Ch.1 Marketing Channel Concept
Growing Importance of Marketing
Channels
1. Explosion of information technology and Ecommerce
2. Greater difficulty of gaining a sustainable
competitive advantage
3. Growing power of distributors, especially retailers
in marketing channels
4. The need to reduce distribution costs
Growing Importance of Marketing
Channels
1. Explosion of information technology and Ecommerce
The introduction of E-commerce leads to a new types
of middlemen called ‘infomediaries’ along with cyber
retailer to connect buyers and sellers via the Internet.
E-commerce didn’t change everything, however it is
now merging with conventional channels in all business
around the world.
Growing Importance of Marketing
Channels
2. Greater difficulty of gaining a sustainable
competitive advantage
“Sustainable competitive advantage” is a competitive
edge that cannot be quickly/easily copied by
competitors.
• The large number of offices makes it easy for clients in
thousands of communities in the U.S. as well as Canada and
England to visit an offices and get in-person advice and
assistance from professional brokers.
Growing Importance of Marketing
Channels
3. Growing power of distributors, especially retailers
in marketing channels
The economic power has shifted from the producers of
goods to the distributors of goods especially the power
retailers.
They play the role of ‘gatekeepers’ act as buying agents
for their customers rather than as selling agents for
manufacturers.
Growing Importance of Marketing
Channels
4. The need to reduce distribution costs
Sometimes distribution costs are higher than the
manufacturing cost or the cost of raw materials and
component parts. Therefore, the cost control in the 21st
century will be marketing channels.
Autos
Software
Gasoline
Fax Machines
Packaged
Foods
Distribution
15%
25%
28%
30%
41%
Manufacturing
40%
65%
19%
30%
33%
Raw Materials
and
Components
45%
10%
53%
40%
26%
The Marketing Channel Defined
• The route taken by a product as it moves from
producer to the customer or other ultimate user.
• The path taken by the title to goods as it moves
through various agencies.
• A loose coalition of business firms that have
banded together for purposes of trade.
The Marketing Channel Defined
• Manufacturer: the movement of the product
through these various intermediaries.
• Intermediaries (wholesalers/retailers): the flow of
the title to the goods.
• Consumer: a lot of middlemen standing between
them and the producer of the product.
• Researcher: the structural dimensions and efficiency
of operation.
The Marketing Channel Defined
• “The external contactual organization that
management operates to achieve its
distribution objectives.”
(*a managerial decision-making viewpoint)
The Marketing Channel Defined
• external: the marketing channel exists outside
the firm (not a part of a firm’s internal
organizational structure.)
The Marketing Channel Defined
• contactual organization: firms or parties who
are involved in negotiatory functions as a
product or service moves from the producer
to its ultimate user.
The Marketing Channel Defined
• operates: suggests involvement by
management in the affairs of the channel.
The Marketing Channel Defined
• distribution objectives: management has
certain distribution goals to achieve.
Use of the Term Channel Manager
• Channel manager: anyone in a firm or
organization who is involved in marketing
channel decision making.
• In practice, the job title involves in channel
management may vary depends on the firms
such as ‘business development manager’,
‘director of channel management’, trade
marketing manager’ and etc.
Marketing Channels and
Marketing Management Strategy
• Marketing management process: a strategic
blending of 4 controllable marketing variables
(marketing mix) to meet the demands of customers
to which the firm wishes to appeal in the light of
internal and external uncontrollable variables
(marketing environments).
 Major tasks: to seek out potential target markets and
develop appropriate and coordinated 4Ps strategies to
serve those markets in competitive and dynamic
environment.
Marketing Channels and
Marketing Management Strategy
• Marketing channel strategy: one of the major
strategic areas of marketing management.
 Management must develop and operate its marketing
channels in such way as to support and enhance the other
strategic variables of the marketing mix in order to meet
the demand of the firm’s target markets.
Marketing Channels and
Marketing Management Strategy
• Coors Brewing Company is the nation’s 3rd largest brewery in
the U.S.
• The company faced the difficulties: slowed beer consumption,
new competitors such as microbreweries and foreign brands.
 Issues on product strategy: high rates of new product
failures, short product life cycles and competitors offer
similar products quickly.
 Issues on price strategy: intense price discounting (beer
wars)
 Issues on promotion strategy: high costs and short-lived of
promotion
Marketing Channels and
Marketing Management Strategy
• Coors Brewing Company came up with the channel strategy:
establish stronger relationships with its independent beer
distributors than the chief competitors had.
• This strategy has been vital to its competitive viability against
larger rivals. Strong distributor support also helped Coors to
increase its profits.
Channel Strategy versus Logistics
Management
Marketing
mix
Product
strategy
Pricing
strategy
Promotion
strategy
Distribution
strategy
Channel
strategy
component
Logistics
management
component
Channel Strategy versus
Logistics Management
Distribution
strategy
1st
Channel
strategy
component
2nd
Logistics
management
component
• Channel strategy is much broader and more
basic component than logistics management.
• Channel strategy is concerned with the entire
process of setting up and operating the
contactual organization that is responsible for
meeting the firm’s distribution objectives.
Channel Strategy versus
Logistics Management
Distribution
strategy
1st
Channel
strategy
component
2nd
Logistics
management
component
• Logistics management is more narrowly
focused on providing product availability at
the appropriate times and places in the
marketing channel.
• Usually, channel strategy must already be
formulated before logistics management can
even be considered.
Flows in Marketing Channels
The actual physical movement of the product from the
manufacturer through all of the parties who take
physical possession of the product, from its point
of production to final consumers.
