MARKETING CHANNELS-DELIVERING CUSTOMER VALUE

At the end of chapter the students would be able to answer:

Q1) What is the nature of marketing channels and why are they important?
Q2) How do channel firms interact and organize to do the work of the channel?
Q3) What problems do companies face in designing and managing their channels?
Q4) What role do physical distribution and supply chain management play in attracting and
satisfying customers?
Marketing Channel or Distribution ChannelA set of interdependent organizations that help make a product or service available for use or
consumption by the consumer or business us every other market affecter.
A companys channel decisions directly affect every other marketing decisions. Pricing is one
major factor affected by it. Apart from that firms sales force and communications decisions
depend on how much persuasion, training, motivation, and support its channel partners need.
Introduction of the new product would also be affected by the capabilities of its channel
members.
How channel members add value?
Producers give some of their selling job to channel partners. Producers use intermediaries
because they create greater efficiency in making goods available to target markets. Through their
contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm
more than it can achieve on its own.
Figure: Intermediaries can provide economies. The figure below shows the three manufacturers,
each using direct marketing to reach three consumers. This system requires nine different
contacts. The other figure shows three manufacturers working through one distributor, which
contacts the three customers. This system requires only six contacts. In this way, intermediaries
reduce the amount of work that must be done by both producers and consumers.

From the economic system s point of view, the role of marketing intermediaries is to transform
the assortments of products made by producers into the assortment wanted by customers.
Producers make narrow assortments of products in large quantities, but consumers want broad
assortments of products in small quantities. Marketing channel members buy large quantities
from many producers and break them down into the smaller quantities and broader assortments
wanted by consumers.
Fore.g. HUL makes million of bars of soap but we want only a few at a time. So retailers like Big
Bazar, More, Spencers and Metro, buy Lux by truck loads and stock it in their stores shelves.
Thus , intermediaries play an important role in matching demand and supply.
NUMBER OF CHANNEL LEVELS:
Channel level- A layer of intermediaries that performs some work in bringing the product and its
ownership closer to the final buyer.
The number of intermediary level indicates the length of a channel.
Channel1, called a direct marketing channel, has no intermediary level; the company sells
directly to the consumers. E.g. Eureka Forbes, Amway.
Indirect marketing Channel : Channel containing one or more intermediary level.
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The business marketer can use its own sales force to sell directly to business customers. Or it can
sell to various types of intermediaries, who in turn sell to these customers. Consumer and
business marketing channels with even more levels can sometimes be found, but less often. More
number of channels results in lesser control and greater channel complexity.
FIGURE : Channel Levels.

CHANNEL BEHAVIOR AND ORGANIZATIONDistribution channels are more than simple collections of firms tied together by various flows.
They are complex behavioral systems in which people and companies interact to accomplish
individual, company and channel goals.
CHANNEL BEHAVIOR- A marketing channel consists of firms that have partnered for their
common goals. Each channel member depends on the others. Each member plays a specialized
role in the channel. The success of individual channel members depends on overall channel
success, all channel firms should work together smoothly. They should understand and accept
their roles, coordinate their activities and cooperate to attain overall channel goals. E.g.
Samsungs role is to produce electronics products that consumers will like and to create demand
through national advertising. A retailers role is to display these Samsung products in convenient
locations, to answer buyers questions, and to complete sales. The channel will be most effective
when each channel member assumes the tasks it can do best.
Although channel members depend on one another, they often act alone in their own short-run
best interests. They often disagree on who should do what and for what rewards. Such
disagreements over goals, roles, and rewards generate Channel conflicts.
Horizontal conflicts occur among firms at the same level of the channel. For e.g. dealers may
have a conflict that one dealer is giving lower prices or advertising out of their territory and thus
stealing away their customers.

Vertical conflicts, conflicts between different levels of the same channel, is even more common.
For e.g. retailers may not cooperate with a company because of its policies, the trade margin it
offers or its behavior.
VERTICAL MARKETING SYSTEMA Conventional distribution channel consists of one or more independent producers, wholesalers
and retailers. Each is a separate business seeking to maximize its own profits, perhaps at the
expense of the system as a whole. No channel member has much control over the other members,
and no formal means exits for assigning roles and resolving channel conflict.
Vertical Marketing system consists of producers, wholesalers, and retailers acting as a unified
system. One channel members owns the others, has contracts with them, or wields so much
power that they must all cooperate. The VMS can be dominated by the producers, wholesaler ,or
retailer.

THREE TYPES OF VMS:

1)Corporate VMS: A vertical marketing system that combines successive stages of production
and distribution under single ownership- channel leadership is established through common
ownership.
e.g.owning the entire chains of production, distribution and marketing of the product.
2) Contractual VMS: A vertical marketing system in which independent firms at different levels
of production and distribution join together through contracts to obtain more economies or sales
impact than they could achieve alone.
Franchise organization: A contractual vertical marketing system in which a channel member,
called a franchisor, links several stages in the production-distribution process.

