6 Designing

the Marketing Channel

 What is Channel Design
There are variations in usage of the term
‘design’ of marketing channel:
• a noun to describe channel structure
• The formation of a new channel from scratch
• Modifications to existing channels
• ‘Selection’
 What is Channel Design

• It refers to those decisions involving the

development of new marketing channels
where none had existed before, or to
modification of existing channels.
 Channel Design
Key distinguished points associated with channel
design:
• It is presented as a decision faced by the marketer
(same as other marketing mix).
• It is used in the broader sense to include either setting
up channels from the scratch or modifying existing
channels (reengineering).
• The management has taken a proactive role in the
development of the channel.
• The term ‘selection’ refers to only 1 phase of channel
design (selection of the actual channel members).
• It is a strategic tool for gaining a differential advantage.
Who Engages in Channel Design
Producers/
Manufacturers

Wholesalers

Retailers

Market
 A Paradigm of the
Channel Design Decision
The channel design decision can be broken
down into 7 phases or steps:
1.Recognizing the need for a channel design
decision
2.Setting and coordinating distribution
objectives
3.Specifying the distribution tasks
4.Developing possible alternative channel
structures
 A Paradigm of the
Channel Design Decision
The channel design decision can be broken
down into 7 phases or steps:
5.Evaluating the variables affecting channel
structures
6.Choosing the best channel structure
7.Selecting the channel members (see ch.7)
 Phase 1: Recognizing the Need for a
Channel Design Decision
Many situations can indicate the need for a channel design decision.
Among them are the following:
1. Developing a new product/product line
2. Aiming an existing product at a new target market (i.e. additional
channel from b2b to b2c)
3. Making a major change in some other component of the marketing
mix (i.e. new pricing policy emphasizing lower prices)
4. Establishing a new firm
5. Adapting to changing intermediary policies (i.e. if intermediaries
begin to emphasize their own private brands, adding new
distributors for the manufacturer may be needed.)
 Phase 1: Recognizing the Need for a
Channel Design Decision
Many situations can indicate the need for a channel design decision.
Among them are the following:
6. Dealing with changes in availability of particular kinds of
intermediaries (i.e. reducing number of prestigious department
stores in the U.S. affected French manufacturers of luxury goods)
7. Opening up new geographic marketing areas (territories)
8. Facing the occurrence of major environmental changes
9. Meeting the challenge of conflict or other behavioral problems (i.e.
A loss of power by a manufacturer to his/her distributors or
communication difficulties)
10.Reviewing and evaluating undertaking by a firm may point to the
need for changes in existing channels/ need for new channels
 Phase 2: Setting and Coordinating
Distributing Objectives
In order to set distribution objectives that are well
coordinated with other marketing and firm
objectives and strategies, the channel manager
needs to perform 3 tasks:
1. Become familiar with the objectives and strategies in
the other marketing mix areas
2. Set distribution objectives and state them explicitly
3. Check to see if the distribution objectives set are
congruent with marketing and other general
objectives and strategies of the firm
 Phase 2: Setting and Coordinating
Distributing Objectives
1. Becoming familiar with the objectives and
strategies in the other marketing mix areas
Short shelf life
Strategic emphasis on
the “Freshness”

Uses almost 13,000

drivers/salespeople to
deliver products directly
Longer shelf life
to grocery stores
 Phase 2: Setting and Coordinating
Distributing Objectives
2. Set distribution objectives and state them
explicitly
Example:
IBM originally was to “have retailers displaying
PCs within driving distance of anyone in the U.S.
who wanted to buy one”.
Later, when IBM decided to use mail order
channels, its distributor objective was
broadened to “make its PCs directly available
wherever its customers are”
 Phase 2: Setting and Coordinating
Distributing Objectives
3. Check to see if the distribution objectives set are
congruent with marketing and other general
objectives and strategies of the firm
Firm’s overall
objectives and
strategies

*Interrelationships
General and Hierarchy of
marketing
Objectives and
objectives and
strategies Policies in the Firm

Product Pricing Promotion Distribution

objectives and objectives and objectives and objectives and
strategies strategies strategies strategies
 Phase 3: Specifying the
Distribution Tasks (Functions)
• The kinds of tasks required to meet specific
distribution objectives must be precisely
stated and situationally dependent on the firm.
Example:
A manufacturer of high-quality tennis racquets
aimed at serious amateur tennis players would
need to specify distribution tasks as the
following:
 Phase 3: Specifying the
Distribution Tasks (Functions)
Example:
1. Gather info. on target market shopping patterns
2. Promote product availability in the target market
3. Maintain inventory storage to assure timely
availability
4. Compile info. about product features
5. Provide for hands-on tryout of product
6. Sell against competitive products
 Phase 3: Specifying the
Distribution Tasks (Functions)
Example:
7.Process and fill specific customer orders
8.Transport the product
9.Arrange for credit provisions
10.Provide product warranty service
11.Provide repair and restringing service
12.Establish product return procedure
 Phase 4: Developing Possible
Alternative Channel Structures
1. Number of
levels in the channel

