Fundamentals

of Marketing
Channels
By Prashant Pokharel
Thames International College
School of Business & Technology
 Meaning and Role of Marketing
Channels

• A marketing channel can be defined as set of interdependent

organizations/entities involved in the process of making product or
services available for consumptions.
• Market Channel should be seen as a network that creates in one
hand value for the consumer by generating possession, time and
place utilities and in the other creates value to
producers/manufacturers in terms of market capitalization for
organizational goal achievement.
• The channel can also be described as grouping of intermediaries
from the first owner (producer) to the last owner (final consumer)
who take title of the product during the marketing process.
 Role of Marketing Channels

•Primary function of any channel of distribution is to bridge the gap

between the producer and final consumer.
•Based on this, channel performs three major functions:
1.Transactional function: Buying, Selling and Risk assumption
2.Logistical Function: Assembly, Storage, Sorting and Transportation
3.Facilitating Function: Post-purchase service & maintenance,
financing, information dissemination and channel coordination or
leadership.
These functions are necessary for effective flow of product and title to
the consumer from producer and payment back to producer from the
consumer for ultimate customer satisfaction and profit maximization
for producers.
 Role of Marketing Channel

•Channel of distribution are established to eliminate different kind of

barriers created in the exchange process. These barriers are:
i.Spatial Discrepancy
ii.Temporal Discrepancy
iii.Discrepancy of Quality and Assortment
iv.Intention to buy
 Spatial Discrepancy

• This barrier arises as the sources of supply and demand are

located at different locations and physical movement is
required.
• Physical movement in small lots becomes costly and
uneconomical.
• Marketing Middlemen/channels play vital role to overcome
such barriers through efficient management of supplies
between producers and final consumers.
 Temporal Discrepancy

• This barrier arises when time of production and consumptions

differs.
• E.g. Food grains are produced during specific period of a year
whereas the consumption of the same is done throughout the
year.
• Marketing channel plays vital role to overcome this barrier
through sufficient storage of supplies and organizing flows of
goods throughout the period of consumption.
 Discrepancy of Quality/Quantity and
Assortment
•This barrier arises when the quality & quantity of production is different from the
size of consumption.
•E.g. Shoe manufacturer produces its product in thousands with different attributes
whereas the final consumer consumes only one/two.
•Moreover, a manufacturer specializes in few products while the consumer wants
variety.
•Marketing intermediaries play vital role to overcome such barrier through the
process of Sorting which includes 4 different functions:
i.Sorting Out
ii.Accumulation
iii.Allocation
iv.Assorting
Discrepancy of Quality/Quantity and
Assortment (cont…)
i. Sorting Out: This involves the selection of an assortment of
homogeneous goods from heterogeneous supply of a given
product class e.g. separating homogeneous supply of cotton
shirting from heterogeneous supplies of textile materials.
ii. Accumulation: It involves assembling homogeneous supplies
from a number of sources into larger quantities. Accumulation is
typically performed closer to demand centers.
iii. Allocation: It consists breaking down homogeneous supply in
relation to a specific demand.
iv. Assorting: It is the task of building up a final collection of goods
to match consumer demand by each channel level.
 Intention to Buy

• The barrier arises due to lack of purchase/consumption

intention by final consumers.
• Supplying right product at right quantity at the right place
do not guarantee final consumption or exchange of
products.
• Purchase/Consumption/Exchange process has to be
influenced.
• Marketing intermediaries play vital role in overcoming
these barriers by influencing the exchange process.
Role of Marketing Channel
Channel Structure for Consumer/Industrial
Goods
•Producers may use different channels of distribution in the process of
supplying products to the final consumers.
•The legal right and ownership goes on transferring from one to another
channel members before reaching the hands of final consumers.
•Levels and number of channel members dependent on nature of
products, market situation, firms capacity and other factors.
•Based on above, channel structure may consist of 4 different levels
which includes:
i.Zero Level Channel
ii.One Level Channel
iii.Two Level Channel &
iv.Three Level Channel
 Zero Level Channel

•Zero Level Channel, commonly known as direct marketing channel has no

intermediary level.
•In this channel, manufacturer sells merchandise directly to customers.
•Advantages & Disadvantages of Zero Level Channel

