Marketing
Channels:
Structure and
Functions
14th February 2008
Middlemen are responsible for
the increase in prices!!!
You have good reasons to agree
to this statement….
Comment!!!
Marketing Channel
is a set of
interdependent organizations
involved in the process of making
a product or service
available
for use or consumption
The purpose of a marketing channel is to satisfy
the end – users in the market.
Concepts underlying
the Distribution System
A middleman is an independent business
concern standing between the producer and
the ultimate user
Either he
- Takes title to the merchandise as it
flows from producer to consumer
- or he actively negotiates the transfer
of title
Classifying Middlemen
Basis :
Whether they take title to the
products involved
Type :
Merchant Middlemen
Wholesalers and retailers who take title
Agent Middlemen
Brokers and manufacturer’s agents who do not
take title but actively assist in the transfer of title
Exchange without Intermediaries
Cloth
Shovels
Meat
Number of Exchanges
Vegetables
Baskets
= n(n -1)
2
= 10
Where n = number of consuming units
Number of Transactions
Without Marketing Intermediaries
In the real world the number of producing
and consuming units would be far greater.
Number of
Units
25
100
500
1000
Number of
Transactions
300
4950
124750
499500
Exchange with Intermediaries
Cloth
Shovels
Meat
Trading
Post
Number of Exchanges
Vegetables
= 5
Baskets
Contact Cost to Reach the Market
with and without Intermediaries
Selling Directly
Manufacturers
40 Contact
Lines
Retailers
Contact Cost to Reach the Market
with and without Intermediaries
Selling Through One Wholesaler
Manufacturers
Wholesaler
Retailers
14 Contact
Lines
Contact Cost to Reach the Market
with and without Intermediaries
Selling Through Two Wholesalers
Manufacturers
Wholesalers
Retailers
28 Contact Lines
Number of Transactions and
Marketing Costs
Activities involved in sale to
a retailer
Costs involved for each
activity
Contact with the retailer by
salesman
Travel costs and selling time to
canvass biz
If it’s a new account, credit
investigation
Unchanged with number of
products sold
If an order is received, processing
of the order
Marginal increase with increase in
size of order
Delivery of the goods
Unchanged or relatively higher for
smaller orders
Billing
Unchanged
Collection of payments
Unchanged
Why are there
Marketing Channels???
Demand side factors :
•
•
Facilitation of search
Adjustment of assortment
discrepancy
Supply side factors :
• Routinization
• Reduction in number of contacts
What is the work of the
Marketing Channels???
Performance of the
Marketing Flows
The term “FLOWS” is used
(instead of functions or activities)
to emphasize that
these processes flow through the channel.
Physical
Possession
Ownership
Physical
Possession
Ownership
Promotion
Promotion
Promotion
Negotiation
Negotiation
Financing
Financing
Risking
Risking
Risking
Ordering
Ordering
Ordering
Payment
Payment
Payment
Negotiation
Financing
Commercial Channel Subsystem
Note :Each flow carries a cost
Consumers Industrial
and Household
Physical
Possession
Ownership
Wholesalers
Producers
Marketing Flows in Channels
Examples of Costs of various
Flows
Marketing
flow
Cost represented
1.
Physical possession
Storage and delivery costs
2.
Ownership
Inventory carrying costs
3.
Promotion
Personal selling, advertising, sales
promotion, public relations, publicity
4.
Negotiation
Time and legal costs
5.
Financing
Credit terms, terms and conditions of sale
6.
Risking
Warranties, repair, after sales service
costs
7.
Ordering
Order-processing costs
8.
Payment
Collections, bad debts costs
Who Belongs to a Marketing
Channel???
The key members are :
Manufacturers – producer or originator of the product
Intermediaries – (wholesalers, agents, brokers,
retailers) that assist producers and manufacturers (and final
users) in the performance of negotiatory functions
End-users – either individual or business customers
Intermediaries
Refers to any channel member other than
the manufacturer or the end-user.
Three types of intermediaries :
Our focus during
• Wholesalers
this course is on
•
Retailers
•
Specialized – such as insurance companies,
banks, shipping firms, advertising agencies
Sales contact
Customer service
Inventory holding
Order processing
Market information
Tasks
performed
by
Wholesalers
For Consumers
Product availability
For Manufacturers
Market coverage
Credit
Assortment
convenience
Breaking bulk
Customer support
Result?
Effective and efficient marketing channels
Advice and
technical support
Distribution Tasks performed
by Retailers
The role of a retailer in the distribution channel,
regardless of his size or type, is to :
•
Interpret the demands of his customers
•
Find and stock the goods these customers
want
•
When they want them,
•
And in the way the want them.
Facilitating Agencies
1. Transportation agencies
2. Storage agencies
3. Order processing agencies
4. Advertising agencies
5. Financial agencies
6. Insurance companies
7. Marketing research firms
What is the best channel
for a particular product???
