Marketing Channels

– A marketing channel consists of the

individuals and firms involved in the
process of making a good or service
available for use or consumption by
consumers or industrial users.
• Merchants
• Agents
• Facilitators
Functions in Marketing Channels
– Carrying of Inventory
– Demand generation
– Physical distribution
– After-sale service
– Extending credit to customers
Flows in Marketing Channels
• Physical flow
• Title flow
• Payment flow
• Information Flow
• Promotion Flow
Consumer Marketing Channels
Industrial Marketing Channels
 Channel Design Decisions-
1. Analyzing Customers’ Desired service Output
Levels
2. Establishing Objectives and Constraints
3. Identifying Major Channel Alternatives
4. Evaluating Major Alternatives
1.Analyzing Customers’ Desired service Output Levels

Channel produces five service outputs-

• Lot size
• Waiting and delivery time
• Spatial convenience
• Product variety
• Service backup
 2.Setting the Channel Objectives and
Constraints
• The company must decide which segments to target
and the best channels to use in each segment. Here,
the objective of the company is to minimize the total
channel cost.
• Besides the target market, the company’s channel
objectives are influenced by;
– the nature of its product, e.g. perishable products require
more direct marketing to avoid delays and too much
handling.
– company characteristics, e.g. the company’s size and financial
situation determine which functions it can
 handle, how many channels it can use, which transportation can
be used…
– characteristics of intermediaries, intermediaries differ in their
abilities to handle promotions, customer contact, storage and
credit e.g. the company’s own sales force is more intense in selling.
– competitors’ channel, some companies may prefer to compete in
or near the same outlets that carry competitors’ products, some
may not e.g. Burger King wants to locate near McDonald’s
– environmental factors, economic conditions and legal constraints
affect channel design decisions e.g. in a depressed economy,
producers want to distribute their goods in the most economical
way, using shorter channels.
 Identifying Major Alternatives

After the channel objective have been determined,

the company should identify its major channel
alternatives in terms of (1) types of intermediaries,
(2) number of intermediaries, and (3) the
responsibilities of each channel member.
• Types of Intermediaries
A firm should identify the types of channel members
that are available to carry out its channel work.
• Number of Marketing Intermediaries
Companies must also determine the number of
channel members to use. There are three strategies;
– intensive distribution; is a strategy in which companies
stock their products in as many outlets as possible.
Convenience products and common raw materials must
be available where and when consumers want them e.g.
toothpaste, candy… Procter & Gamble, Coca-Cola
distributes its products in this way. Here, the advantages
are maximum brand exposure and consumer convenience.
– exclusive distribution; is a strategy (opposite to intensive
distribution) in which the producer gives only a limited
number of dealers the exclusive right to
 distribute its products in their territories. Here, the
advantages are establishing image and getting higher
mark-ups.
– selective distribution; (is between intensive and
exclusive distribution) is a strategy in which the
company uses more than one but fewer than all of the
intermediaries. Here, the advantages are; it provides
good market coverage with more control and less cost
than intensive distribution + it does not spread its
efforts over many outlets as in intensive distribution.
• Responsibilities of Channel Members
The producer and intermediaries must agree on
price policies, discounts, territories, and services
to be performed by each party. E.g. McDonald’s
provides franchisees with promotional support,
training, management assistance, in turn,
franchisees must meet company standards for
physical facilities, buy specific food products...
 Evaluating the Major Alternatives

In order to select the channel that satisfy the company

objectives in the best way, each alternative should be
evaluated by using;
• economic criteria; the company compares the
projected profits and costs of each channel.
• control issues; the company prefers to keep the
channel where it has the highest control.
• adaptive criteria; the company prefers to keep the
channel which is the most flexible to the changing
marketing environment.
 Channel Management Decisions-
• Selecting Channel Members
• Training & Motivating Channel Members
• Evaluating Channel Members
• Modifying Channel Design and arrangements
 Selecting Channel Members-
Characteristics of Intermediaries-
• No. of years in business
• Other lines carried
• Growth & profit record
• Financial strength
• Cooperativeness
• Service reputation
 Training & Motivating Channel Members-

Channel powers to exercise-

• Coercive power
• Reward power
• Legitimate power
• Expert power
• Referent power
 Evaluating Channel Members-

• Sales-quota attainment
• Avg inventory levels
• Customer delivery time
• Treatment of damaged and lost goods
• Cooperation
Modifying Channel Design and arrangements-

