Objective 4.08
• Acquire foundational knowledge of channel management to
understand its role in marketing
How do channel members add value?
The use of intermediaries results from their greater efficiency in
making goods available to target markets.
 Offers the firm more than it can achieve on its own through the
intermediaries contacts, experience, specialization, and scale of
operation.
Channel intermediaries offer contacts, experience, specialization, and
economies of scale to organizations that cannot offer these attributes on
their own.
 Marketing channels allows producers to realize the benefits that only
larger organizations may be able to support.
 Channel intermediaries offer value in the form of Information,
Promotion, Negotiation, Funding, Risk taking, Physical possession,
Payment options, and Title
Channel Functions
• Information
• Negotiation
• Promotion
• Funding
• Contact
• Risk taking
• Matching
• Physical
distribution
• Payment options
Key Channel Tasks
•
Marketing
•
Delivery
•
Packaging
•
Merchandising
•
Financing
•
Personal Selling
•
Storage
When will a Channel be most effective?
• Each member is assigned tasks it can do best
• All members cooperate to attain overall channel goals
• If the channel is not effective, conflict occurs:
• Horizontal – Occurs among firms at the same level of the
channel (ex. Retailer to retailer)
• Vertical – Occurs between different levels of the same channel
(ex. Wholesaler to retailer)
Describe Channel Management Decisions
Selecting Channel Members
– Involves determining the characteristics that distinguish the better ones by
evaluating channel members
• Do they: Provide value? Perform a function? Expect an economic return ?
• Years in business
• Lines carried
• Profit record
– Selecting intermediaries that are sales agents involves evaluating
• Number and character of other lines carried
• Size and quality of sales force
– Selecting intermediates that are retail stores that want exclusive or selective
distribution involves evaluating
• Store’s customers
• Store locations
• Growth potential
Describe Channel Management Decisions
• Managing and Motivating Channel Members
• Partner relationship management (PRM) and supply chain management (SCM) software
are used to
• Forge long-term partnerships with channel members
• Recruit, train, organize, manage, motivate, and evaluate channel members
• The company must sell not only through the intermediaries but also to/with them
• Methods to motivate channel partners are:
• Develop a cooperative/collaborative and balanced relationship with the partner
• Understand the partner’s customers – their needs, wants, and demands
• Understand the partner’s business – operationally and financially and what’s really
important to them
• Look at the partner’s needs in terms of customer support, technical support, and
training
• Establish clear and agreed upon expectations and goals
• Develop recognition programs focusing on the partner’s contributions
• Build internal support systems and dedicate resources to the partner
• Evaluating Channel Members
• Produces must evaluate intermediaries performance against such standards as:
• Sales quota attainment
• Average inventory levels
• Customer delivery time
• Treatment of damaged and lost goods
• Cooperation in promotional and training programs.
Channel Design Decisions
• Analyzing consumer needs
• Setting Channel Objectives
• Identifying Major Alternatives
• Types of intermediaries
• Company sales force
• Manufacturer’s agency
• Industrial distributors
• Number of intermediaries
• Responsibilities of intermediaries
Types of Channel
Members/Intermediaries
• There are a variety of intermediaries that may get involved before a
product gets from the original producer to the final user.
• Retailers
• Can be classified by:
• Type of goods being sold( e.g. clothes, grocery, furniture)
• Type of service (e.g. self-service, counter-service)
• Size (e.g. corner shop; superstore)
• Ownership (e.g. privately-owned independent; public-quoted
retail group)
• Location (e.g. rural, city-centre, out-of-town)
• Brand (e.g. nationwide retail brands; local one-shop name)
• Wholesalers
• Distributors and dealers
• Franchises
• Agents
What is the importance of middlemen in
channel of distribution?
• Middlemen provide value to producers because
they often have expertise in certain areas that
producers do not have.
• Intermediaries that sell to final user are experts
in displaying, merchandising, and providing
convenient shopping locations and hours for
customers.
