UNDERSTANDING

MARKETING CHANNEL
STRATEGIES
Chapter 1
LEARNING OBJECTIVES

 After reading this chapter, you will be able to:

 WHAT IS A MARKETING CHANNEL
STRATEGY?

 A company’s overall marketing strategy focuses on

four marketing mix elements (4Ps): product, price,
promotion, and channel (or place).
 Each company must make a number of strategic
decisions to determine how to distribute its products
and service to its end customers.
 A marketing channel or marketing channel system is
defined as a set of interdependent organizations that
are involved in the process of making a product or
service available for consumption or use.
Example of Channel Structures
 I Phone Distribution Channels
 Mobile Service Providers (Orange)
 Apple online stores
 Wholesalers
 General mass merchandisers (Carrefour)
 Apple retail stores
 Consumer electronics superstores (Smart Buy)
 Online marketplace (Amazon)
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 The definition of marketing channel indicates that a

marketing channel is a set of interdependent
organizations.
 Many companies are involved in the channel such as
manufacturers, retailers, and wholesaler and each of
these company depends on the each other to do their
job.
 The definition of a marketing channel also makes it
clear that running a marketing channel is a process
not an event.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 Distribution usually takes time and , and even when a

sale finally occurs, the relationship with the end-user
is not over.
 For example: After a hospital buys a medical
equipment, it still needs to service the equipment after
the purchase.
 Finally, the definition of a marketing channel
indicates that the purpose of this process is to make
the product or service available for use or
consumption.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 This means the purpose of this process is to satisfy

the end-users ( consumers or final business
buyers).
 The goal of these end-users is the use or
consumption of the product or service that is being
sold.
 All channel members must focus their attention on
satisfying the end-user.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 Business managers want to make their products and

services available to customers through marketing
channels.
 Business managers also want to use marketing
channels to improve their companies’ sustainable
competitive advantage.
 A sustainable competitive advantage is a
competitive advantage that cannot be quickly or
easily copied by competitors.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 In today’s global competitive arena, gaining a

sustainable competitive advantage by emphasizing
the first three Ps of the marketing mix (product,
price, and promotion) has become more difficult.
 More companies are now focusing on channel
strategy especially multi-channel strategy as a way to
gain a sustainable competitive advantage.
 The main reason for this is that well-formulated
channel strategies are more difficult to quickly copy.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 Manager are investing their limited resources to

turn their marketing channels into strategic assets
that can:
 1) Increase customer satisfaction
 2) Reduce distribution costs
 3) Minimize competitor rivalry
 4) Improve financial performance
Q1:
 Which term refers to a set of independent
organizations involved in the process of making a
product or service available for use or consumption?
 A) value chain
 B) supply chain
 C) marketing channel
 D) wholesale consortium
 E) multinational enterprise
 Answer: C
Q2:
 Which type of strategy did Walmart decide to use
to compete with Amazon?
 Class Exercise
 Do you think shopping from a company’s online
channel via a social networking site is different
from shopping on the company’s regular Web site?
Explain.
 Class Exercise
Growth in online retail sales has been outperforming
traditional sales in retail stores. This online sales growth
might be increased significantly by the latest online sales
phenomenon of mobile commerce.—shopping via mobile
phones. But so far, mobile commerce has not grown as much
as experts have predicted.

Question:
Do you think mobile commerce will grow more rapidly in the future? Why
or why not (use examples to support your answer).
 Class Exercise
 ROCKAUTO.COM is a leading online auto parts store that prides itself
on offering a huge selection of auto parts, everyday low prices, fast
shipping, and an easy to use Web site.
 Some ROCKAUTO.COM advertisements have even claimed this online
auto parts store is “head and shoulders” above any brick and mortar part
stores.
 The company’s slogan, “All The Parts Your Car Will Ever Need,”
suggests that customers have all the choice they could possibly want
from ROCKAUTO.COM and that they need look no further than this
online auto parts store to satisfy all their needs.
 Question:
 Do you agree with ROCKAUTO.COM’s claim? Might customers
seeking auto parts need other channel options? Explain.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 Therefore the definition of a marketing

channel strategy is:
 “The set of activities focused on

designing and managing a marketing

channel to improve the company’s
sustainable competitive advantage and
financial performance.”
Who Participates in Marketing Channels?

