100
FINANCING 25 Medium 29 33 33 33 100
RISKING 5 Low 2 40 40 20 100
ORDERING 6 Low 3 25 50 25 100
PAYMENT 7 Low 4 25 50 25 100
TOTAL 100 N/A 100 N/A N/A N/A N/A
NORMATIVE N/A N/A N/A 32% 38% 29% 100
PROFIT SHARE
 Chapter 4
Supply-Side Channel Analysis:
Channel Structure and
Intensity
Learning Objectives
FIGURE 4- 1: SAMPLE REPRESENTATIONS OF THE COVERAGE/MARKET SHARE
RELATIONSHIP FOR FAST MOVING CONSUMER GOODS

100% D C

Brand
Market Share

A
“normal”
expectation

100%
Extent of Dis tribution Coverage for a Brand
(% of all Poss ible Outlets )

Function A is an example of the type of relationship that would ordinarily be expected between distribution coverage and market share.
Functions B, C and D are convex and are examples of approximate relationships often found in FMCG markets.
A brand can achieve 100% market share at less than 100% coverage because not every possible outlet will carry the product
category. For example, convenience stores sell food but not every category of food.

Based on Reibstein, David J., and Paul W. Farris (1995), "Market Share and Distribution: A Generalization, A
Speculation, and Some Implications," Marketing Science, 14 (3), G190-G202.
FIGURE 4- 2: : SELECTIVE COVERAGE--THE MANUFACTURER’S
CONSIDERATIONS
For
For the
the Manufacturer
Manufacturer
Limited coverage is currency
More selectivity = more money
Exclusive distribution =

Manufacturers use the money to “pay” the Channel Members for :

- limiting its own coverage of brand in product category
(gaining exclusive dealing is very expensive)
- supporting premium positioning of the brand
- finding a narrow target market
- coordinating more closely with the manufacturer
- making-supplier specific investments
• new products
• new markets
• differentiated marketing strategy requiring downstream implementation
- accepting limited direct selling by manufacturer
- accepting the risk of becoming dependent on a strong brand

Manufacturers need to “pay more” when :

- the product category is important to the Channel Member
- the product category is intensely competitive
FIGURE 4- 3: CATEGORY SELECTIVITY: THE DOWNSTREAM CHANNEL
MEMBER’S CONSIDERATIONS
For the Downstream Channel Member
Limiting brand assortment is currency
Fever brand = more money
Exclusive dealing =

Downstream Channel Members use the money to “pay” the supplier for :
- limiting the number of competitors who can carry the brand in the Channel Member’s trading area
- providing desired brands that fit the Channel Member’s strategy
- wording closely to help the Channel Member achieve competitive advantage
- making Channel-Member-specific investments
• new products
• new markets
• differentiated Channel Member strategy requiring supplier cooperation
- accepting the risk of becoming dependent on a strong Channel Member

Downstream Channel Members need to “pay more” when :

- the trading area is important to the supplier
- the trading area is intensely competitive
 Chapter 5
Gap Analysis
FIGURE 5-1: THE GAP ANALYSIS FRAMEWORK
SOURCES OF GAPS

Environmental Managerial
Bounds: Bounds:
Local legal Constraint due to
constraints lack of knowledge
Local physical, Constraint due to
retailing optimization at a
infrastructure higher level

TYPES OF GAPS
Demand-Side Gaps: Supply-Side Gaps:
SOS < SOD Flow cost is too high
SOS > SOD Which flow(s)?
Which service outputs?