• Reduce the number of contacts required to reach
the final user of the product.
Channel Behavior and Organization
A multichannel distribution system
Producer
Producer
Producer
Producer
Agent
Consumer
Retailer
Wholesaler
Wholesaler
Retailer
Channels
for
consumer
goods
and
services
Consumer
Retailer
Consumer
Consumer
Producer
Buyer
Producer
BB distributor
Buyer
Producer
Producer
Agent
Agent
Buyer
Distributor
Buyer
Channels for
industrial
goods and
services
Illegal Channel Management Activities
Tying Agreements
Full-Line Forcing
Closed Territories
Laws that Govern Channel Management
Activities
• Sherman Act of 1890
• Clayton Antitrust Act of 1914
• Robinson-Patman Act of 1936
• Federal Trade Commission Act of 1914
Impact of Regulation on Channel
Management Activities
• Designed to promote a free-market system and protect against restraints of trade.
• Political theory supported a body of law that promoted equality and fair play
among businesses--interests of the entrepreneur are paramount, even if the end
result is economic inefficiency, which essentially puts the entrepreneur's interests
ahead of that of the consumer.
• Economists viewed antitrust as a body of law designed to protect competition and
production efficiency, with the emphasis on the consumer and not the interests of
individual competitors.
• Owners and managers of growing companies adopting aggressive strategies in
order to expand market share must be aware of the pricing, customer relations,
marketing practices and distribution methods that will not be tolerated.
• To avoid antitrust problems and penalties, a formal antitrust compliance program
should be developed and maintained. Implementation of such a program should
begin with an antitrust audit, which consists primarily of circulating a legal and
strategic questionnaire to all key employees responsible for marketing, distribution
and pricing decisions. The purpose of the questionnaire is to identify existing
company policies, objectives, activities, contracts, practices, and even attitudes that
could create problems under the antitrust laws.
Impact of Regulation on Channel Management Activities
continued
• What cannot be done….
• Monopolies--such as price discrimination, a refusal to do business with a given customer or
supplier (often referred to as a "refusal to deal"), certain customer and territorial restrictions,
mergers of rivals, tying arrangements and conspiracies among competitors, some of which will
be discussed in greater detail below.
• Price-Fixing - If two or more competitors conspire to fix prices or methods of price
computation at a certain level, then such conduct per se is illegal. Or "conscious parallelism," by
which companies follow the acts of a dominant market leader, by changing prices or sales terms,
even in the absence of a formal agreement to fix prices among competitors.
• Price Discrimination - Most price discrimination issues arise under the Robinson-Patman Act
when a seller offers its otherwise uniform products at different prices due to size or geographic
location of the buyer.
• Vertical Non-Price Restraints - Manufacturers may attempt to implement a variety of
restraints affecting distribution channels that trigger antitrust considerations. The three most
common forms are tying, exclusive dealing, territorial and customer restrictions.
• Tying is an arrangement by which the sale or lease of Product X, which the buyer wants, is
conditioned on the buyer also purchasing Product Y, which the buyer does not necessarily want.
• Exclusive dealing involves a situation in which a buyer contracts to purchase all of its
requirements for a given product exclusively from a particular seller.
Impact of Regulation on Channel Management
Activities continued
• Territorial and Customer Restrictions usually involve attempts by sellers
to divide the targeted market into distinct territorial segments and grant
geographic or customer exclusivity to a given buyer.
• Vertical restraints are those placed by a manufacturer on a distributor or
by a wholesaler on a retailer. These are restraints on trade that develop
between firms at different levels in the production and distribution network
and are relevant when building distribution channels.
• Horizontal Restraints are practices by firms operating at the same level in
the distribution chain and generally doing business in the same markets.
The laws are designed to protect against large portions of market strength
and market share being concentrated in the hands of one or only a few firms
• The penalties for failure to obey the federal antitrust laws can be severe, and in
the past have included criminal sanctions, injunctive relief, damages for lost
profits, and in certain cases triple damages.
