TOPIC FIVE

DESIGNING THE MARKETING CHANNELS

Intended learning outcomes
At the end of the topic you will be able to:
1. Explain the meaning of channel design; and
2. Describe steps in the channel design decision.

Meaning of channel design

Channel design refers to those decisions involving the development of new marketing channels
(channel structures) where none had existed before, or to the modification of existing channels.

Key points
1. Channel design is a decision faced by the marketer. In this sense channel design is similar to
the other decision areas of the marketing mix, namely product, price, and promotion. The
manager must make decision on these areas.
2. Channel design is used in the broader sense to include either setting up channel from scratch
or modifying existing channels.
3. The term design implies that the marketer is consciously and actively allocating the
distribution tasks in an attempt to develop an efficient channel structure. In short, design
means that management has taken an active role in the development of the channel.
4. The term selection refers to only one phase of channel design, the selection of the actual
channel members.
5. The term channel design also has a strategic connotation. This is because channel design is
used as an integral part of the firm’s attempt to gain a differential advantage in the market.

Steps in the channel design decision

The channel design decision can be broken down into seven steps:
1. Recognizing the need for a channel design decision.
2. Setting and coordinating distribution objectives.
3. Specifying the distribution tasks.
4. Developing possible alternative channel structures.

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5. Evaluating the variables affecting channel structure.
6. Choosing the “best” channel structure.
7. Selecting the channel members.

1. Recognizing the need for a channel design decision

Many situations can indicate the need for a channel design decision. Among them are the
following:-
(i) Developing a new product or product line. If existing channels for other products are not
suitable for the new product or product line, a new channel may have to be set up or the
existing channels modified in some fashion.
(ii) Aiming an existing product at a new target market e.g. introduction of a product in the
consumer market after it has sold in the industrial market.
(iii) Making a major change in some other component of the marketing mix. For example, a
new pricing policy emphasizing lower prices may require a shift to lower-price dealers
such as discount mass merchandisers.
(iv) Establishing a new firm, from scratch or as a result of mergers or acquisitions.
(v) Adapting to changing existing intermediaries might make their policies so as to inhibit
the attainment of the firm’s distribution objectives e.g. if intermediaries begin to
emphasize their own private brands, then the manufacturer may want to add new
distributors who will promote the company’s products more enthusiastically.
(vi) Dealing with changes in availability of particular kind of intermediaries.
(vii) Opening up new geographic marketing areas (territories).
(viii) Facing the occurrence of major environmental changes. These changes may be in the
economic, social-cultural, competitive, technological or legal spheres.
(ix) Meeting the challenge of conflict or other behavioral problems. For example, in some
instances conflict may become so intense that it is not possible to resolve it without
modifying the channel. A loss of power by a manufacturer to his or her distributors may
also foster the need to design an entirely new channel.
(x) Reviewing and evaluating. The regular periodic reviews and evaluations undertaken by a
firm may point to the need for changes in existing channels and possibly the need for new
channels.

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This list, although by no means comprehensive, offers an overview of the more common
conditions that may require the channel manager to make channel design decisions.

2. Setting and coordinating of distribution objectives (i.e. with objectives and strategies in
other areas of marketing mix and overall objectives and strategies of the firm)
- Having recognized that a channel design decision is needed, the channel manager should try
to develop a channel structure, whether from scratch or modifying existing channels, that
will help achieve the firm’s distribution objectives efficiently.
- Distribution objectives are explicit statements describing the part that distribution is
expected to play in reaching the firm’s overall marketing objectives.
- At this stage of the channel design, the firm’s distribution objectives are not explicitly
formulated, particularly since the changed conditions that created the need for channel design
decisions might also have created the need for new or modified distribution objectives.
- At this point it is important for the channel manager to evaluate carefully the firm’s
distribution objectives to see if new ones are needed.
- An examination of the distribution objectives must also be made to see if they are
coordinated with objectives and strategies in other areas of marketing mix (product, price,
and promotion), and with overall objectives and strategies of the firm.
- In order to set objectives that are well coordinated with other marketing and firm objectives
and strategies, the channel manager needs to perform three tasks:
(i) Become familiar with objectives and strategies in the other marketing mix areas (e.g. nature
of the product) and any other relevant objectives and strategies of the firm. For instance if a
company wants to emphasize freshness of the product offering, then the firm must ensure that
direct and fast distribution is implemented.
(ii) Set distribution objectives and state them explicitly i.e. clearly or specifically).
Examples of explicit distribution objectives:
 To ensure that the product is delivered at the lowest cost. The firm may then use e-channels.
 To ensure that products are delivered 24 hours after customer’s makes the order. The
company may then use e-channels or direct distribution.
 To ensure products are delivered in fresh condition. This may force the company to use direct
and fast channels of distribution.