CLOSING GAPS
Demand-Side Gaps: Supply-Side Gaps:
Offer tiered service Change flow responsibilities
levels of current channel members
Expand/contract Invest in new low-cost
provision of service distribution technologies
outputs Bring in new channel
Change segment(s) members
targeted
 FIGURE 5-2: ONLINE BILLING AND PAYMENT: GAP ANALYSIS
BOUNDS
Environmental:
Technology infrastructure:
takes time to fully develop
initially endowed benefits more on
billers than on payers
is not universally available
is characterized by high fixed set-up
costs, but low marginal implementation
costs and thus is not attractive unless
significant scale is achieved
GAPS
Demand-side:
Assortment/variety (one-stop bill
payment site not available)
Waiting time too long (some e-bills took
5 days to pay)
Information provision poor (thus e-bill
payment viewed as risky)
Supply-side:
Clear lowering of many channel flow
costs
But consumer (as a channel member)
bears more perceived risk, with no
compensating price cut
Cost cuts initially much more available
to biller than to payer (asymmetric cost
efficiencies that hamper adoption)
CLOSING THE GAPS
Relax environmental bounds:
Build software applications to generate
back-office benefits for B2B players
Presentment technology eventually
developed to improve assortment/variety
for consumer payers
Increase promotional efforts  generate
information for consumers
Add new specialist channel members
New specialists develop new technology
to provide integrated benefits to
consumers and B2B payers
FIGURE 5-3: ONLINE BILLING AND PAYMENT: A VIRTUOUS CYCLE

Consumers
adopt
e-bill payment

Banks, billers increase

promo efforts to publicize Scale goes up at biller
e-bill payment; may even or bank
cut cost to consumer

Due to economies of scale,

per-transaction cost of
offering e-bill payment falls

Note: the B2B process exhibits a similar path, with the added inducement to payers of the development
of technologies to integrate bill payment information with back-office (accounts payable, inventory
management, and ordering) processes.
 FIGURE 5-4: APPLYING THE GAP ANALYSIS FRAMEWORK TO
REVERSE LOGISTICS
Environmental Bounds:
Infrastructure for managing returns is not
as well developed as for forward
logistics.

Demand-Side Gaps:
Customer service: end-users may be
dissatisfied when charged a restocking
fee, as many are not widely publicized.
Quick delivery: end-users fail to get their
desired product quickly when they have
to return it for exchange or refund.

Demand-Side Gaps:
Efforts to minimize returns improve on
quick delivery.
Sources of Gaps:
Managerial Bounds:
Many manufacturers lack information about scope of problem and how much money
they are losing by not managing it better.
Types of Gaps:
Supply-Side Gaps:
Physical possession, ownership, and financing: returned product held in the system
for 30-70 days before returning to the market for resale adds to all of these costs.
Promotion: when returned product is sent to a liquidator, it is likely to end up in a
channel competitive to the new-goods market, creating brand confusion and
promotional inefficiency.
Risking: uncertainty on both the supply (demand forecasting) and demand (what
product is right for me?) sides
Payment: returns trigger multiple new payment flows, to end-user (who returns
product), to retailer (who gets money back from original invoice paid to
manufacturer), and to third-party disposal or logistics firms.
Closing Gaps:
Supply-Side Gaps:
Effective third-party logistics specialists not only handle returned product faster, but
also repackage and re-kit it to sell through non-competing new channels.
 FIGURE 5-5: PATH FOLLOWED BY A COPY OF
“THE PERRICONE PROMISE”

3,6

1,4

2,7

KEY:
1,4: Lebanon, Indiana
2,7: Marina del Rey, California
3,6: Jamesburg, New Jersey
5: Bridgewater, Massachusetts
TOTAL DISTANCE: 9,600 MILES
TABLE 5-1: U.S. RETAIL MUSIC SALES, 1999-2003

Year Sales in $billion

1999 $14.6

2000 $14.3

2001 $13.7

2002 $12.8

2003 $11.8
 TABLE 5-2: AVERAGE RETAIL CD PRICES IN THE U.S.