Gray Market
• A gray market is a market created through the sale or
resale of branded products through unauthorized
dealers or distributors. These are real products showing
up in places in which the firm never expected them to
be sold – and it happens all the time.
• Can and do cause problems for firms. Their existence
can damage channel relationships, foster free-riding,
dilute brands, undermine segmented pricing schemes
and impact the firm’s reputation and legal liability.
Gray Market…continued
• The existence of gray markets can, counter-intuitively, be
somewhat beneficial to the firm.
• There is an opportunity for firms to learn from gray
market activity.
• In order to do so, firms must ask a specific set of questions, such
as:
• Why is it occurring?
• Who is behind this activity?
• Who is buying on the gray market?
• What is being sold?
• When is it being sold?
• How is it being sold?
Explain how Customer Service Facilitates
Order Processing
• In retail selling, bag the merchandise with care. Products
such as glassware may require individual wrapping before
bagging.
• Work quickly to bag your customer’s merchandise and
complete the payment process.
• In business-to-business sales, complete the paperwork
quickly and leave a business card.
Call
Center
Customer
Online
Order
Warehouse
Actions to
Facilitate
Order
Processing
No, Customer
Notified of
Backorder
Inventory
Check
Items
in
Stock?
Yes, Item Packed
for Shipment
Accounts
Receivable
Processes
Payment
Item Shipped
Customer Service Role in Following Up on
Orders
• Following up with your customers after the sale is an
important part of providing good customer service.
• Should customer have questions or problems it is your duty
to make sure they have a positive experience with your
company.
Ways Technology Impacts the Channel
• Processes have to be end-to-end integrated so that every
action creates a chain reaction.
• For example, when a customer orders a product, all of the
distribution functions are triggered effectively to handle the
impact of that order.
• Critical issues come into play in a distribution on
demand system.
• Some of the problems associated with distribution on
demand are SKU proliferation, cyclical labor, coordinating
multiple vendors, and so on.
• At the same time, there are opportunities for continuous
improvement and performance management, resulting
in improved market share.
Business Identify Distribution on Demand Standing with Three
Key Processes
• The first is delivery performance, which is a measure
of the percentage of customer orders delivered on
time and in compliance.
• The second is order fulfillment lead time, or the
amount of time from customer order to the customer
receipt of the product.
• The third is distribution response time, which is the
amount of time a distribution operation takes to
respond to changes in demand at the least cost
without penalties.
Distribution on Demand
• Seamless, synchronized processes are what it’s about.
• Processes must be integrated end-to-end and demand
the right mix of technology, infrastructure and labor to
make them work.
• Distribution Intelligence Software (DIS) comes into
play.
• Existing assets (like WMS, MHE and labor) are all
synchronized by DIS.
• Events are tracked by the software and data is turned into
continuous feedback enabling performance evaluation and
process synchronization.
Barriers to use of Technology in Channel
Management
o Technology (Enterprising Resource Software) aims to integrate all
departments and functions across a company or channels
o Building a single software program that serves the needs of people in
finance, human resources, and the warehouse is a huge task
o Each channel typically has its own software and computer system
o More information is available to all the channel levels and will they use
it correctly?
o Financial records may be viewed by employees/channel members
who do not need that information
Barriers to use of Technology in Channel
Management (continued)
o Channel member employees have to change the way they
used to keep records AND do their job (no change-large
barrier)
o Channel member employees have to enter information
into the system in a TIMELY manner
o Channel member employees may resist using the
technology
o IT departments get bogged down in expensive
customizing software for each channel member
Ways to serve markets with low profit
potential
 Show own interests are aligned with community interest
in employment and commerce
 Enlist community support for security, collection, and
system monitoring
 Improve alignment between the business and community
 Partner with the communities, as communities are
frequently in a better position to resolve issues that make it
uneconomic to serve low profit areas
 Build awareness of benefits the company can bring