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 To ensure that 25 percent of all manufacturers using abrasive products would be able to
obtain our products locally the same day they are ordered. The firm may thus use direct
distribution.
 To ensure that customers can only access the company’s products. Therefore the company
uses exclusive distribution contracts.
 To gain access to restaurants, schools cafeterias and vending machines. In such a case the
company can merge with another company that has foothold in such channels and markets.

(iii) Check to see if the distribution objectives set are congruent with marketing and other
general objectives and strategies of the firm. This entails verifying that the distribution
objectives do not conflict with the objectives in other areas of the marketing mix (i.e.
product, price or promotion) or with the overall marketing and general objectives and
strategies of the firm. In order to make such a check, it is important to examine the
interrelationships and hierarchy of objectives and strategies of the firm. This is shown in the
figure below:

Firm’s overall
objectives and
strategies

General
marketing
objectives and
strategies

Product Price Promotional Distribution

objectives and objectives objectives and objectives and
strategies and strategies strategies
strategies

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In the figure above, objectives and strategies for the four components of the marketing mix are
connected via two-way arrows. This is meant to convey the idea that these areas are interrelated.
Hence objectives and strategies in these are must be generally congruent with the other areas.
For example, a high quality objective in the product area would likely call for a pricing
objectives that would cover the probable high costs of the product and enhance its quality image.
Promotional objectives would have to focus on communicating to the target market the superior
quality of the product. At the same time distribution objectives would need to be developed in
terms of making the product conveniently available to that market in the types of outlets in which
targeted customers are likely to shop.
The figure also shows that objectives and strategies in each area of the marketing mix must also
be congruent with higher level marketing objectives and strategies and overall objectives and
strategies of the firm.

3. Specifying the distribution tasks

- After the distribution objectives have been set and coordinated, a number of distribution tasks
(functions) must be performed if the distribution objectives are to be met. The channel
manager should therefore specify explicitly the nature of these tasks i.e. the kinds of tasks
required to meet specific distribution objectives must be precisely stated.

For example, a manufacturer of a consumer product such as, say, high-quality tennis racquets
aimed at serious amateur tennis players would need to specify distribution tasks such as the
following to make the racquets readily available to them (serious amateur tennis players):-
(i) Gather information on target market shopping patterns.
(ii) Promote product availability in the target market.
(iii) Maintain inventory storage to assure timely availability.
(iv) Compile information about product features.
(v) Provide for hand-on tryout of product.
(vi) Sell against competitive products.
(vii) Process and fill specific customer orders.
(viii) Transport the product.
(ix) Arrange for credit provisions

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(x) Provide product warranty service
(xi) Provide repair service.
(xii) Establish product return procedure.

4. Developing possible alternative channel structure

- Having specified in detail the particular distribution tasks that needs to be performed to
achieve the distribution objectives, the channel manager should then consider alternative
ways of allocating these tasks. Often, the channel manager will choose more than one
channel structure in order to reach the target markets efficiently and effectively.
- The allocation alternatives (possible channel structures) should be in terms of the following
three dimensions:

(i) Number of levels

- The number of levels in a channel can range from two levels which is the most direct
(manufacturer-user) up to five levels and occasionally higher. The number of alternatives that
the channel manager can realistically consider for this structural dimension is often limited to
no more than two or three choices. For example, it might be feasible to consider going direct
(two-level), using one intermediary (three- level), or possibly two intermediaries (four-level).
These limitations result from variety of factors such as the particular industry practices;
nature and size of the market; availability of intermediaries, and other variables.

