Managing Marteing Channels

Designing and Managing Value Networks and

Marketing Channels

Managing Managing Marketing Marketing

Channels Channels Channels should be chosen according to their efficiency, controllability and adaptability.

Marketing Channels

Marketing Channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption.

What Work is Performed by Marketing Channels

Many Producers lack the financial resources to carry out direct marketing

In some cases direct marketing simply is not feasible

Producers who do establish their own channels can often earn a greater return by increasing their investment in their main business

What Work is Performed by Marketing Channels

Number of contacts, 3x3=9

What Work is Performed by Marketing Channels

Number of contacts, 3+3=6

Channel Functions and Flows

Members of the marketing channel perform a number of key functions:

They gather information about potential and current customers, competitors and other actors and forces in the marketing environment.

They develop and disseminate persuasive communications to stimulate purchasing

They reach agreement on price and other terms so that transfer of ownership or possession can be effected

Channel Functions and Flows They place orders with manufacturers They acquire the funds to finance inventories

at different levels in the marketing channel They assume risks connected with carrying

out channel work They provide for the successive storage and

movement of physical products They provide for buyers’ payment of their bills

through banks and other financial institutions They oversee actual transfer of ownership

from one organization or persona to another

Channel Functions and Flows

Forward Flow of activity:Company CustomerE.G. Physical, title, promotion etc.Backward Flow of activity:Customer CompanyE.G. Ordering and paymentOther Flow of activity:Company CustomerE.G.Information, negotiation, finance, risk

taking etc.

Channel Functions and Flows

All channel functions have three things in common:

They use up scarce resources they can often be performed better

through specialization they can be shifted among channel

members

Channel Levels Zero level channel/Direct marketing channel:

Manufacturer selling directly to the final customer One level channel:

Contains one selling intermediary, such as a retailer

Two level channel:contains two intermediaries, such as a wholesaler and a retailer

Three level channel:contains three intermediaries, such as wholesalers, jobbers, small retailersLonger marketing channels can be found. All of these channels are quite known in industrial marketing channels

Service Sector Channel

With the advancement of internet technology, service industries such as banking, insurance, travel and stock buying and selling will take place through new channels.

Analyzing Customers’ Desired service output levels

1. Lot size: The number of units the channel permits a typical customer to purchase on one occasion.

2. Waiting time: The average time customers of that channel wait for receipt of the goods.

3. Spatial convenience: The degree to which the marketing channel makes it easy for customers to purchase the product.

Analyzing Customers’ Desired service output

levels (contd.)

4. Product variety: The association breadth provided by the marketing channel.

5.Service backup: The add-on service (credit, delivery, installation, repairs) provided by the channel.

Establishing Objectives and constraints

Channel objectives vary with product characteristics.

Perishable products require more direct marketing.

Bulky products, such as building materials, require channels that minimize the shipping distance and the amount of handling in the movement from product to consumer.

Establishing Objectives and constraints (Contd.)

Nonstandardized products, such as custom-built machinery and specialized business form, are sold directly by company sales representatives.

Product requiring installation or maintenance services such as heating and cooling systems are usually sold and maintained by the company or exclusively franchised dealers.

High-unit-value products such as generators and turbines are often sold through a company sales force rather than intermediaries.

Establishing Objectives and constraints (Contd.)

Channel design must take into account the strengths and weaknesses of different types of intermediaries.

Channel design must adapt ot the larger environment.

Identifying Major Channel Alternatives

A channel alternative is described by three elements:

1. The types of available business intermediaries

2. The number of intermediaries needed

3. The terms and responsibilities of each channel member

Types of Intermediaries

The firm needs to identify the types of intermediaries available to carry on its channel work.

Company should search for innovative marketing channels.

Sometimes a company chooses and unconventional channel because of the difficulty or cost of working with the dominant channel. The advantage is hat the company will envounter less competition in the initial move into this channel.

Number of Intermediaries1. Exclusive distribution: means severely limiting

the number of intermediaries. Used when the producer wants to maintain control over the service level and service outputs offered by the resellers.

2. Selective distribution: involves the use of more than a few but less than all of the intermediaries who are willing to carry a particular product. Used by established companies and by new companies seeking distribution.

3. Intensive distribution: consists of the manufacturing placing the goods or services in as many outlets as possible. Used for products that require a great deal of location convenience.

Terms and Responsibilities of channel Members

The main elements in the trade-relations mix are:

Price policy calls for the producer to establish a price list and schedule of discounts and allowances that intermediaries see as equitable and sufficient.