1.
2.
3.
4.
5.
Product flow
Negotiation flow
Ownership flow
Information flow
Promotion flow
Flows in Marketing Channels
1.
2.
3.
4.
5.
Product flow
Negotiation flow
Ownership flow
Information flow
Promotion flow
Manufacturer
Transportation
company
Wholesalers
Retailers
Consumers
Flows in Marketing Channels
1.
2.
3.
4.
5.
Manufacturer
Product flow
Negotiation flow
Buying & selling
Ownership flow functions associated
with the transfer of
Information flow title (right of
ownership)
Wholesalers
Promotion flow
Retailers
Consumers
Negotiation
involve a
mutual
exchange
between
buyers and
sellers
Flows in Marketing Channels
1.
2.
3.
4.
5.
Product flow
Negotiation flow
Ownership flow
Information flow
Promotion flow
Manufacturer
Wholesalers
Retailers
Consumers
Flows in Marketing Channels
1.
2.
3.
4.
5.
Product flow
Negotiation flow
Ownership flow
Information flow
Promotion flow
Manufacturer
Transportation
company
Wholesalers
Retailers
Consumers
Flows in Marketing Channels
1.
2.
3.
4.
5.
Product flow
Negotiation flow
Ownership flow
Information flow
Promotion flow
Persuasive commu. in the
form of ad., personal
selling, sales promotion,
and publicity.
Manufacturer
Advertising
agency
Wholesalers
Retailers
Consumers
Distribution
strategy
1st
Channel
strategy
component
2nd
Logistics
management
component
In the context of channel flows concept:
• Channel strategy and management involve
planning for managing all of the flows
• Logistics is concerned almost exclusively with
the management of the product flow
Distribution through Intermediaries
Economic considerations in determining whether
intermediaries will appear in marketing channel:
Specialization and Division of Labor
“Breaking down a complex task into smaller, less complex ones
and allocating them to parties who are specialist at performing
them, much greater efficiency result.”
(see figure 1.5 Specialization and Division of Labor Principle:
Production vs. Distribution)
Distribution through Intermediaries
Economic considerations in determining whether
intermediaries will appear in marketing channel:
Contactual Efficiency
The level of negotiation effort between sellers and buyers
relative to achieving a distribution objective.
• Or it is the relationship between an input (negotiation
effort) and an output (distribution objective).
Example of Contactual Efficiency for
Granada Guitar Company
*Retailers Only
Negotiation
Effort (Inputs)
Estimated Dollar
Costs of Inputs
Distribution
Objective
(Outputs)
Contactual
Efficiency
1,500 sales visits
@ $50 = $75,000
1,000 phone calls
@
10 magazine ads
@1,000 = 10,000
Get 500 music
stores to carry new
guitar line.
Negotiation effort
in dollar terms
relative to achieving
the distribution
objective = $88,000
3 =
Total
3,000
$88,000
*Wholesalers
Negotiation
Effort (Inputs)
Estimated Dollar
Costs of Inputs
Distribution
Objective
(Outputs)
Contactual
Efficiency
100 sales visits
@ $50 = $5,000
100 phone calls
@
20 magazine ads
@1,000 = 20,000
Get 500 music
stores to carry new
guitar line.
Negotiation effort
in dollar terms
relative to achieving
the distribution
objective = $25,300
Total
3 =
√
300
$25,300
Distribution through Intermediaries
The use of additional intermediaries will often
increase the level of contactual efficiency.
 The use of wholesalers has eliminated the need for
direct contact with retailers, thereby greatly
reducing the number of contacts needed.
(see figure 1.6: How the introduction of additional
intermediary reduces the number of contacts)
Channel Structure
• The group of channel members to which a set
of distribution tasks has been allocated.
•
•
•
•
MC
MRC
MWRC
MAWRC
(2-level)
(3-level)
(4-level)
(5-level)
A = Agent
C = Consumer
M = Manufacturer
R = Retailer
W = Wholesaler
A Typical Portrayal of Channel Structure
for Consumer Goods
Two-level
Three-level
Four-level
Five-level
Channel Structure
• Multi-channel strategy: the firm has chosen
to reach its customers through more than 1
channel.
• This will result in multi-channel structure
because distribution tasks have been allocated
among more than 1 channel structure.
 Some firms also developed multi-channel
structures that include online channels.
Polo by
Ralph Lauren
Web site
Manufacturer
http://www.ralphlauren.com/
Upscale
department
stores
Specialty
apparel
retailers
Consumers
Companyowned stores
and outlets
Ancillary Structure
• The group of institutions (facilitating
agencies) that assists channel members in
performing distribution tasks.
• The role of facilitating agencies is one of
providing services to the channel members
after the basic channel decisions have already
been made.
• One of the world’s leading manufacturers of power
tools. B&D farm out the nonnegotiatory tasks to
facilitating agencies (the ancillary structure) as the
following:
 It uses the common carriers to transport its power tools to
industrial distributors.
 It uses the commercial insurance companies to protect
against risks while the products are transit.
 It uses independent advertising agencies to promote its
products.
Homework
1. What are the “Channel Participants”?
Explain.
2. What are the “Environment of Marketing
Channels”? Explain.
1st Quiz
1. Explain 2 reasons make marketing channel become
more important.
2. Explain what is marketing channel.
3. Explain what is ancillary structure.
4. Explain flows in marketing channel.
5. Explain the channel strategy and logistics
management.
6. In the case of Amway, what happened to its
marketing channel?