(ii) Intensity at the various levels

- Intensity refers to the number of intermediaries at each level of the marketing channel.
- Intensity can be intensive which means that as many outlets as possible are used at each level
of the channel; selective means that not all possible intermediaries at a particular level are
used, but rather that those included in the channel are carefully chosen; and exclusive which
means that only one intermediary in a particular market area is used.
The intensity dimension should be carefully considered because it often reflects and is a crucial
feature of the firm’s basic marketing strategy, overall firm’s corporate objectives and strategies,
overall methods of operation and image.

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(iii) Types of intermediaries
The types of intermediaries to be used should also be carefully considered in the light of
availability of intermediaries and their capabilities for performing particular distribution tasks.
Examples of intermediaries may include: kiosks, chemists, hotels, cafeterias, food courts, bars,
supermarkets, petro stations, shoe shops and hardware’s among others.
The channel manager should not overlook new types of intermediaries that have emerged,
particularly electronic or online auction firms such as Jumia, OLX and Kilimall, as possible sales
outlets for consumer products. The emphasis of the channel manager’s analysis at this point
should focus on the basic types of distribution tasks performed by these intermediaries.

5. Evaluating the variables affecting channel structure

Having laid out alternative channel structures, the channel manager should then evaluate a
number of variables to determine how they are likely to influence various channel structures
(Rosenbloom, 2004). The following six basic categories of variables are the most important in
such an analysis.
(i) Market variables;
(ii) Product variables;
(iii) Company variables;
(iv)Intermediary variables;
(v) Environmental variables; and
(vi)Behavioural variables.

(i) Market variables

In developing and adapting the marketing mix, the marketing managers should consider the
needs and wants of the target market. Therefore, just as the products a company offers, the prices
it charges, and the promotional messages it employs should closely reflect the needs and wants
of the target market, so too should the channel of distribution. Market variables are therefore the
most basic consideration when developing a channel of distribution (i.e. choice of channel
structure). Market variables that are particularly important in influencing the channel of
distribution include:

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 a) Market geography
It refers to the geographical size of the markets and their physical location and distance from the
producer. The greater the distance between the producer and its markets, the higher the
probability that the use of intermediaries will be less expensive than direct distribution. For
example, it is less expensive for Bidco to sell in rural areas using “dukas” or shops in those
places because its location in Thika is far removed from final consumers scattered in Kenya.
b) Market size
The number of customers making up a market determines the market size. If the market is large,
the use of intermediaries is more likely to be needed. On the other hand, if the market is small, a
firm is more likely to be able to avoid the use of intermediaries. Large firms selling to consumer
markets must use intermediaries because the number of consumers is many. This is the most
efficient and effective way of distributing products. On the other hand when the number of
consumers is small the firm can distribute its products directly. This is particularly the case of
business customers.
c) Market density
The number of buying units per unit of land area determines the density of the market area. The
market having 10000 customers in an area of 1000 square km is denser than one containing the
same number of customer in an area 5000 sq. km. The less dense, the market, the more likely it
is that intermediaries will be used and vice versa. Marketing to final consumers involves the use
of intermediaries because they are scattered over the country and it would be expensive to sell to
them directly. On the other hand industrial buyers are located in one place and thus direct
distribution is used to reach these buyers because it is more economical. In Kenya, for example,
most textile companies are located in Kitengela EPZs (Export Processing Zones). Thus direct
distribution would be more feasible.
d) Market behavior
Market behavior refers to four types of buying behavior:
 How do customers buy?
 When do customers buy?
 Where do customers buy?
 Who does the buying?

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a. How do customers buy?
If customers buy in very small quantities, long channels are used (use of several levels of
intermediaries). Marketing to final consumers particularly in less developing countries involves
the use of intermediaries (shops, kiosks, butcheries, supermarkets, roadside vendors etc) because
they buy in small quantities due to low incomes. On the other hand business buyers (wholesalers,
retailers, producers, government agencies, non-profit organizations etc) buy in large quantities
and thus direct distribution would be more realistic.

b. When do customers buy?

If consumer buying is highly seasonal (e.g. ice creams, sweaters, Christmas, valentine cards, etc),
intermediaries should be added to perform storage task thereby reducing peaks and valleys in
production. Storage function facilitates continuous production, since the manufacturers storage
space is consistently emptied by the outflow of stock going to the intermediaries (Kibera and
Waruingi, 1998). For instance, imagine the number of bottles of soda stored by all types of
outlets and by consumers at any one time. If all these bottles were returned to Coca-Cola for
storage, the company would probably require a warehouse more than the total area of Nairobi.

c. Where do customers buy?