Time Period Average Price

2002 (Q1) $13.90
2002 (Q2) $13.90
2002 (Q3) $13.60
2002 (Q4) $13.90
2003 (Q1) $13.80
2003 (Q2) $13.70
2003 (Q3) $13.50
2003 (Q4) $13.55
2004 (Q1) $13.25

TABLE 5-3: SHARE OF ALBUMS SOLD BY CHANNEL, 2002

Channel Share of Albums Sold

Music chain stores 51.0%
Mass merchants 33.8%
Independents 11.9%
Other 3.3%

Notes: 680.9 million albums were sold in total in 2002. Mass merchant channel
includes Best Buy, Kmart, Wal-Mart, Costco, and Target.
 FIGURE 5-6: TYPES OF GAPS

Demand-side No Demand- Demand-side

COST Gap Side Gap Gap
PERFORMANCE (SOD>SOS) (SOD=SOS) (SOS>SOD)
LEVEL:
Price/value Price/value
No Supply-Side proposition=right proposition=right
Gap (Efficient for a less No Gaps for a more
Flow Cost) demanding demanding
segment! segment!
Supply-side Gap Insufficient SO High cost, but High costs and
(Inefficiently High provision, at high SO’s are right: SO’s=too high:
Flow Cost) costs: price &/or value is good, but no extra value
cost too high, price &/or cost is created, but price
value too low high &/or cost is high
 FIGURE 5-7: CHANNEL COSTS AND THE PRINCIPLE OF
POSTPONEMENT-SPECULATION
45

Total Cost as a
40 Function of
Delivery Time

35
G
30

End-User's Cost
25
A of Holding Goods
Cost

E
20

15
F
B
10
Cost of Moving Goods
to the End-User
5
C
D
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46
Delivery Time

Source: Adapted from Louis P. Bucklin, A Theory of Distribution Channel Structure (Berkeley, CA: IBER Publications,
University of California, 1966), pp. 22-25.
 FIGURE 5-8: DEMAND-SIDE GAP ANALYSIS TEMPLATE

SERVICE OUTPUT LEVEL DEMANDED (SOD) VERSUS SERVICE OUTPUT LEVEL SUPPLIED (SOS)

SEGMENT BULK SPATIAL DELIVERY/ ASSORTMEN CUSTOMER INFORMATIO MAJOR

NAME/ BREAKING CONVENIENC WAITING T/ VARIETY SERVICE N PROVISION CHANNEL
DESCRIPTO E TIME FOR THIS
R SEGMENT
1.

2.

3.

4.

5.

Notes and directions for using this template:

Enter names and/or descriptions for each segment.
Enter whether SOS>SOD, SOS<SOD, or SOS=SOD for each service output and each segment. Add footnotes to explain
entries if necessary. If known and relevant, footnote can record any supply-side gaps that lead to each demand-side gap.
Record major channel used by each segment, i.e., how does this segment of buyers choose to buy?
 FIGURE 5-9: SUPPLY-SIDE GAP ANALYSIS TEMPLATE
(to be used in conjunction with Demand-Side
Gap Analysis Template, Figure 5-8)

CHANNEL CHANNEL ENVIRONMENTAL/ SUPPLY-SIDE GAPS PLANNED DO/DID ACTIONS

[targeting which MEMBERS AND MANAGERIAL [affecting which TECHNIQUES FOR CREATE OTHER
segment(s)?] FLOWS THEY BOUNDS flow(s)?] CLOSING GAPS GAPS?
PERFORM
1.

2.

3.

4.

5.

Notes:
Record routes to market in the channel system. List should include all channels recorded in Figure 5-4 above. Note the
segment or segments targeted through each channel.
Summarize channel members and key flows they perform (ideally, link this to the Efficiency Template analysis in
Chapter 3).
Note any environmental or managerial bounds facing this channel.
Note all supply-side gaps in this channel, by flow or flows affected.
If known, record techniques currently in use or planned for use to close gaps (or note that no action is planned, and why).
Analyze whether proposed/actual actions have created or will create other gaps.
 FIGURE 5-10: DEMAND-SIDE GAP ANALYSIS TEMPLATE:
CDW EXAMPLE

SERVICE OUTPUT LEVEL DEMANDED (SOD: L/M/H) VERSUS

SERVICE OUTPUT LEVEL SUPPLIED BY CDW (SOS)