 There following are the main types of entities

who are involved in every marketing channel:
 1) Manufacturers and producers
 2) Intermediaries
 3) Facilitating agencies
 4) End-users
Who Participates in Marketing Channels?

 Usually there is one channel member who serves as

the channel captain, taking the most interest in the
workings of the channel for a specific product or
service.
 The channel captain is the member who establishes
and maintains channel links.
 The channel captain is usually the manufacturer but
other members could be channel captains.
Members and Nonmembers of the Channel

 The term contactual organization refers to those

firms or parties who are involved in negotiatory
functions as a product or service moves from the
producer to its end-user.
 Negotiatory functions consist of buying, selling,
and transferring title to products or services.
 Only those firms or parties that engage in these
functions are members of the marketing channel.
Members and Nonmembers of the Channel

 Other firms (usually referred to as facilitating

agencies) such as transportation companies, public
warehouses, banks, insurance companies,
advertising agencies that perform functions other
than negotiatory, are excluded.
Classification of Channel Participants
 Who Participates in Marketing Channels?

 1) Manufacturers and producers: Upstream Channel

Members: Producers and manufacturers are
companies that are involved in extracting, growing, or
making products.
 Producers and manufacturers are found in industries such
as agriculture, forestry and fishing, mining, construction,
manufacturing, and some service industries.
 Producing and manufacturing companies must insure
that their products are distributed to their intended
markets.
 Who Participates in Marketing Channels?

 Most producing and manufacturing organizations are not in a

favorable position to distribute their products directly to the final
user markets.
 They often to do not have the required expertise and economies
of scale (and/ or scope) to perform all the tasks necessary to
distribute their products effectively and efficiently to their final
users.
 Economies of scale: Reduction in cost per unit resulting from
increased production, realized through operational efficiencies.
 Economies of scope: are cost advantages that result when firms
provide a variety of products rather than specializing in the
production or delivery of a single product or service.
Who Participates in Marketing Channels?

 With regard to the required expertise, many

producers and manufacturers do not have the level
of expertise in distribution that they have acquired
in production or manufacturing.
 Example: An electronics manufacturer may be
operating at the leading edge of industry
technology yet the manufacturer knows little about
the best way to distribute its sophisticated products
to its markets.
 Who Participates in Marketing Channels?

 Even for those producing and manufacturing companies that

have or are capable of developing expertise in distribution,
the economies of scale that are necessary for efficient
production do not necessarily make for efficient distribution.
 Producing and manufacturing companies usually face high
average costs for distribution tasks when they attempt to
perform them by themselves.
 Average cost: Computed by dividing the total of fixed costs
and variable costs by the number of total units produced
(total output).
 Who Participates in Marketing Channels?

 Producing and manufacturing companies can reduce

cost by shifting distribution tasks to other channel
participants such as wholesalers and retailers.
 The reason for this is that intermediaries distribute the
products of many other manufacturers and are
therefore able to spread the high fixed costs of
performing the distribution tasks over large quantities
of different products.
 By doing this, intermediaries can achieve economies of
scale as well as economies of scope.
Who Participates in Marketing Channels?

 2) Intermediaries: The term intermediary refers to

any channel member other than the manufacturer or
end-user.
 There two main types of intermediaries:
 A) Wholesalers
 B) Retailers
Who Participates in Marketing Channels?

 A) Wholesalers: includes merchant wholesalers,

agents, and brokers.
 A wholesaler sells to other channel members such
as retailers, or to business end-users but usually not
to individual consumer end-users.
 Who Participates in Marketing Channels?

 Types and kinds of wholesalers:

 1. Merchant wholesalers: Are firms engaged mainly
in buying, taking title to, usually storing and physically
handling products in relatively large quantities.
 They then resell the products in smaller quantities to
retailers, other wholesalers, and to business end-users.
 Merchant wholesalers earn profits by buying at
wholesale from the manufacturers and selling at a
marked-up price to downstream customers .
 Who Participates in Marketing Channels?

 2. Agents and brokers: Are also independent middlemen

who do not, for all or most of their business take title to the
goods in which they deal.
 But they are actively involved in negotiatory functions of
buying and selling while acting on behalf of their clients.
 They are compensated in the form of commissions on sales
or purchases.
 Examples of Agents, brokers and commission
merchants:
 Manufacturer agents, selling agents, and import and export
agents.
Who Participates in Marketing Channels?