THREE TYPES OF FRANCHISE:

A) MANUFACTURER-SPONSORER RETAILER FRANCHISE e.g Ford and its network
of independent franchised dealers
B) MANUFACTURER SPONSORED WHOLESALER FRANCHISE SYSTEM e.g.Coca
cola licenses bottlers in various markets who buy coca- cola syrup concentrate and then
bottle and sell the finished product to the retailers in local markets.
C) SERVICE FIRM SPONSORED REATILER FRANCHISER SYSTEM e.g.fast food
service business Mc Donalds,
3) Administered VMS
A vertical marketing system that coordinates successive stages of production and distribution,
not through common ownership or contractual ties, but through the size and power of one of
the parties. E.g. manufacturers of top brands can obtain strong trade cooperation and support
from sellers. Parle, GE, Amul, HUL, P&G, Dabur, GILLETTE, can command unusual
cooperation from resellers regarding displays, shelf-space, promotions and price policies.
Large retailers such as bib bazar, Spencers, Wal Mart can exert strong influence on the
manufacturers that supply the products that they sell.
HORIZONTAL MARKETING SYSTEMA channel arrangement in which two or more companies at one level join together to follow a
new marketing opportunity. By working together, companies can combine their financial,
production, or marketing resources to accomplish more than any one company could lead.
Companies may join forces with competitors and non-competitors. They might work with
each other on a temporary or permanent basis, or they may create a separate company. E. Mc
Donalds places express versions in Wal Mart stores and benefits from High footfall rates of
the same.
MULTICHANNEL DISTRIBUTION SYSTEM
Today more and more companies are adopting Multi-channel distribution systems often
called hybrid marketing channel. Such multichannel marketing occurs when a single firm
sets up two or more marketing channels to reach one or more customer segments. The use of
multichannel systems has increased greatly in recent years.

Figure: Multichannel Distribution System

Almost all companies whether small or large distribute through multiple channels. For e.g.
Eureka Forbes sells Aqua guard water purifiers and vacuum cleaners directly to its
consumers; it also sells them through retailers. And it sells industrial cleaning and water
purification solutions through select large, full-service dealers and their sales force.
Advantages:
With each channel, the company expands its sales and market coverage and gains
opportunities to tailor its products and services to the specific needs of the diverse customer
segments.
Disadvantages:
Harder to control and they generate conflict as more channels compete for customers and
sales.

CHANNEL DESIGN DECISIONS:

It calls for the following:
1) Analyzing Consumer Needs- Marketing channels are a part of the overall customer-value
delivery network. Each channel member adds value for the customers. Thus designing the
marketing channel starts with finding out what target customer want from the channel.
Providing the fastest delivery, greatest assortment and most services may not be possible.
The company must balance consumer needs not only against the feasibility and costs of
meeting these needs but also against customer price preferences.
2) Setting Channel Objectives- Companies must state their marketing channel objectives in
terms of targeted levels of customer service. The companys channel objectives are also
influenced by the nature of the company, its products, its marketing intermediaries, its
competitors and the environment.
3) Identifying Major Alternativesa) Types of Intermediaries- A firm should identify the types of channel members
available to carry out its channel work. Using many resellers in a channel provides
both benefits and drawbacks.
b) Number of Marketing Intermediaries- Companies must determine the number of
channel members to use at each level. Three strategies are available: intensive
distribution, exclusive distribution and selective distribution. Intensive distribution
a strategy in which they stock their products in as many outlets as possible.e.g.
toothpaste, candy and other similar items. Exclusive Distribution- in which the
producer gives only a limited number of dealers the right to distribute its products in
their territories. e.g Rolex watches Selective distribution- the use of more than one,
but fewer than all, of the intermediaries who are willing to carry a companys
products. E.g. Whirlpool, G.E. etc.
c) Responsibilities of Channel Members- The producers and intermediaries need to
agree on the terms and responsibilities of each channel member. They should agree on
price policies, conditions of sale, territorial rights and specific services to be
performed by each party. The producer must establish a list price and a fair set of
discounts for intermediaries. It must define each channel members territory, and it
should be careful about where it paces new resellers.
4) Evaluating the Major Alternatives- Each of the several alternatives that have been
identified must be evaluated against economic, control and adaptive criteria.
5) Designing International Distribution Channels- International marketers face many
additional complexities in designing their channels. Each country has its own unique
distribution system that has evolved over time and changes very slowly. These channel
systems can vary widely from country to country. E.g.Avon had to shift to selling through
retail outlets as China does not allow Personal selling.

CHANNEL MANAGEMENT DECISIONS

1) Selecting Channel Members- Producers vary in their ability to attract qualified marketing
intermediaries. Some producers have no problems in signing up channel members. At the
other extreme are producers who have to work hard to line up enough qualified
intermediaries.
2) Managing and Motivating Channel Members- Once selected, channel members must be
continuously managed and motivated to do their best. The company must sell not only
through the intermediaries but to and with them. Most companies see their intermediaries
as first line customers and partners. They practice strong partner relationship
management to forge long-term partnerships with channel members.
3) Evaluating Channel Members- The producer must regularly check channel members
performance against standards such as sales quotas, average inventory levels, customer
delivery time, treatment of damaged and lost goods, cooperation in company promotion
and training programs and services to the customers.

