Chapter 6
Designing the Marketing Channel
Objective 1:
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Channel Design
• Channel Design
– Decisions involving either the development of new
marketing channels where none had previously existed
or the modification of existing channels
• Important points:
1. A decision made by the marketer
2. The creation or modification of channels
3. The active allocation of distribution tasks in an attempt
to develop an efficient structure
4. The selection of channel members
5. A strategic tool for gaining a differential advantage
Objective 2:
Who Engages in Channel Design
• Manufacturers:
– Includes also service providers and franchisors
– Must look down the channel toward the market
• Wholesalers
– Must look both up and down the channel
• Retailers
– Must look up the channel to secure suppliers
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Objective 3:
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Channel Design Paradigm
• Seven (7) Steps to Consider:
1.
2.
3.
4.
5.
6.
7.
Recognize the need for channel design decision
Set & coordinate distribution objectives
Specify distribution tasks
Develop alternative channel structures
Evaluate relevant variables
Choose the “best” channel structure
Select channel members
Objective 4:
When to Make a
Channel Design Decision
• Developing a new product or
product line
• Aiming an existing product at a
new market
• Making a major change in some
other component of the
marketing mix
• Establishing a new firm
• Adapting to changing
intermediary policies that may
inhibit attainment of
distribution objectives
• Dealing with changes in
availability of particular kinds
of intermediaries
• Opening up new geographic
marketing areas
• Facing the occurrence of major
environmental changes
• Meeting the challenge of
conflict or other behavioral
problems
• Reviewing and evaluating
existing members’ performance
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Objective 5:
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Distribution Objectives
• Setting distribution objectives requires
knowledge of which, if any, existing
objectives & strategies may impinge on
these new distribution objectives.
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The Need for Congruency
• Holistic approach is needed…
– Distribution is often really a facilitator for achieving the
firm’s other objectives
• Product marketing
• Price marketing
• Promotion marketing
– And the firm’s marketing mix objectives are derived
from the firm’s overall objectives an strategies.
• A change in one area is likely to affect all
other areas.
Objective 6:
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Distribution Tasks
• Outlining distribution tasks is highly
idiosyncratic and situationally specific
– i.e., Tasks are a function of the distribution objectives
and the firms involved
• 8 marketing functions are as specific as one
can get on any generalizable scale*
– Note the 8 functions though represent general
categories which your text’s task all fall under*
Objective 7:
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Channel Structure Dimensions
1. Number of levels
2. Intensity at each level
Control
(for mgmt & image)
3. Types of intermediaries
at each level
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Number of Levels
• Often ranges from two (i.e., manufacturer
and customer) to five or more
• Number of alternatives is often limited to
two or three choices because of factors like:
1. Particular industry practices (e.g., automobiles)
2. Nature & size of market
3. Availability of intermediaries
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Intensity at Various Levels
Positive relationship between the intensity of the
distribution dimension & number of intermediaries used
(in a given market area)*
Intensity Dimension
Intensive
Selective
Exclusive
Numbers of Intermediaries (retail level)
Many
Few
One
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Types of Intermediaries
• Numerous types
– E.g., retailers, wholesalers, A/Bs, etc.
• Manager’s emphasis should be on the types
of tasks performed by each & what’s needed
• Must be aware of emerging types:
– Electronic online auctions for consumers (e.g., eBay)
– Electronic markets for industrial goods (converge.com)
– Demand collection channels (priceline.com)*
Objective 8:
Variables Affecting
Channel Structure
• Categories of variables:
1.
2.
3.
4.
5.
6.
Market variables
Product variables
Company variables
Intermediary variables
Environmental variables
Behavioral variables
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Market Variables
• Market geography
– Location, geographical size, & distance from producer
• Market size
– Number of customers in a market
• Market density
– Number of buying units (consumers or firms) per unit
of land area
• Market behavior
– Who buys, & how, when, and where customers buy
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Product Variables
•
•
•
•
•
•
Bulk and weight
Perishability
Unit value
Degree of standardization
Technical vs. nontechnical
Newness
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Company Variables
• Size
– Larger often confers greater “power bases”
• Financial capacity
– Greater capital lessens dependency
• Managerial expertise
– Increases dependency on others’ expertise
• Objectives & strategies
– Particulars may limit alternatives
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Intermediary Variables
• Availability
– Positively related to length
• Cost
– Negatively related to length
• Services (available from intermediaries)
– Positively related to use
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Environmental Variables
•
•
•
•
•
Economic
Sociocultural
Competitive
Technological
Legal
*reference Ch. 3 for effects*
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Behavioral Variables
• Develop congruent roles for all channel
members
• Be aware of members’ “power bases”
• Manage communication channels to
minimize possible conflict
*reference Ch. 4 for effects*
Objective 9:
Heuristics in Channel Design
• Heuristics
– Rules of thumb
• Benefits
– Fairly simple prescriptions for channel structure
• Limitations
– Mostly useful as a rough guide to decision-making
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Objective 10:
Choosing an Optimal
Channel Structure
• Why is management incapable of choosing
an optimal channel structure?
– All possible outcome alternatives are unknown
– Precise methods for calculating the exact payoffs
associated with each alternative structure do not exist
• Which is why we assume with the use of
heuristics & why tacit knowledge is so
important…
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Objective 11:
Approaches for Choosing
a Channel Structure
• Some techniques for enhancing our channel
design decisions include the:
– “Characteristics of Goods & Parallel Systems”
Approach
– Financial Approach
– Transaction Cost Analysis Approach
– Management Science Approaches
– Judgmental-Heuristic Approach*
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Objective 12:
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Judgmental Heuristic Approaches
• Assuming that management’s ability to
make judgments is high, and good empirical
data on costs & revenues exists
then…
• It’s possible to make satisfactory channel
design choices using the judgmentalheuristic approach
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Judgmental Heuristic Approaches
• 3 General Approaches:
1. Straight Qualitative Judgment Approach
2. Weighted Factor Score Approach
3. Distribution Costing Approach*