 B) Retailers: include department stores,

hypermarkets, specialty stores, convenience store,
franchises, online retailers and many others.
 Retailers sell directly to individual consumer and
business end-users.
Distribution Tasks Performed by Retailers

 1. Provide manpower and physical facilities that

allows producers, manufactures, and wholesalers to
have many points of contact with customers close
to their home.
 2. Provide personal selling, advertising, and display
to help in selling suppliers’ products.
 3. Interpret consumer demand and relay this
information back through the channel.
Distribution Tasks Performed by Retailers

 4. Divide large quantities into consumer-sized in

order to provide economies for supplies (by accepting
large shipments) and convenience for consumers.
 5. Provide storage, so that suppliers can have a
broadly dispersed inventories of their products at low
cost.
 6. Removing substantial risk from the producer and
wholesaler by ordering and accepting delivery in
advance of the season.
 Who Participates in Marketing Channels?

 3) Facilitating agencies: are companies that assist in the

performance of the distribution tasks other than buying, selling
and transferring title.
 Examples of facilitating agencies include:
 1) Transportation companies
 2) Storage agencies
 3) Order processing agencies
 4) Advertising agencies
 5) Financial agencies
 6) Insurance companies
 7) Marketing research firms
Who Participates in Marketing Channels?

 1. Transportation agencies: Includes all

companies that offer transportation services on a
public basis such as United Parcel Service (UPS)
and Aramex.
 Because of the great economies of scale and
scope, these transportation agencies are able to
perform transportation services much more
efficiently and cost effectively than manufacturers,
wholesalers, or retailers.
Who Participates in Marketing Channels?

 2. Storage agencies: Is made up of mainly public

warehouses that specialize in the storage of goods
for a fee.
 3. Order processing agencies: Are companies that
focus on order fulfillment tasks.
 They relieve manufacturers, wholesalers, and
retailers from some or all of the tasks of processing
orders for shipment to customers.
 Who Participates in Marketing Channels?

 5. Advertising agencies: offer the channel member

expertise in developing promotion strategy.
 This can range from providing a small amount of
assistance in writing an ad to complete design and
execution of the advertising or promotional
campaigns.
 6. Financial agencies: Are made up of firms such as
banks, and finance companies.
 These firms posses the financial resources and
expertise that the channel manager often lacks.
 Who Participates in Marketing Channels?

 7. Insurance companies: Provide the channel

manager with a means for transferring some of the
risks involved in any business venture, such as fire
and theft loses, in-transit damage of goods, and in
some cases severe weather.
 8. Marketing research firms: The channel manager
can call on these firms to provide information when
his or her own company does not have the necessary
skills to acquire the marketing information relevant
to distribution.
 Class Exercise
 In your opinion, which task performed by
facilitating agents is most important for
manufacturer, wholesalers, retailers to perform
themselves if they had the resources and expertise
to avoid the risk of having someone else perform
the task. Explain your answer.
Who Participates in Marketing Channels?

 4) End-users: Down stream Channel members: are

business or individual consumers who consume the
product or service that is being sold by other
channel members.
Q:
 In the context of a marketing channel, the relationship with an
end-user is considered finished once a product or service has
been distributed.
 Answer: FALSE
 Channel captains are typically manufacturers of branded
products.
 Answer: TRUE
 Since intermediaries usually increase costs for producers and
lower value for consumers, a decentralized system of
exchange is more efficient than a centralized network.
 Answer: FALSE
Distribution through Intermediaries
 The term disintermediation refers to the removal
of intermediaries in a supply chain, or “eliminating
the middlemen".
 Disintermediation has not occurred on a large scale.
 The fact that the Internet can connect hundreds of
millions of people and organizations does not
necessarily remove the need for intermediaries.
Q:
 Which term refers to reducing the use of
intermediaries?
 A) allocation
 B) facilitation
 C) routinization
 D) reintermediation
 E) disintermediation
 Answer: E
Factors that determine the role of Intermediaries