An
Analytic Framework
for
Channel Design
and
Implementation
Designing the Right Channel
The steps in designing the Right Channel are :
•
Segmenting the market by service outputs
desired
•
Positioning
•
Targeting
Segmentation
for
Marketing Channel
Design:
Service Outputs
The Marketing Channel
System Design and Management requires
starting with the
END – USERs
each of whom will have differential
preference for service output levels that
reduce their
Search, Waiting time, Storage and other
Costs
Segmenting for Channel Design
Segmenting on the basis of the
demands for the outputs of the
marketing channel
Service outputs include :
Bulk breaking
Assortment
Variety
Waiting and delivery time
Spatial convenience
Role of Service Output Demand
Analysis in
Marketing Channel Design
After segmenting the market on the basis of SODs,
the channel manager can easily
1. Assess segment attractiveness
2. Target a subset of the segments identified
3. Customize the marketing channel system
solution for each targeted segment
Service Output Demand Differences
SERVICE
OUTPUT
FAMILY
SERVICE OUTPUT
DESCRIPTOR
DEMAND LEVEL
Bulk-breaking
“I buy groceries
weekly for my
family, and all of us
like soft drinks”
Spatial
convenience
“I drive to the
supermarkets in my
area to shop”
Quick delivery
“We usually have some
extra cans of soft drinks
in the house, so I’ll just
come back the next time
if I can’t find the drinks
I want on this trip”
Assortment
and variety
“My husband and I like
Coke and Pepsi, but our
kids aren’t permitted to
drink caffeinated soft
drinks. They like
caffeine-free fruitflavored soft drinks”
LOW
OFFICE EMPLOYEE
SERVICE
DESCRIPTOR
OUTPUT
DEMAND
LEVEL
“I’m on my coffee
break and I have only
have time for one can
of soft drink”
HIGH
LOW
“I only have 15 minutes
for my break, so I need to
buy whatever is handy”
HIGH
LOW
“If I don’t get my soft
drink right at 3:00
when my break starts,
I’ll never have a
chance to go back later
and get one”
HIGH
HIGH
“I can’t be too
particular about which
soft drink I pick. It’s
important to me to get
one, as long as it has
caffeine”
MODERATE
Service Output Demand Template
for Laptop Computers
SERVICE OUTPUT DEMAND:
SEGMENT
NAME/
DESCRIPTOR
SPATIAL
CONVENIENCE
DELIVERY/
WAITING
TIME
ASSORTMENT/
VARIETY
Low
High
High
Low
2. Home
buyer
High
High
Low
High
3. Student
High
High
High
High
1. Business
buyer
4.
5.
BULK
BREAKING
OTHER
SERVICE
OUTPUT
DEMANDS
Targeting
The segments to be targeted would depend
upon :
Internal environment – the constraints
the company faces
External environment – such as
legal constraints, trade practices,
channel power.
Channel design : Positioning
Each segment will have its own set of service output
demands
The channel designer must therefore decide :
1. The type - optimal channel structure to produce the channel flows
2. The identity – exact identity of the channel partner to use at each
level of the channel
3. The intensity – how many of each type of channel members
of the channel members at each level
At the minimum channel flow cost
Channels of Distribution - Levels
Consumer Goods
Manufacturer
Manufacturer
Retailer
One Level
Manufacturer
Wholesaler
Retailer
Two Level
Manufacturer
Agent
Wholesaler
Retailer
CONSUMER
Zero Level
Channels of Distribution
Industrial Goods
Manufacturer
Manufacturer’s
Agent
Manufacturer
Industrial
Supply House
CONSUMER
Manufacturer
Channel Design
Establish new channels – Zero based
channel design
Modify existing channels – after a
Gap Analysis (the differences between the zero
based and actual channels)
Demand and Supply Side
Gaps
Demand Side Gaps – at least one of the service
output demands is not being appropriately met by
the channel.
Undersupplied
Dissatisfaction
Oversupplied
High cost
leading to drop
in sales and
market share
Service Output
Supply Side Gaps – at least one flow in the channel
is carried out at too high a cost
Channel Power
A channel member’s
power to control
the decision variables
in the marketing strategy of
another member
in a given channel at a
different level of distribution
Channel Conflict
When one channel member’s actions
prevents the channel from achieving its
goal, there is Channel Conflict.
Types of Channel Conflicts :
* Goal conflict
* Domain conflict
* Perceptual conflict
Channel Management Schematic
1.
SEGMENTATION
Define
SODs by
segment
Identify
environmental
characteristics
and constraints
2.
POSITIONING
Define optimal
channel flow
performance for
each segment
Define
optimal
channel
structure for
each segment
3.
TARGETING
Choose segments to
target, subject to:
Environmental
bounds
Managerial bounds
Competitive
Benchmarks
4A. ESTABLISH
NEW CHANNELS
Channel flow
performance
Channel
structure
4B. REFINE
EXISTING
CHANNELS
Gap Analysis
Channel flow
performance
Channel
structure
CHANNEL DESIGN PROCESS
THAT’S ALL FOR
TODAY!!!