Marketing Logistics and Supply Chain ManagementPlanning, implementation, and controlling the physical flow of materials, final goods, and
related information from points of origin to points of consumption to meet consumer
requirements at a profit.
Supply Chain Management (SCM) is the management of the flow of goods and services. It
includes the movement and storage of raw materials, work-in-process inventory, and finished
goods from point of origin to point of consumption.
Goals of the Logistics System:
Logistics objective could be set as providing maximum customer service at the least cost.
But these both maximizing customer satisfaction and minimizing distribution costa
cannot be done.
Maximum customer service implies rapid delivery, large inventories, flexible
assortments, liberal return policies etc which all raise distribution costs.
Minimum distribution costs involve slower delivery, smaller inventories, and larger
shipping lots- which all represent a lower level of overall customer service.
Major Logistics Functionsa) Warehousing
b) Inventory Management
c) Transportation
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d) Logistics Information Management

RETAILING AND WHOLESALINGRetailing includes all the activities in selling goods or services directly to final consumers for
personal, nonbusiness use.
Any organization selling to final consumerswhether it is a manufacturer, wholesaler, or
retaileris doing retailing. It doesnt matter how the goods or services are sold (in person, by
mail, telephone, vending machine, or on the Internet) or where (in a store, on the street, or in the
consumers home).
Major store typesMajor Types of Store Retailers
Specialty store: Narrow product line.
Department store: Several product lines.
Supermarket: Large, low-cost, low-margin, high-volume, self-service store designed to meet
total needs for food and household products.
Convenience store: Small store in residential area, often open 24/7, limited line of high-turnover
convenience products plus takeout.
Drug store: Prescription and pharmacies, health and beauty aids, other personal care, small
durable, miscellaneous items.
Discount store: Standard or specialty merchandise; low-price, low-margin, high-volume stores.
Extreme value or hard-discount store: A more restricted merchandise mix than discount stores
but at even lower prices.
Off-price retailer: Leftover goods, overruns, irregular merchandise sold at less than retail.
Factory outlets; independent off-price retailers such as TJ Maxx; warehouse clubs such as
Costco.
Superstore: Huge selling space, routinely purchased food and household items, plus services
(laundry, shoe repair, dry cleaning, check cashing). Category killer (deep assortment in one
category) such as Staples; combination store such as Jewel-Osco; hypermarket (huge stores that
combine supermarket, discount, and warehouse retailing) such as Carrefour in France and Meijer
in the Netherlands.
Catalog showroom: Broad selection of high-markup, fast-moving, brand-name goods sold by
catalog at a discount. Customers pick up merchandise at the store.
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WHOLESALERS
Wholesaling includes all the activities in selling goods or services to those who buy for resale or
business use. It excludes manufacturers and farmers because they are engaged primarily in
production,
and it excludes retailers.
MAJOR WHOLESALERS TYPESMajor Wholesaler Types
Merchant wholesalers: Independently owned businesses that take title to the merchandise they
handle. They are full-service and limited-service jobbers, distributors, and mill supply houses.
Full-service wholesalers: Carry stock, maintain a sales force, offer credit, make deliveries,
provide management assistance. Wholesale merchants sell primarily to retailers: Some carry
several merchandise lines, some carry one or two lines, others carry only part of a line. Industrial
distributors sell to manufacturers and also provide services such as credit and delivery.
Limited-service wholesalers: Cash and carry wholesalers sell a limited line of fast-moving
goods to small retailers for cash. Truck wholesalers sell and deliver a limited line of
semiperishable goods to supermarkets, grocery stores, hospitals, restaurants, hotels. Drop
shippers serve bulk industries such as coal, lumber, and heavy equipment. They assume title and
risk from the time an order is accepted to its delivery. Rack jobbers serve grocery retailers in
nonfood items. Delivery people set up displays, price goods, and keep inventory records; they
retain title to goods and bill retailers only for goods sold to the end of the year. Producers
cooperatives assemble farm produce to sell in local markets. Mail-order wholesalers send
catalogs to retail, industrial, and institutional customers; orders are filled and sent by
mail, rail, plane, or truck.
Brokers and agents: Facilitate buying and selling, on commission of 2 percent to 6 percent of
the selling price; limited functions; generally specialize by product line or customer type.
Brokers bring buyers and sellers together and assist in negotiation; they are paid by the party
hiring themfood brokers, real estate brokers, insurance brokers. Agents represent buyers or
sellers on a more permanent basis. Most manufacturers agents are small businesses with a few
skilled salespeople: Selling agents have contractual authority to sell a manufacturers entire
output; purchasing agents make purchases for buyers and often receive, inspect, warehouse, and
ship merchandise; commission merchants take physical possession of products and negotiate
sales.
Manufacturers and retailers branches and offices: Wholesaling operations conducted by
sellers or buyers themselves rather than through independent wholesalers. Separate branches and
offices are dedicated to sales or purchasing. Many retailers set up purchasing offices in major
market centers.

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Specialized wholesalers: Agricultural assemblers (buy the agricultural output of many farms),
petroleum bulk plants and terminals (consolidate the output of many wells), and auction
companies (auction cars, equipment, etc., to dealers and other businesses .

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