Ch.

1 Marketing Channel
Concept
 Growing Importance of Marketing
Channels

1. Explosion of information technology and E-

commerce
2. Greater difficulty of gaining a sustainable
competitive advantage
3. Growing power of distributors, especially retailers
in marketing channels
4. The need to reduce distribution costs
 Growing Importance of Marketing
Channels
1. Explosion of information technology and E-
commerce

The introduction of E-commerce leads to a new types of

middlemen called ‘infomediaries’ along with cyber
retailer to connect buyers and sellers via the Internet.

E-commerce didn’t change everything, however it is now

merging with conventional channels in all business
around the world.
 Growing Importance of Marketing
Channels
2. Greater difficulty of gaining a sustainable
competitive advantage

“Sustainable competitive advantage” is a competitive

edge that cannot be quickly/easily copied by
competitors.
• The large number of offices makes it easy for clients in
thousands of communities in the U.S. as well as Canada and
England to visit an offices and get in-person advice and
assistance from professional brokers.
 Growing Importance of Marketing
Channels
3. Growing power of distributors, especially retailers
in marketing channels

The economic power has shifted from the producers of

goods to the distributors of goods especially the
power retailers.
They play the role of ‘gatekeepers’ act as buying agents
for their customers rather than as selling agents for
manufacturers.
 Growing Importance of Marketing
Channels
4. The need to reduce distribution costs

Sometimes distribution costs are higher than the

manufacturing cost or the cost of raw materials and
component parts. Therefore, the cost control in the
21st century will be marketing channels.
Autos Software Gasoline Fax Packaged
Machines Foods
Distribution 15% 25% 28% 30% 41%

Manufacturing 40% 65% 19% 30% 33%

Raw Materials 45% 10% 53% 40% 26%

and
Components
 The Marketing Channel Defined

• The route taken by a product as it moves from

producer to the customer or other ultimate user.

• The path taken by the title to goods as it moves

through various agencies.

• A loose coalition of business firms that have

banded together for purposes of trade.
 The Marketing Channel Defined
• Manufacturer: the movement of the product
through these various intermediaries.
• Intermediaries (wholesalers/retailers): the flow of
the title to the goods.
• Consumer: a lot of middlemen standing between
them and the producer of the product.
• Researcher: the structural dimensions and efficiency
of operation.
 The Marketing Channel Defined

• “The external contactual organization that

management operates to achieve its
distribution objectives.”

(*a managerial decision-making viewpoint)

 The Marketing Channel Defined

• external: the marketing channel exists outside

the firm (not a part of a firm’s internal
organizational structure.)
 The Marketing Channel Defined

• contactual organization: firms or parties who

are involved in negotiatory functions as a
product or service moves from the producer
to its ultimate user.
 The Marketing Channel Defined

• operates: suggests involvement by

management in the affairs of the channel.
 The Marketing Channel Defined

• distribution objectives: management has

certain distribution goals to achieve.
Use of the Term Channel Manager
• Channel manager: anyone in a firm or
organization who is involved in marketing
channel decision making.

• In practice, the job title involves in channel

management may vary depends on the firms
such as ‘business development manager’,
‘director of channel management’, trade
marketing manager’ and etc.
 Marketing Channels and
Marketing Management Strategy
• Marketing management process: a strategic blending
of 4 controllable marketing variables (marketing mix)
to meet the demands of customers to which the firm
wishes to appeal in the light of internal and external
uncontrollable variables (marketing environments).

 Major tasks: to seek out potential target markets and

develop appropriate and coordinated 4Ps strategies to
serve those markets in competitive and dynamic
environment.
 Marketing Channels and
Marketing Management Strategy

• Marketing channel strategy: one of the major

strategic areas of marketing management.

 Management must develop and operate its marketing

channels in such way as to support and enhance the other
strategic variables of the marketing mix in order to meet
the demand of the firm’s target markets.
 Marketing Channels and
Marketing Management Strategy
• Coors Brewing Company is the nation’s 3rd largest brewery in
the U.S.

• The company faced the difficulties: slowed beer consumption,

new competitors such as microbreweries and foreign brands.
 Issues on product strategy: high rates of new product
failures, short product life cycles and competitors offer
similar products quickly.
 Issues on price strategy: intense price discounting (beer wars)
 Issues on promotion strategy: high costs and short-lived of
promotion
 Marketing Channels and
Marketing Management Strategy
• Coors Brewing Company came up with the channel strategy:
establish stronger relationships with its independent beer
distributors than the chief competitors had.

• This strategy has been vital to its competitive viability against

larger rivals. Strong distributor support also helped Coors to
increase its profits.
Channel Strategy versus Logistics
Management
Marketing
mix

Product Pricing Promotion Distribution

strategy strategy strategy strategy

Channel Logistics
strategy management
component component
Channel Strategy versus Distribution
strategy

Logistics Management 1s
t
2n
d
Channel Logistics
strategy management
component component

• Channel strategy is much broader and more

basic component than logistics management.

• Channel strategy is concerned with the entire

process of setting up and operating the
contactual organization that is responsible for
meeting the firm’s distribution objectives.
Channel Strategy versus Distribution
strategy

Logistics Management 1s
t
2n
d
Channel Logistics
strategy management
component component

• Logistics management is more narrowly

focused on providing product availability at
the appropriate times and places in the
marketing channel.