Conditions of sale refers to payment terms and producer guarantees. Most producers grant cash discounts to distributors for early payment. Producers might also guarantee distributors against defective merchandise of price declines.

Terms and Responsibilities of channel Members (contd.)

Distributors’ territorial rights define the distributors’ territories and the terms under which the producer will enfranchise other distributors. Distributors normally expect to receive full credit for all sales in their territory, whether or not they did the selling.

Mutual services and responsibilities are conditions that must be carefully spelled out, especially in franchised and exclusive-agency channels.

Evaluating the Major Alternatives

Each Channel alternative needs to be evaluated against three criteria,

1. Economic2. Control3. Adaptive

Economic Criteria1. Determine whether a company sales force

or a sales agency will produce more sales.Company Sales

Force Concentrate on the

company’s products They are better trained

to sell those products They are more

aggressive because their future depends on the company’s success

They are more successful because many customers prefer to deal directly with the company

Sales Agency

Have 30 representatives not just 10

Might be just as aggressive as a direct sales force, depending on the commission level

Some consumers prefer dealing with agents as they represent several manufacturers

have extensive contacts and marketplace knowledge

Economic Criteria

2. Estimating the cost of selling different volumes through each channel.

Company Sales force

Manufacturer’s sales agency

Level of sales (dollars)SB

Sel

ling

Cos

ts (

doll

ars)

Economic Criteria

3. Comparing sales and costs

Sales agency is the better channel for any sales volume below SB

The company sales branch is better at any volume above SB.

Control Criteria

Using a sales agency poses some control problem:

1. Agents may concentrate on the customers who buy the most not necessarily of the manufacturer’s goods

2. Agents might not master the technical details of the company’s product or handle its promotion materials effectively

Adaptive Criteria

To develop a channel, members must make some degree of commitment to each other for a specified period of time. Yet these commitments invariably lead to a decrease in the producer’s ability to respond to a changing marketplace. In rapidly changing, volatile or uncertain product markets, the producer needs channel structures and policies that provide high adaptability

Channel-Management Decisions

After a company has chosen a channel alternative, individual intermediaries must be selected,trained, motivated and evaluated.

Selecting Channel Members

The characteristics that are considered to distinguish better intermediaries:

Years in business Other lines carried Growth and profit record Solvency Cooperativeness reputation

Selecting Channel Members (contd.)

If the intermediaries are sales agents:

The size and quality of the sales forceIf the intermediaries are department stores:

Locations, future growth potential and type of clientele

Training Channel Members

Why do the companies train the distributors and dealers:Because the intermediaries will be viewed as the company by end users.

Motivating Channel Members A company needs to view its intermediaries

in the same way that it views its end users. The company needs to determine

intermediaries’ needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries

The company should provide training programs, market research programs and other capability-building programs to improve intermediaries’ performance.

The company must constantly communicate its view that the intermediaries are partners in the joint effort to satisfy end-using consumers.

Motivating Channel Members (contd.)

Producers can draw on the following types of power to elicit cooperation from the distributors:

1. Coercive power occurs when the manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries are highly dependent upon the manufacturer. But the exercise of coercive power produces resentment and can lead the intermediaries to organize countervailing power

2. Reward Power occurs when the manufacturer offers intermediaries an extra benefit for performing specific acts or functions. Reward power typically produces better results than coercive power but can be overrated.

Motivating Channel Members (contd.)

3. Legitimate power is wielded when the manufacturer requests a behavior that is warranted under the contract. As long as the intermediaries view the manufacturer as a legitimate leader, legitimate power works.

4. Expert power can be applied when the manufacturer has special knowledge that the intermediaries value. This is an effective form of power if intermediaries would perform poorly without this help.

5. Referent power occurs when the manufacturer is so highly respected that intermediaries are proud to be associated.

Motivating Channel Members (contd.)

Manufacturers will gain cooperation best if they would resort to referent power, expert power, legitimate power and generally avoid using coercive power

Motivating Channel Members (contd.)

Intermediaries can aim for a relationship based on cooperation, partnership or distribution programming.

Most producers see the main challenge as gaining intermediaries’ cooperation.

Producers often use positive motivation like, higher margins, special deals, premiums, cooperative advertising, allowances, display allowances and sales contests.

At times producers can apply negative sanctions like, threatening to reduce margins, slow down delivery, or terminate the relationship. The weakness of this approach is that the producer is using crude stimulus-response thinking.

More sophisticated companies try to forge a long-term partnership with distributors.

Motivating Channel Members (contd.)

The most advanced supply-distributor arrangement is distribution programming, which can be define as building a planned, professionally managed, vertical marketing system that meets the needs of both manufacturer and distributors.