2. Intensity at the
various levels

Allocation Alternatives

3. Types of
intermediaries
at each level
 Phase 4: Developing Possible
Alternative Channel Structures
Number of Levels
• Range from two to five or more
• Number of alternatives is limited to two or three
choices
• Limitations result from the following factors:
– Particular industry practices
– Nature & size of the market
– Availability of intermediaries
 Phase 4: Developing Possible
Alternative Channel Structures

Intensity at the Various Levels

• Relationship between the intensity of distribution dimension
& number of retail intermediaries used in a given market area

Intensity Dimension

Intensive Selective Exclusive

Numbers of Intermediaries (retail level)

Many Few One

 Phase 4: Developing Possible
Alternative Channel Structures
Types of Intermediaries
• Numerous types
• Manager’s emphasis on types of distribution tasks performed
by these intermediaries
• Should not overlook new emerged intermediary types:
– Electronic online auction firms (eBay)
– Industrial products sold in B2B markets
(Chemdex, Converge.com)
 Phase 5: Evaluating the Variables
Affecting Channel Structure
Categories of Variables
1. Market Variables
2. Product Variables
3. Company Variables
4. Intermediary Variables
5. Environmental Variables
6. Behavioral Variables
 Phase 5: Evaluating the Variables
Affecting Channel Structure
1. Market Variables

Market Geography Location, geographical size,

& distance from producer

Market Size Number of customers in a

market

Market Density Number of buying units

(consumers or industrial firms)
per unit of land area

Market Behavior Who buys, & how, when, and

where customers buy
 Phase 5: Evaluating the Variables
Affecting Channel Structure
2. Product Variables

Bulk & Weight -> heavy & bulky product -> high handling & shipping costs -> minimize
costs by shipping in large lots to fewest possible points
Perishability (fresh products) -> channel structure should be designed to provide for rapid
delivery from producers to consumers
Unit Value -> lower unit value product (convenience goods) -> create small margin for
distribution costs -> should use the longer channel
Degree of Standardization -> can lengthen the channel by increase intermediaries unlike
the custom-made products (i.e. industrial machinery) often sold directly from
manufacturer to the user
Technical versus Nontechnical –> highly technical product -> needed the technical advice,
after sales service from the expert -> generally be distributed through a direct channel
Newness -> new product -> require extensive & aggressive promotion in the introduction
stage -> a shorter channel will enable such promotional effort
 Phase 5: Evaluating the Variables
Affecting Channel Structure
3. Company Variables

Size The range of options is

relative to a firm’s size

Financial The greater the capital, the

Capacity lower the dependence on
intermediaries

Managerial Intermediaries are necessary

Expertise when managerial experience
is lacking

Objectives Marketing & objectives may

& Strategies limit use of intermediaries
 Phase 5: Evaluating the Variables
Affecting Channel Structure
4. Intermediary Variables
Availability Availability of intermediaries
influences channel structure.

Cost Cost is always a consideration

in channel structure.

Services Services that intermediaries

offer are closely related to the
selection of channel members.
 Phase 5: Evaluating the Variables
Affecting Channel Structure
5. Environmental Variables

Economic Competitive

Sociocultural

The impact of environmental forces is

a common reason for making
channel design decisions.

Technological Legal
 Phase 5: Evaluating the Variables
Affecting Channel Structure
6. Behavioral Variables

Develop congruent roles for channel members.

Be aware of available power bases.

Attend to the influence of behavioral problems that can

distort communications.
 Phase 6: Choosing the “Best”
Channel Structure
Heuristics in Channel Design

Benefit Limitation

Fairly simple prescriptions Mostly useful as rough guide

for channel structure to decision making
 Phase 6: Choosing the “Best”
Channel Structure
Approaches for Choosing Channel Structure
• “Characteristics of Goods & Parallel Systems” Approach
• Financial Approach
• Transaction Cost Analysis Approach
• Management Science Approaches
• Judgmental-Heuristic Approach
 Phase 6: Choosing the “Best”
Channel Structure
Judgmental-Heuristic Approach
IF
Management’s ability to
make sharp judgments is high

+
Good empirical data on costs
and revenues is available

It’s possible to make highly satisfactory channel-choice decisions

using judgmental-heuristic approaches