If customers tend to shop from home (online shopping or telephone shopping), wholesaler and
retail intermediaries should be eliminated and products sold directly. Online shopping and door-
to-door selling has enabled consumers to be able to shop directly from producers or their sales
people.

d. Who does the buying?

If the husband and the wife are generally both involved in the buying, products should be sold
through retailers that can successfully cater for both spouses. For example it would be a mistake
to distribute products bought by both spouses through hair saloons because these retail outlets are
generally accessed by women. It would be a mistake for East African Breweries to sell its
popular non-alcoholic beverage Alvaro only in bars because this is a product bought by nearly all
consumers, some of whom may not want to enter bars.

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(ii) Product variables
Product variables include bulk and weight, perishability, unit value, degree of standardization
(custom made versus standardized products), technical versus non-technical and newness.

(i) Bulk and weight of products

Heavy and bulk products have very high handling and delivery costs compared to their value.
Thus, the channel of distribution for such products should be as short as possible, usually direct
from producer to the consumer in order to reduce these costs. This is the case for industrial
markets (buyers) that buy bulky and heavy products like machinery and many types of raw
materials. However where consumers buy in small quantities and quick delivery is needed it
may be necessary to use intermediaries. This is the case of final consumers who buy in small
quantities for such products as consumer durables (such as fridges, microwaves furniture etc) and
agricultural products (such as bananas, livestock etc).

(ii) Perishability of products

Products that are subject to rapid physical deterioration should use very short channels to avoid
going bad. Horticultural products like flowers, fruits, vegetables and others are quickly
transported by trucks to the airport and air lifted to Europe and North America because of their
perishability. For instance, Miraa grown in Meru is transported very fast by road to Wilson
airport or Jomo Kenyatta International airport and airlifted to Europe, Somalia and Middle East
markets. This is because it is very perishable.

(iii) Unit value of products

Generally, the lower the unit values of a product, the longer the channel of distribution. This is
because the low unit value leaves a small margin for distribution costs. Convenience products
(such as milk, sodas, bread, biscuits, cigarettes etc) are usually sold through intermediaries
because of their low unit value. This is unlike specialty (such as high quality cameras, suits,
jewellery etc) and industrial goods (such as heavy earth moving equipments, aircrafts etc) that
have very high unit value. They are sold directly to the buyers.

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(iv) Degree of standardization of products
Custom made products (such as tailor made suits, custom made houses, furniture etc) are sold
directly to the consumers unlike identical products (such as estate houses, fast moving consumer
goods, and consumer durables) that are usually sold through many intermediaries.

(v) Technical versus non-technical products

Technical products will generally be distributed through direct channels. This is because
potential customers require after sales service. There may be no intermediaries that can provide
the after sales service. This is the case for most industrial capital goods like those sold by
companies like caterpillar (such as heavy earth moving equipments). In consumer market
because products (such as pens, pencils, detergents, sugar, salt, bread etc) are not highly
technical, intermediaries are used in distributing the products.

(vi) Newness of products

In general, at the introductory stage of the product a shorter channel is generally viewed as an
advantage for product acceptance. This is because it requires personalized attention of the
producer, something intermediaries may not be willing to provide because there might not be
enough demand. Most intermediaries’ starts to stock the product after the demand starts to
increase. They do not want to spend any of their resources promoting a new product whose
demand is low. Thus producers must be actively involved in promoting the product in the actual
stages of the product introduction.

(iii) Company variables

The most important company variables affecting channel of distribution are:
(i) Company size
Large companies exercise a substantial amount of power in the channel of distribution. This
gives large companies a relatively high degree of flexibility in choosing a large channel of
distribution, compared to smaller companies. Large companies are able to use a variety and types
of channels of distribution and intermediaries. Large companies sometimes start their own
channels or engage franchises that they highly control. Small companies are forced to rely on
existing intermediaries.

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(i) Company financial capacity
Generally speaking, the greater the capital available to a company, the lower its dependence on
intermediaries. In order to sell directly to ultimate consumers or industrial users, a firm often
needs its own sales force and support services or retail stores, warehousing and order processing
capabilities. Large companies are better able to bear the higher cost of those facilities. Large
companies like East African Breweries, Coca-Cola and Unilever are able to use multiple
channels. For instance, Coca-Cola uses supermarkets, shops, kiosks, containers, direct selling,
bars, and hotels among others. It is able to support all this outlets with promotion materials,
fridges, and many other services. The same case applies to all large companies.