Advantages Disadvantages
i. Close relationship with the i. High cost involvement training,
consumer maintaining and supervising large
ii. Profit Maximization and do not number of sales force.
require to share profit with ii. Involves Cumbersome difficulties in
intermediaries. providing and maintaining
iii. Quick delivery of final products to inventories and prompt supplies to
consumers. various locations.
iv. Quick Response on
concern/complaints/changing
market trend.
 One Level Channel
•In One Level of Channel, products are supplied to final consumers
through single intermediary i.e. retailers.
•The products are sold to retailers who in turn sells the product to the
final consumers & and retailer act as source of products to the
consumers.
•Advantages & Disadvantages of One Level Channel:
Advantages Disadvantages
i. Lower Cost in comparison to multiple i. Missed Opportunities for market
channel strategy. It has been estimated capitalization based on limitations in
that single channel marketing strategy prompt supplies to various locations.
can cost as much as 1/3rd of multi ii. Channel Limitations- A single
channel strategy. marketing channel will only let your
ii. Maintaining Dominance-Single channel business to grow as far as chosen
helps maintain dominance in small marketing channel is capable of
market segment. reaching.
Two Level Channel
• A Marketing channel in which final products are supplied through
two intermediaries i.e. agents/wholesalers and retailers.
• Products are sold by producers to wholesalers/agents who in turn sell
the product to retailer and then to final consumers through retailers.
• This channel is suitable for products which need to be supplied to
scattered markets and consumers.
Advantages Disadvantages
i. Large Market Coverage-Two level of i. Loose/Lack control over market
marketing helps producers to reach information and dominance by
large market segments through its producers.
channel. ii. Production and cash flow stress.
iii. Decreased economies of scale
Three Level Channel
•This is the longest channel of distribution of consumer goods. It
basically consist 3 intermediaries in between producer and final
consumer.
•It involves agents, wholesalers and retailers as intermediaries.
Producers supply their products to agents who in turn supplies the
merchandise to wholesalers to retailers and finally to final consumer.
•Helpful for producers to penetrate new/international market segments
through agents and wholesalers who have strong market dominance.
•Mostly this channel is not used for distribution as it is costly, takes long
time and invites several problems.
Channel Structure
Zero-level Channel
(Manufacturer ---------------> Consumers)

One-level channel
(Manufacturer -------> Retailer -------> Consumer)

Two-level channel
(Manufacturer ------> Agent/Wholesaler ------>Retailer ------> Consumer)

Three-level channel
(Manufacturer---->Sole Agent---->Wholesaler---->Retailer---->Consumer)
Selection of marketing channels
•Marketing channels are to be selected on the basis of its effectiveness and
efficiency.
•Overall motive for prudent selection of marketing channel is focused on cost
minimization with maximization of profit through customer satisfaction.
•There are various factors and constraints that are to be considered before
deciding channel selection. These includes:
i.Nature of Market
ii.Nature of Product
iii.Consumer buying habits
iv.Competition
v.Financial Consideration
vi.Cost of Channel
 Selection of Marketing Channel
i. Nature of Market: The selection of channel depends on the requirement of the
market. Moreover, other factors to be considered are average demand size, repeat
demand/sales, seasonality of sales, scope of distribution and competition.
ii. Nature of Products: Product features also influence channel selection decision.
Nature of products may be defined on the basis of:
a) Perishability: This requires more of direct selling approach as to reduce risk
associated with time lapse and multi handling of products as different levels.
b) Size: Bulky objects require short distribution channels.
c) Style: This is dangerous elements and often demands frequent changes in
channel structure.
d) Unit Value: Products of high unit value are sold through direct channel.
e) Newness of Product: When new products are introduced, it requires
reassessment of channel structure.
 Selection of Marketing Channels
iii. Consumer Buying habits: The factor also influence decision in selecting
marketing channels. The consumer buying habits may be categorized as under:
a)Size of Average Sales: When the quantity sold is small the channels should be elaborate.
b)Seasonal Character of Sales: Continuous marketing channels must be used.
c)Concentration of Customers: if the market is fully concentrated and localized, direct
selling would be preferred.
iv. Competition: This also influences the decision of seller to decide on the
channel to be selected. Similar types of channels are preferred which are being
used by the competitors with main motive to reach targeted customer base and
to minimize cost of distribution.
v. Financial Consideration: Financial condition of channel members is also
considered for selection.
vi. Cost of Channel: Important factor to be considered in channel selection
Marketing Channel System
•Marketing Channel System is a process of developing and
adopting different approaches to reach to the target market
in partnership with different channel members.
•It has three major components:
i.Vertical Channel System
ii.Horizontal Channel System
iii.Multi Channel System
 Marketing channel system

i. Vertical channel system

• A vertical channel system is a type of cooperation between the
members of distribution channel.
• It includes a producer, a wholesaler and a retailer collaborating to
deliver necessary products to their customer and aims to
achieving better efficiency.
• If producer, distributor and retailer act together as one team to
provide service to the end user, it would be called a vertical
marketing system.
 Vertical Channel System

Vertical Channel System comprises three sub-systems as detailed:

a)Corporate Vertical Channel System
b)Administered Vertical Channel System
c)Contractual Vertical Channel Syste.