• Usually, channel strategy must already be

formulated before logistics management can
even be considered.
 Flows in Marketing Channels
The actual physical movement of the product from
the manufacturer through all of the parties who
take physical possession of the product, from its
point of production to final consumers.
1. Product flow
2. Negotiation flow
3. Ownership flow
4. Information flow
5. Promotion flow
 Flows in Marketing Channels
1. Product flow Manufacturer

2. Negotiation flow
Transportation
3. Ownership flow company

4. Information flow
Wholesalers
5. Promotion flow
Retailers

Consumers
 Flows in Marketing Channels
1. Product flow Manufacturer
Negotiation
2. Negotiation flow involve a
Buying & selling mutual
3. Ownership flow functions associated exchange
between
with the transfer of buyers and
4. Information flow title (right of sellers
ownership) Wholesalers
5. Promotion flow
Retailers

Consumers
 Flows in Marketing Channels
1. Product flow Manufacturer

2. Negotiation flow
3. Ownership flow
4. Information flow
Wholesalers
5. Promotion flow
Retailers

Consumers
 Flows in Marketing Channels
1. Product flow Manufacturer

2. Negotiation flow
Transportation
3. Ownership flow company

4. Information flow
Wholesalers
5. Promotion flow
Retailers

Consumers
 Flows in Marketing Channels
1. Product flow Manufacturer

2. Negotiation flow
Advertising
3. Ownership flow agency

4. Information flow
Wholesalers
5. Promotion flow
Persuasive commu. in the
form of ad., personal Retailers
selling, sales promotion,
and publicity.
Consumers
 Distribution
strategy

1s 2n
t d
Channel Logistics
strategy management
component component

In the context of channel flows concept:

• Channel strategy and management involve
planning for managing all of the flows

• Logistics is concerned almost exclusively with

the management of the product flow
 Distribution through Intermediaries
Economic considerations in determining whether
intermediaries will appear in marketing channel:

Specialization and Division of Labor

“Breaking down a complex task into smaller, less complex ones
and allocating them to parties who are specialist at performing
them, much greater efficiency result.”

(see figure 1.5 Specialization and Division of Labor Principle:

Production vs. Distribution)
 Distribution through Intermediaries
Economic considerations in determining whether
intermediaries will appear in marketing channel:

Contactual Efficiency
The level of negotiation effort between sellers and buyers
relative to achieving a distribution objective.
• Or it is the relationship between an input (negotiation
effort) and an output (distribution objective).
 Example of Contactual Efficiency for
Granada Guitar Company
*Retailers Only
Negotiation Estimated Dollar Distribution Contactual
Effort (Inputs) Costs of Inputs Objective Efficiency
(Outputs)
1,500 sales visits @ $50 = $75,000 Get 500 music Negotiation effort
1,000 phone calls @ 3 = 3,000 stores to carry new in dollar terms
guitar line. relative to achieving
10 magazine ads @1,000 = 10,000 the distribution
Total $88,000 objective = $88,000
*Wholesalers
Negotiation Estimated Dollar Distribution Contactual
Effort (Inputs) Costs of Inputs Objective Efficiency
(Outputs)
100 sales visits @ $50 = $5,000 Get 500 music Negotiation effort
100 phone calls @ 3 = 300 stores to carry new in dollar terms
guitar line. relative to achieving
20 magazine ads @1,000 = 20,000 the distribution
Total √ $25,300 objective = $25,300
 Distribution through Intermediaries
The use of additional intermediaries will often
increase the level of contactual efficiency.

 The use of wholesalers has eliminated the need for

direct contact with retailers, thereby greatly
reducing the number of contacts needed.

(see figure 1.6: How the introduction of additional

intermediary reduces the number of contacts)
 Channel Structure
• The group of channel members to which a set
of distribution tasks has been allocated.

• MC (2-level)
A = Agent
• MRC (3-level) C = Consumer
M = Manufacturer
• MWRC (4-level) R = Retailer
W = Wholesaler
• MAWRC (5-level)
A Typical Portrayal of Channel Structure
for Consumer Goods
Two-level Three-level Four-level Five-level
 Channel Structure
• Multi-channel strategy: the firm has chosen to
reach its customers through more than 1
channel.

• This will result in multi-channel structure

because distribution tasks have been allocated
among more than 1 channel structure.
 Some firms also developed multi-channel
structures that include online channels.
 Polo by
Manufacturer Ralph Lauren
Web site
http://www.ralphlauren.com/

Upscale Specialty Company-

department apparel owned stores
stores retailers and outlets

Consumers
 Ancillary Structure
• The group of institutions (facilitating
agencies) that assists channel members in
performing distribution tasks.

• The role of facilitating agencies is one of

providing services to the channel members
after the basic channel decisions have already
been made.
• One of the world’s leading manufacturers of power
tools. B&D farm out the nonnegotiatory tasks to
facilitating agencies (the ancillary structure) as the
following:
 It uses the common carriers to transport its power tools to
industrial distributors.
 It uses the commercial insurance companies to protect
against risks while the products are transit.
 It uses independent advertising agencies to promote its
products.
 Homework

1.What are the “Channel Participants”?

Explain.

2.What are the “Environment of Marketing

Channels”? Explain.
 1 Quiz
st

1. Explain 2 reasons make marketing channel

become more important.
2. Explain what is marketing channel.
3. Explain what is ancillary structure.
4. Explain flows in marketing channel.
5. Explain the channel strategy and logistics
management.
6. In the case of Amway, what happened to its
marketing channel?