SEGMENT BULK SPATIAL DELIVERY/ ASST/ CUSTOMER INFORMATIO MAJOR

NAME/ BREAKING CONVENIENCE WAITING VARIETY SERVICE N PROVISION CHANNEL
DESCRIPTO TIME FOR THIS
R SEGMENT
1. Small H Original Original M (SOS>SOD) H (SOS=SOD) H (both pre-sale Value-added
business (SOS=SOD) equipment: M equipment: M and post-sale) reseller like
buyer (SOS=SOD) (SOS>SOD) (SOS=SOD) CDW, or
Post-sale service: Post-sale service: retailer
H (SOS=SOD) H (SOS=SOD)
2. Large L Original Original M/H M (SOS>SOD) L (SOS>SOD) Manufacturer
business (SOS>SOD) equipment: H equipment: M (SOS=SOD) direct, or
buyer (SOS=SOD) (SOS>SOD) large reseller
Post-sale service: Post-sale service: like CDW
L (SOS>SOD) L (SOS>SOD)
3. Gov’t/ L Original Original M/H H (SOS=SOD) H (both pre-sale Manufacturer
education (SOS>SOD) equipment: H equipment: M (SOS=SOD) and post-sale) direct, or
(SOS=SOD) (SOS>SOD) (SOS=SOD) reseller; 23
Post-sale service: Post-sale service: percent from
H (SOS=SOD) M (SOS>SOD) small business
(VARs)
 FIGURE 5-11: SUPPLY-SIDE GAP ANALYSIS TEMPLATE:
CDW EXAMPLE
(to be used in conjunction with Demand-Side Gap Analysis Template,
Figure 5-10)

CHANNEL CHANNEL ENVIRONMENTAL SUPPLY-SIDE GAPS PLANNED DO/DID ACTIONS

[targeting which MEMBERS AND (E) / MANAGERIAL [affecting which TECHNIQUES FOR CREATE OTHER
segment(s)?] FLOWS THEY (M) BOUNDS flow(s)?] CLOSING GAPS GAPS?
PERFORM*
1. CDW direct to Manufacturer; (M): no screening of Promotion [sales Better screening of No
buyer ( small CDW; recruits for expected force new recruits Buying from CDW
business buyer) Sm. Bus. Buyer longevity with firm training/turnover] closes gaps for
customer in Risking
2. CDW direct to Manufacturer; (E): government Promotion [sales force Better screening of No
buyer ( large CDW, CDW-G; requires 23 percent of training/turnover] new recruits;
business buyer, Lg. Bus. Buyer or purchases from small Negotiation [cannot Rely on consortium
government) Government Buyer vendors close 23% of deals channel structure
(M): no screening of with government] (below)
recruits for expected
longevity with firm
3. CDW + small Manufacturer; (E): government Promotion [sales force Better screening of No
business VAR CDW-G; requires 23 percent of training/turnover]; new recruits;
consortium member Small VAR; purchases from small (Negotiation: only a Negotiation gap above
( government) consortium partner vendors; gap for a small VAR is closed through
Government Buyer (M): VAR’s small not in the CDW consortium with small
business size alliance) VARs
(M): no screening of
recruits for expected
longevity with firm

Note: all channel members perform all flows to some extent. Key channel flows of interest are promotion, negotiation, and risking.
 Chapter 8
Strategic Alliances in
Distribution
FIGURE 8-1: SYMPTOMS OF COMMITMENT IN MARKETING CHANNELS

A committed party to a relationship (a manufacturer, a distributor, or another channel member) views its arrangement as a long-
term alliance. Some manifestations of this outlook show up in statements such as these, made by the committed party about its
channel partner.

• We expect to be doing business with them for a long time.

• We defend them when others criticize them.

• We spend enough time with their people to work out problems and misunderstandings.

• We have a strong sense of loyalty to them.

• We are willing to grow the relationship.

• We are patient with their mistakes, even those that cause us trouble.

• We are willing to make long-term investments in them, and to wait for the payoff to come.

• We will dedicate whatever people and resources it takes to grow the business we do with them.

• We are not continually looking for another organization as a business partner to replace or add to this one.

• If another organization offered us something better, we would not drop this organization, and we would hesitate to take on the
new organization.