(ii) Managerial expertise

Some companies lack the managerial skills necessary to perform distribution tasks. When this is
the case, channel of distribution must of necessity include the services of intermediaries. This
mainly applies to small entities like small holder farmers, “Jua Kali” artisans and small scale
companies among others. For instance, small holder farmers in Kenya are now benefiting a lot
because supermarkets are now stocking fresh agricultural products (such as “Sukuma wiki or
kales”, cabbages, fresh milk, carrots, fruits, onions French beans etc). On their own they cannot
be able to perform these distribution tasks.

(iii) Objectives and strategies

Company’s objectives and strategies (such the need to exercise a high degree of control over the
product and its service) may limit the use of intermediaries.
Further, strategies such as emphasis on aggressive promotion and rapid reaction to emerging
market conditions will limit the types of channel of distribution available to those companies
employing such strategies. Producers of premium brands may sell their products directly or use
franchisee in an attempt to ensure that the brand image is protected or enhanced. For example,
Daimler-Chrysler the producers of Mercedes Benz use only one intermediary, in Kenya it is DT
DOBIE, in order to ensure that the image of the brand is protected. This is because where the
product is sold matters. On the other hand producers of convenience products may not be
concerned a lot with where the product is sold.

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(iv) Product mix
A company producing a wide and divergent mix of products will use long and short channels of
distribution. This will depend on the nature of the products as seen earlier. For instance, Bidco
uses short channels to distribute industrial detergents (used in factories, schools, supermarkets,
hotels etc) and long channels to distribute its brands like Power Boy, Gentle, White Star bar
soap, Kimbo, Cow Boy, Golden Fry and many others that are aimed at final consumers.

(v) Past channel experiences

In deciding on channels to use, the firm will consider past channel experiences. The company
will normally use those channels that have been successful in the past. Organizations normally
evaluate their channel of distribution with the objective of making modifications. They can add
new channel members or terminate contracts with old ones. For instance, Celtel (now renamed
Zain and later Airtel) terminated the contract with Airtime Business Solutions for the distribution
of its products. Celtel complained of the failure of the company to meet performance targets and
stocks (Daily Nation, June 6, 2008).

(iv) Intermediary variables

A marketer should evaluate the following variables or factors in relation to intermediaries;
(i) Availability of intermediaries
The availability of sufficient intermediaries will influence the channel of distribution. For
instance, lack of availability of appropriate intermediaries led Michael Dell to design a direct
mail order channel that provided strong technical expertise as well as custom designed personal
computers. According to Michael Dell, existing retailers both large and small could not provide
similar capabilities. In Kenya supermarkets represents a very effective way of reaching the
middle class consumers. However the major supermarkets (e.g. Carrefour, Naivas, and Tuskys)
are only found in major towns in Kenya but not in smaller towns where there are so many
consumers. Thus producers are forced to use less effective retailers. Producers of consumer
durables like microwaves, fridges, HiFi systems, and radios face the same problem of
distributing these products due lack of good retailers who can be able to provide support services
for products.

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(ii) Cost of using an intermediary
If the cost of using intermediaries is high for the services performed, the company should choose
a channel of distribution that is likely to minimize the use of intermediaries. Some big
supermarkets ask for money in order to allow the producer to display his products in supermarket
shelves. This money is referred to as slotting allowances and is sometimes regarded as unethical.

(iii) Services offered by intermediaries

Different intermediaries offer some services better than others. The choice of intermediaries will
be affected by how effective they are in offering those services at a lower cost. These services
include repair, maintenance, installation, information, delivery and credit among others.

(iv) Financial capability of intermediaries

Some intermediaries may be weak financially. For instance, they may insist on buying goods on
two month credit basis. The company on the other hand may not be willing to extend credit for
more than one month. In such as case the producer will refuse to use the intermediary.