 1. Specialization and Division of Labor: By dividing

a complex task into smaller, less complex tasks and
assigning these tasks to parties who are specialists at
performing them, much greater efficiency occurs.
 2. Contactual efficiency: Is the level of negotiation
effort between sellers and buyers relative to achieving
a distribution objective.
 The use of additional intermediaries will often
increase the level of contactual efficiency.
Use of the Term Channel Manager
 Channel manager refers to anyone in an organization
who is involved in marketing channel decision making.
 Few organizations have a single executive position
called channel manager.
 Many different executive are involved in making
channel decisions.
 For example: the vice president of marketing, general
marketing manager, product manager, and sales
executive, such as the vice president of sales might be
the key channel decision maker.
Q:
 Which statement is most likely true about a marketing channel
system?
 A) Firms in the marketing channel typically work independently.
 B) Modifying a channel system is usually a simple, inexpensive task.
 C) Marketing channels represent a very small portion of the world’s
business.
 D) Most marketing channel systems are easily duplicated by other
firms in an industry.
 E) Efficient marketing channels reduce distribution costs and increase
customer satisfaction.
 Answer: E
Q:
 What is the most likely outcome of an ineffective
marketing channel strategy?
 A) limited product reach
 B) too many channel captains
 C) quick product line maturation
 D) excessive gatekeeper control
 E) wasted marketing mix components
 Answer: A
Q:
 Sony produces televisions and computers and sells
them through electronics stores. In a marketing
channel, Sony would best be described as a ________.
 A) trading company
 B) manufacturer
 C) wholesaler
 D) distributor
 E) retailer
 Answer: B
Q:
 Manufacturers are LEAST likely to use
intermediaries to:
 A) negotiate terms of trade
 B) manage production levels
 C) transport products to customers
 D) facilitate product orders and payments
 E) sell products directly to final consumers
 Answer: B
Q:
 Which of the following statements is false?
 a. Consumer expectations have moved firms to add additional
channels.
 b. Both B2C and B2B businesses are increasing the number of
channels they use to distribute their products
 c. The flexibility to respond to consumers does not appear to be
relevant to channel design.
 d. Channels must be targeted to reach intended customer segments.
 e. The increasing role of technology is helping to foster the use of
multiple channels.

 ANS: C
Q:
 Channel management is concerned mainly with
 a. Providing for the physical availability of products.
 b. Planning and overseeing the firm’s logistics activities.
 c. The entire process of setting up and operating the
contactual organization.
 d. Developing the firm’s overall strategic marketing
program.
 e. Operating the firm’s entire marketing mix.

 ANS: C
 Channel Structure
 Channel structure is the group of channel
members to which a set of distribution tasks have
be allocated.
 The definition suggests that in developing channel
structure, the channel manager is faced with an
allocation decision.
 The manager must decide how to allocate or
structure the tasks.
 Channel Structure
 Multi-channel strategy means that the company has
chosen to reach its customers through more than one
channel.
 A multi-channel marketing strategy results in a multi-
channel structure.
 Example: The multi-channel structure used by Polo
by Ralph Lauren apparel to reach its customers is
made up of sales through upscale department stores
and specialty retailers, its own company stores, and
online sales through its Web site.
Example of a Multi-Channel Structure
 Ancillary Structure
 Ancillary structure is defined as the group of institutions
(facilitating agencies) that assists channel members in performing
distribution tasks.
 The basic decisions facing the channel manager in trying to
develop ancillary structure is the same as developing channel
structure.
 The problems faced in developing ancillary structures are usually
less complex than those faced in developing channel structures.
 This is because facilitating companies do not play a part in the
channel decisions that control the distribution of goods and
services.
What are the nine universal channel functions? What
direction does each function move? Why do some
channel functions move in both directions?

 The marketing channel, through its members, performs a range of channel

functions that constitute a process, flowing through the channel that is
performed at different points in time by different channel members. Some
functions move forward through the channel (physical possession,
ownership, and promotion); others move up the channel from the end-user
(ordering and payment); and still other channel functions can move in
either direction or reflect activities by pairs of channel members
(negotiation, financing, risk, information sharing). Some functions, like
information sharing, move in either direction. Manufacturers share product
and sales information with their distributors, independent sales
representatives, and retailers, which helps them perform the promotion
function better. Consumers provide their preference information to the
channel, which improves its ability to supply valued services.
 References
 Palmatier, R.W., Stern, L., & El-Ansary, A.I. (2019).
Marketing Channel Strategy, 9Th edition, Routledge.
 Rosenbloom, B. (2013). Marketing Channels: A
Management View, 8th edition, Cengage Learning.