Clearly, this is not normal operating procedure for two organizations. Commitment is more than having an ongoing cordial
relationship. It involves confidence in the future, and a willingness to invest in the partner, at the expense of other opportunities,
in order to maintain and grow the business relationship.
FIGURE 8-2: MOTIVES TO CREATE AND MAINTAIN STRATEGIC ALLIANCES
IN CHANNELS
Motives to Ally Strategically The Upstream Channel Member
Fundamentals Motivate downstream channel members to
represent them better
In current markets
With current products
In new markets
With new products
Generate customer preference Coordinating marketing efforts more tightly with
downstream channel members
Get closer to customers and prospects
Enhance understanding of the market
Preserving choice and flexibility of channel Guaranteeing market access in the face of
partners consolidation in wholesaling
Keep routes to market open
Rebalance power between the producer and
surviving channels
Strategic pre-emption Erecting barriers to entry to other brands
Induce channels to refuse access
Induce channels to offer low levels of support to
entrants
Superordinate Goal Enduring competitive advantage leading to profit
Reduce accounting and opportunity costs
The Downstream Channel Member
Avoid stockouts while keeping costs under
control
Lower costs of all flows performed, such as
lower inventory holding costs
Coordinating marketing efforts more tightly with
upstream channel members
Serve the customer better
Convert prospects into customers
Net effect: higher volume and margins
Assure a stable supply of desirable products, even
as manufacturers consolidate
In current markets
Selling current products
Opening to new markets
With new products
Differentiate themselves from other downstream
channel members
Supplier’s preferred outlet
Value-added services, difficult to copy and of
high value to their customers
Enduring competitive advantage leading to profit
Reduce accounting and opportunity costs
 FIGURE 8-3: THE CIRCLE OF COMMITMENT

Supplier’s Guess:
How committed is
this
distributor to me?

Distributor’s Supplier’s
Commitment to a Commitment to a
Supplier Distributor

Distributor’s Guess:
How committed is this
supplier to me?
 FIGURE 8- 4: PHASES OF RELATIONSHIPS IN MARKETING
CHANNELS
Relationship Phas e 1:
Awarenes s
• One organization sees
another as a feas ible
exchange partner
• Little interaction
• Networks are critical :
one player recommends
another
• Physical proximity
matters: parties more
likely to be aware of each
other
• Experience with
transactions in other
domains (other products,
markets , functions) can be
us ed to identify parties
1 2
Relationship Phase 2: Relationship Phase 3:
Exploration Expans ion
• Testing, probing by both • Benefits expand for both
s ides s ides
• Inves tigation of each • Interdependence expands
other’s natures and • Ris k taking increases
motives • Satis faction with res ults
• Interdependence grows
leads to greater motivation
• Bargaining is intens ive and deepening
• Selective revealing of commitment
information is initiated • Goal congruence
and mus t be reciprocated increas es
• Great s ensitivity to • Cooperation increases
is sues of power and • Communication
justice increas es
• Norms begin to emerge
• Atlernative partners look
• Role definitions become less attractive
more elaborated • Key feature: momentum
• Key feature: each s ide mus t be maintained . To
draws inferences and tests progres s, each party mus t
them s eek new areas of activity
• This phase is eas ily and maintain cons istent
terminated by either side efforts to create mutual
payoffs
3 5
Relationship Phase 4: Relationship Phas e 5:
Commitment Decline and Diss olution
• Each party inves ts to • Tends to be s parked by
build and maintain the one s ide
relations hip • Mounting
• Long time horizon diss atis faction leads one
• Parties may be aware of s ide to hold back
alternatives but do not inves tment
court them • Lack of investment
• High expectations on provokes the other s ide to
both s ides reciprocate
• High mutual dependence • Dis solution may be
• High trus t abrupt but is us ually
• Partners resolve conflict
gradual
and adapt to each other • Key feature: it takes two
to build but only one to
and to their changing
undermine. Decline often
environment
s ets in without the two
• Shared valves and/or parties’ realization
contractual mechanis ms
(s uch as s hared risk)
reinforce mutual
dependence
• Key features: loyalty,
adaptability, continuity,
high mutual dependence
s et these relations hips
apart
4