The manufacturer establishes a department within the company called distributor-relations planning. Its job is to identify distributor needs and build up merchandising programs to help each distributor operate as efficiently as possible.

This department and the distributors jointly plan merchandising goals, inventory levels, space and visual merchandising plans, sales-training requirements, and advertising and promotion plans.

Evaluation Channel Members

Producers must periodically evaluate intermediaries’ performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods,and cooperation in promotional and training programs.

Modifying Channel Arrangements

A Producer must periodically review and modify its channel arrangements. Modification becomes necessary when the distribution channel is not working as planned, consumer buying patterns change, the market expands, new competition arises, innovative distribution channels emerge and the product moves into later stages in the product life cycle.

Modifying Channel Arrangements (Contd.)No marketing channel will remain effective over the whole product life cycle. Miland Lele developed the grid to show how marketing channels have changed for PCs and designer appearel at different stages in the PLC.

Value added by the channel

Mar

ket

gro

wth

rat

e 1. Introductory

-PC’s: hobbyist store

-Designer apparel: boutiques

4. Declining

-PC’s: mail order

-Designer apparel: off-price stores

2. Growing

-PC’s: specialty retailers

-Designer apparel: better department stores

3. Mature

-PC’s: mass merchandisers

-Designer apparel: mass merchandisers

High Low

Low

Hig

h

Modifying Channel Arrangements (contd.)

Stern and sturdivant have outlined an excellent framework, called Customer Driven Distribution System Design.Six steps are involved:

1. Research target customers’ value perceptions, needs, and desires regarding channel service outputs

2. Examine the performance of the company’s and competitors’ existing distribution systems in relation to customer desires

3. Find service output gaps that need corrective action

4. Identify major constraints that will limit possible corrective actions

5. Design a “managemetn-bounded” channel solution

6. Implement the reconfigured distribution system

Channel Dynamics

Distribution Channels do not stand still. New wholesaling and retailing institution emerges and new channel systems evolve like:

Vertical Horizontal Multichannel

Vertical Marketing Systems

A vertical marketing system comprises the producer, wholesaler(s), and retailer(s) acting as a unified system.

One channel member (producer, wholesaler, retailer), the channel captain owns the others or franchises them or has so much power that they all cooperate.

Vertical Marketing Systems (contd.)

There are three types of Vertical Marketing System:

1. Corporate2. Administered3. Contractual

Vertical Marketing Systems (Contd.)

1. Corporate VMS: Combines successive stages of Production and distribution under single ownership. Vertical integration is preferred by the companies that desire a high level of control over their channels.

2. Administered VMS: coordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers.

Vertical Marketing Systems (Contd.)

Contractual VMS: consists of independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Johnstone and Lawrence call them “value adding partnership (VAP).

Contractual VMS are of three types:1. Wholesaler sponsored voluntary chains2. Retailer cooperatives3. Franchise organizations

Vertical Marketing Systems (Contd.)

The traditional system is the Manufacturer-sponsored retailer franchise

Another is the Manufacturer-sponsored wholesaler franchise

A newer system is the service-firm-sponsored retailer franchise

The new competition in retailing

Many independent retailers that have not joined VMSs have developed specialty stores that serve special market segments. The result is a polarization in retailing between large vertical marketing organizations and independent specialty stores.

This development creates a problem for the manufacturers. They are strongly tied to independent intermediaries, which they cannot easily give up. But they must eventually realign themselves with the high-growth vertical marketing systems on less attractive terms.

The new competition in retailing (contd.)

Furthermore, vertical marketing systems constantly threaten to bypass large manufacturers and set up their own manufacturing.

The new competition in retailing is no longer between independent business units but between whole systems of centrally programmed networks competing against one another to achieve the best cost economics and customer response.

Horizontal Marketing System

In horizontal marketing system, two or more unrelated companies put together resource or programs to exploit an emerging marketing opportunity.

Each company lacks the capital, know-how, production or marketing resources to venture alone.

Roles of Individual Firms in a channel

Insiders Strivers Complementers Transients Outside innovators

Channel Cooperation, Conflict, and CompetitionTypes of conflict and competition: Vertical conflict Horizontal conflict multichannel conflictCauses of Channel Conflict: Goal incompatibility Unclear roles and rights Differences in perception Great dependence

Channel Cooperation, Conflict, and Competition

Managing Channel Conflict: Super ordinate goals Exchange of persons Cooperation Joint membership in and

between trade associations

Channel Cooperation, Conflict, and Competition

Legal and Ethical Issues in channel relations:

Exclusive dealing Exclusive Territories Tying Agreements Dealer’s rights