Part 2: Developing the Marketing Channel

CHAPTER 6
Designing
Marketing
Channels
1
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Le ① Channel Design

ar ② Who engages in channel design

ni ③ Channel design paradigm
ng ④ When to make a channel design
O ⑤ Distribution objectives
bj
⑥ Distribution tasks
ec
⑦ Channel structure decisions
tiv
⑧ Variables affecting channel structure
es
⑨ Heuristics in channel design

⑩ Choosing an optimal channel structure

2

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Objective

1 Channel Design (1 of 2)

Channel Design: Decisions involving the

development of new marketing channels
either where none had previously existed or
to the modification of existing channels

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 Channel Design (2 of 2)

Distinguishing points of the definition include:

1. Applying selection criteria to determine the suitability
of prospective channel members
2. The creation or modification of channels
3. The active allocation of distribution tasks in an
attempt to develop an efficient structure
4. The selection of channel members
5. A strategic tool for gaining a differential advantage

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Objective

2 Who Engages in Channel Design?

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Objective

3 Channel Design Paradigm

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Objective
When to Make a Channel Design
4 Decision (1 of 2)
• Developing a new product or product line
• Aiming an existing product at a new market
• Making a major change in some other component of
the marketing mix
• Establishing a new firm
• Adapting to changing intermediary policies that may
inhibit attainment of distribution objectives

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 When to Make a Channel Design
Decision (2 of 2)
• Dealing with changes in availability of particular kinds
of intermediaries
• Opening up new geographic marketing areas
• Facing the occurrence of major environmental
changes
• Meeting the challenge of conflict or other behavioral
problems
• Reviewing and evaluating

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Objective

5 Distribution Objectives

Setting distribution objectives requires

knowledge of which, if any, existing
objectives & strategies may impinge on
these distribution objectives.

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 The Need for Congruency

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Objective

6 Distribution Tasks

Outlining distribution tasks is specific and situationally

dependent on the firm.

For example: Distribution tasks for a manufacturer of

consumer products differs from those for products sold
in industrial markets.

Distribution tasks are a function of the distribution objectives and

the types of firms involved.

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Objective

7 Channel Structure Dimensions

1. Number of levels 2. Intensity at the

in the channel various levels

Allocation Alternatives
3. Types of intermediaries
at each level

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 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

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 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

14

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 Types of Intermediaries

• Numerous types
• Manager’s emphasis on types of distribution
tasks performed by these intermediaries
• Watch emerging types
– Electronic online auction firms (eBay)
– Industrial products sold in B2B markets (Chemdex,
Converge.com)

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Objective

8 Variables Affecting Channel Structure

Categories of Variables
1. Market Variables
2. Product Variables
3. Company Variables
4. Intermediary Variables
5. Environmental Variables
6. Behavioral Vari

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 Market Variables

Market Geography Location, geographical size,

& distance from producer

Market Size Number of customers in a

market

Number of buying units

Market Density (consumers or industrial firms)
per unit of land area

Market Behavior Who buys, & how, when, and

where customers buy

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 Product Variables

Bulk & Weight

Perishability
Unit Value
Degree of Standardization
Technical versus Nontechnical
Newness

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 Company Variables

The range of options is

Size relative to a firm's size

Financial The greater the capital, the

lower the dependence on
Capacity intermediaries

Intermediaries are necessary

Managerial when managerial experience is
Expertise lacking

Objectives & Marketing & objectives may

Strategies limit use of intermediaries

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 Intermediary Variables

Availability of intermediaries
Availability influences channel structure.

Cost is always a consideration

Cost in channel structure.

Services that intermediaries

Services offer are closely related to the
selection of channel members.

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 Environmental Variables

The impact of environmental forces is a

common reason for making channel design
decisions.

Economic Forces

Competitive Forces

Legal Forces
Technological Forces

Sociocultural Forces
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 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.

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Objective

9 Heuristics in Channel Design

Benefit Limitation

Fairly simple Mostly useful as

prescriptions for rough guide to
channel structure decision making

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Objective
Choosing an Optimal Channel
10 Structure
Why is choosing an optimal channel structure not
possible?
1. Management is incapable of knowing all possible
alternatives.
2. Precise methods for calculating the exact payoffs
associated with each alternative structures do
not exist.

BUT

Techniques exist for developing

more exact methods.
24

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 Approaches for Choosing Channel
Structure

• “Characteristics of Goods & Parallel

Systems” Approach
• Financial Approach
• Transaction Cost Analysis Approach
• Management Science Approaches
• Judgmental-Heuristic Approach

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 Judgmental-Heuristic Approaches

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

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 Discussion Question #1

Best Buy Co., the largest consumer electronics retailer in the world, is
famous for its giant 40,000 square-foot “big-box” stores. This channel has
served Best Buy well over the years as consumers wandered through the
giant product displays in the cavernous stores, and competitors such as
Circuit City were literally driven out of business by Best Buy’s dominant
stores. But by the end of the first decade of the Twenty-first century, Best
Buy made a channel design decision that focused on adding a retail channel
consisting of much smaller 3,000 square-foot stores to its large-store
channel. The new smaller stores will be located in shopping malls as well as
in urban downtown venues. Best Buy designed this new small-store channel
structure mainly to do a better job of reaching the still-growing market for
mobile phones, especially smartphones. These smaller stores will sell
almost one hundred different phones as well as the services of nine carriers.
Do you think Best Buy’s channel design decision is a good one? What
other channel design options might Best Buy have pursued to accomplish its
distribution objective?
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 Discussion Question #2

Vending machines have existed as a mechanical channel for distributing

a variety of products for many decades. Traditionally the typical products
found in vending machines were soft drinks, candy, cigarettes, and snack
foods. But in recent years the variety of products sold through vending
machine channels has broadened dramatically. Consumers can now buy
digital cameras, DVDs, iPods, baby diapers, and in Germany, even solid
gold bars for which the price charged changes every two minutes with the
ups and downs of the price of gold.
From a channel design standpoint, what do you see as the key variables
to consider in determining whether vending machines could be a feasible
channel choice for any given product of your choice?

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 Discussion Question #4

Marketing channels should be designed to make products and services

conveniently available to customers, how, when, and where they want them.
This is exactly what several franchises such as Cousins Submarines Inc.,
Tasti D-Lite LLC frozen yogurt, and Toppers Pizza Inc. intend to do by
changing their channel structures to include mobile channels consisting of
fully equipped trucks and vans that can bring many of the products sold in
their bricks and mortar stores right to customers where they work and play.
How will potential customers know when and where these truck and van
mini-restaurants will appear? Simple customers can track the whereabouts
of the vendors by going to Facebook, Twitter, and FourSquare.
Do you think this type of mobile channel is just a novelty in fast-food
channels or does it have the potential to be a major force for change in the
channel structure of fast-food and other product and service distribution
channels?

29

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