(v) Environmental variables

The choice of intermediaries is affected by macro environmental factors such as political-legal
forces, technological, economic, social-cultural and competitive forces. Legal regulations are
important factor in the distribution environment for they may restrict the choice of
intermediaries. For instance, the government may determine how products are going to be
distributed. In Kenya small scale tea farmers can only distribute their tea using Kenya Tea
Development Agency. Legal regulations may also affect distribution strategies. There are certain
distribution practices that may be considered illegal. Illegality or legality of a distribution
practice depends on whether it restricts competition. Assael (1990) observes that the following
distribution practices that restrict competition are deemed illegal:

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 e) Exclusive dealing contracts
Here the seller requires that its intermediaries handle only the company’s line of products. Such
contracts restrain trade by excluding competitors from the market. They also apply where a large
powerful seller forces a small buyer to accept the exclusive terms.

f) Tying contracts
These are contracts that require a buyer to take less popular products in a producer’s line in order
to get the desired products. These arrangements are illegal if the seller is large enough to restrain
trade or when the substantial volume of business is tied to the contract.

g) Granting of exclusive sales territories

This is where the producer gives a wholesaler or retailer a sole right to sell the seller’s products
or services in that territory. This may restrain trade among the retailers or wholesalers.

Changes in technology have brought about new marketing channels such as electronic channels.
Competitive factors are also important in selecting a channel system. A company may choose
new and innovative channel systems to help them gain competitive advantage. For instance,
Naivas is now selling its products online. East African Breweries is selling its products through
telephone for consumers having a function (Daily Nation June 5 2008). Universities in Kenya are
offering education through multiple channels like opening of town campuses, distance learning,
online learning, and accrediting colleges. Cloth producers, farmers, electronics, and furniture
producers are distributing their products through supermarkets. Soft drink producers like Coca
Cola are selling their products through a host of channels like kiosks, bars, shops, supermarkets,
vending machines, hawkers, containers, and telephone among other channels.

Economic conditions also influence channel choices. It can be argued that when the economy is
in recession the marketers should move their products through those channels that are cost
effective so that consumers can be able to get the products easily and at a lower cost. Distribution
practices like the use of kiosks, hawkers, shops, containers, telephone, online, town campuses,
distance learning and accrediting colleges are attempts to reduce costs of buying for the
consumers.

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Social-cultural factors also influence channel choices. The marketer must consider factors like
religion, social organization, material culture, education, language and attitudes and values in the
choice of distribution channel systems. For instance, electronic channels are not highly used in
Africa because of the low level of economic and technological advancement. Many people do
not have computers, mobile phones, fax machines and other communication devices that can
facilitate the use of electronic channels as ways of distributing products.
Door-to-door selling may not be effective in Africa because people will not open doors to
strangers because of high crime rate. This problem can be solved by employing salespeople from
the neighborhood.

(vi) Behavioral variables

When choosing a channel of distribution the marketing manager should review the behavioral
variables (channel conflict, power, role and communication processes). For instance, developing
more matching roles for channel members can reduce a major cause of channel conflict. By
understanding the channel power the manager will be able to develop a channel structure that the
company can be able to influence. Giving more attention to the influence of behavioral problems
that can distort communication fosters a channel of distribution with a more effective
communication flow.

6. Choosing the “best” channel structure (channel of distribution)

- In theory, the channel manager should choose an optimal channel structure alternative. Such
a structure would offer the desired level of effectiveness in performing the distribution tasks
at the lowest possible cost. If the firm’s goal is to maximize its long term profits, an optimal
channel structure would be completely consistent with that goal.
- In reality, choosing an optimal channel structure in the strictest sense of the term is not
possible. To do so would require the channel manager to have considered all possible
alternative channel structures and to be able to calculate the exact payoffs associated with
each of the alternatives in terms of some criterion (usually profit). The manager would then
choose the one alternative offering the highest profit. This however is beyond human
capability.

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- Nevertheless, approaches do exist for making good, if not optimal channel choices.
Examples of these methods include “characteristics of goods and parallel systems”
approach, financial approach, transaction cost analysis approach and management science
methods.
- However most channel choices are still made on the basis of managerial judgement
supplemented by heuristics and whatever data (even if imperfect) are available. Judgmental-
Heuristic (experiential) approaches include: straight qualitative judgement approach;
weighted factor score approach; and distribution costing approach.
NB-Read about approaches of choosing the best channel structure.

NB-Step 7 (selecting channel members) in designing marketing channel is covered in chapter

seven.

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