a)Corporate Vertical Channel System

Successive stages of production and distribution are handled by one
entity so that it has direct control on the distribution of its products.
 Vertical Channel System

Administered Vertical Channel System

One usually large entity co-ordinates the distribution activities and
gains market power by dominating the channel. This power could be
exercised in gaining shelf space, special displays, commanding pricing
policies and promotional strategies.
Contractual vertical channel system
Convenient arrangements made between channel members to exploit
favorable opportunities and economies of scale.
•Franchise contract
•Retailer cooperative
2) Horizontal Channel System
Two or more unrelated companies work together using the marketing
channel to benefit both the parties.eg. ATMs leading banks in
supermarkets.
3) Multi Channel System
A single firms uses two or more marketing channels to reach one or more
customer segments.
 Same product is sold to different market segments
 Unrelated products are sold in the same market.
 The size of buyer varies
 Geographic concentration of potential consumers varies-like in urban and
rural
 Power of Channel Members
• Power is the ability of one channel member (A) to get another
channel member (B) to do something it otherwise would not
have done.
• Power is the Potential for Influence.
• It can cause great damage because it can force another channel
to generate some value without generating it equitable
compensation for that effort.
Sources of Channel Power

Channel Power Comes from 5 different sources:

Reward, Coercive, Expert, Legitimate and Referent.
 Reward Power

• A reward is a benefit, given in return for a channel member’s

agreement to correct its behavior.
• In channel, the emphasis is mainly on financial rewards. A
channel member enjoys reward power by providing wider
margin, allocation of promotional allowances, functional
discount schemes, assignment of exclusive territories to other
members.
• This power is generally exercised by the manufacturer over
wholesalers and retailers.
 Coercive Power
•Coercive power denotes any negative sanction or punishment by a channel
member to another member.
•Coercion may result in terms of reduction in margin, withdrawal of rewards
previously granted, Slowing down of shipments etc. with holding sales
money etc. This power can be gained by any member of the channel.
•Coercion is synonymous with the potential to threaten another
organization either implicitly or explicitly.

Example:
•A manufacturer my stop supplying products to wholesalers.
•A wholesaler may not be making payment of good sold in time.
•A retailer may not be selling goods of the manufacturer.
 Expert Power
• The member having such knowledge and expertise gains
expert power by directing others with what is possesses.
• This power is generally exercised by intermediaries over the
manufactures because they have gained special knowledge
and expertise through direct dealings with target market.
 Referent Power
• Referent/Identification Power emerges when a channel member
feels that another member is in attractive group, and desires to
join that group.
• In case distributors have strong distribution network, the
manufacturer shows strong desire to join that network. In this
sense, referent power is gained by distributors.
Legitimate Power
• Legitimate Power is the right held by a channel member in
leader follower relationship to exert in influence on
another member.
• The power allows a channel leader to maintain
agreements and use patent and trade marks rights.
 Recent Trends in Marketing
Channels
Symbiotic Marketing
A marketing method in which one manufacturer sells its finished
product to another for resale under the second manufacturer's label
where that manufacturer already has access to the market through a
well-established distribution system.
Third Party Delivery

 Someone who may be indirectly involved but is not a

principal party to an arrangement, contract, deal,
lawsuit, or transaction.
 Multi –Channel Marketing
Systems
 A multichannel marketing system is an approach to marketing that
uses a variety of media to communicate with customers and
prospects.
 You can use media such as websites, printed publications,
advertising, email, mobile communications and social networking
sites to communicate marketing messages, build customer
relationships or sell products and services.
 The key to successful multichannel marketing is selecting the
channels that customers prefer to use and ensuring that your
messages are consistent across every channel.
Multi –level marketing

 Multi-level marketing is a strategy that some direct sales

companies use to encourage their existing distributors to
recruit new distributors by paying the existing distributors
a percentage of their recruits' sales.
 The recruits are known as a distributor's "down line." All
distributors also make money through direct sales of
products to customers.
 Amway is an example of a well-known direct-sales
company that uses multi-level marketing.
E-marketing

 Internet marketing, or online marketing, refers to

advertising and marketing efforts that use the Web and
email to drive direct sales via electronic commerce, in
addition to sales leads from Web sites or emails.
Direct Marketing

 Direct marketing is a form of advertising which allows

businesses and nonprofit organizations to communicate
directly to customers through a variety of media including
cell phone text messaging, email, websites, online adverts,
database marketing, fliers, catalog distribution,
promotional letters and targeted television, newspaper
and magazine advertisements as well as outdoor
advertising. Among practitioners, it is also known as direct
response.
Channel Reduction and
Elimination
 Business slows down and manufacturers reduce channel
members.
 When new products come in the market or when there is
takeover of the company manufacturers eliminate.
 https://youtu.be/0aNX5AoTeLg