• Channel is not working as planned

• Consumer buying patterns change
• Market expands
• New competition arises
• Innovative distribution channels emerge
• Product moves into later stages
 Vertical Marketing Systems
• Vertical Marketing Systems (VMS) consists of
producers, wholesalers, and retailers acting as a
unified system - that seek to maximize profits for the
whole channel.
• Here, one channel members owns the others, has
contracts with them or use so much power that they
all cooperate.
• Such systems occur to control channel behavior and
manage channel conflict.
Types of Vertical Marketing Systems
V ertic al
m ark etin g
sys tem s (V M S )

C orp orate C on trac tu al A d m in is tered

VMS VMS VMS

W h oles aler- R etailer F ran c h is e

sp on s ored c oop eratives org an iz ation s
volu n tary
c h ain s
 Corporate VMS
• In a corporate VMS, production and
distribution stages are combined under single
ownership, in order to manage cooperation
and conflict management e.g. AT&T markets
its products through its own chain of
distributors.
 Contractual VMS
• A contractual VMS consists of independent firms at different
levels of production and distribution who join together
through contracts to obtain more economies or sales impact
than each could achieve alone.
• Ex. Apple, which has its own retail stores as well as designing
and creating the products to be sold in those retail stores.
• There are three types of contractual VMSs;
– wholesaler-sponsored voluntary chains; are contractual marketing
systems in which wholesalers organize voluntary chains of
independent retailers to help them compete with large corporate
chain organizations.
– retailer cooperatives; are contractual marketing systems in
which retailers organize a new, jointly owned business to
carry on wholesaling and possibly production.
– franchise organizations; are contractual marketing systems
in which a channel member, called a franchiser, links
several stages in the production-distribution process.
There are three forms of franchisees;
• manufacturer-sponsored retailer franchise system e.g. Ford
licenses dealers to sell its cars. The dealers are independent
businesspeople who agree to meet various conditions of sales and
service.
• manufacturer-sponsored wholesaler franchisee system e.g. Coca-
Cola licenses bottlers (wholesalers) in varius markets who buy
Coca-Cola syrup concentrate and then carbonate, bottle and sell
the finished product to retailers in local markets.
• service-firm-sponsored retailer franchise system in which a
service firm e.g. Hertz, Avis, McDonald’s, Burger King, NIIT,
APTECH licenses a system of retailers to bring its service to
consumers.
 Administered VMS
• In which one member of the production and
distribution chain is dominant and organizes the
nature of the vertical marketing system informally,
due to its sheer size.
• Ex. Procter & Gamble ,HUL are very strong that they
can command special displays, shelf space,
promotions and prices from the other parties.
• Ex. Wal Mart
 Horizontal Marketing Systems
• Horizontal marketing systems is a channel arrangement
in which two or more companies at one level join
together to follow a new marketing opportunity.Ex.
Banks and Insurance companies.
• The major benefit is that companies combine their
capital, production capabilities, marketing resources and
therefore accomplish more.
• Companies might join forces with competitors or
noncompetitors. They might work with each other on a
temporary or permanent basis or they may create a
separate company.
• E.g. Coca-Cola and Nestle formed a joint venture
to market ready-to-drink coffee and tea
worldwide. Coke provided worldwide experince in
marketing and distribution beverages and Nestle
contributed two established brand names -
Nescafe and Nestea.
 Hybrid Marketing Systems
• Hybrid marketing systems is also called
multichannel distribution systems where the
company uses several marketing channels (e.g.
direct mail - telemarketing, retailers, distributors,
dealers, own sales force) to sell its products to
different customer segments.
• E.g. IBM uses its own sales force + IBM direct which
is the catalog and telemarketing operation of IBM +
independent IBM dealers + IBM dealers for
business segments + large retailers like Wal-Mart.
• The major benefit is that when the company has
large and complex markets (consumers) the
company can expand its sales and market
coverage by providing services to the specific
needs of diverse customer segments.
• The disadvantage is that they are harder to
control and generate more conflict.
 Channel Conflict Management-
• Channel conflict occurs when disagreement
among channel members on goals and roles -
who should do what and for what rewards.
– Horizontal conflict; occurs among firms at the same level of
the channel. In other words, one dealer may complain about
the other.
– Vertical conflict; occurs among different levels of the same
channel. In other words, the producer may complain about
its dealers or vise versa. Ex. HUL , petrol pumps
– Multichannel conflict; occurs when manufacturer has two or
more channels that sell to the same market. Ex. Apple
 Causes of Channel Conflict-
• Goal incompatibility
• Unclear roles and rights
• Differences in perception
• Intermediaries dependence on the
manufacturer
 Managing Channel Conflict-
• Adoption of superordinate goals
• Exchange of employees
• Joint membership in trade associations
• Co-optation- win support of leaders of other
organisations
• Diplomacy, mediation, arbitration
• Legal course