CHANNEL

MANAGEMENT
AND CHANNEL
RELATIONSHIPS
 Channel Management &
Relationships
• Designing a Distribution Channel.
• Types of Intermediaries
• Functions of Intermediaries
• Identification & Selection of Channel Partners.
• Appointment & Training of Channel Partners.
• Evaluating & Motivating Channel Partners.
• Causes of Channel Conflict.
• Resolution of Channel Conflict.
 Designing a Distribution
Channel
• Specifying the role of distribution
channel.
• Selecting type of distribution channel.
• Determining the intensity of
distribution channel.
• Choosing specific channel members.
 Specifying the role of
distribution channel
• Channel strategy to be proportional to a Co.’s
marketing objectives, and roles assigned to the rest
of the marketing mix.
• Co to decide whether distribution will be used
defensively or offensively.
• Defensive approach – Distribution as good as a
competitor.
• Offensive approach – Gain competitive advantage
by having better distribution.
 Planning the distribution
Channel
• To decide on:
 Channel structure
 Channel tiers
 Channel Structure
• Direct, Indirect.
• Vertical, Horizontal.
• Multi-channel
 Channel Structure
• Direct: Producer  Consumer
• Indirect: Producer  Intermediary  Consumer
• Vertical Marketing Systems (VMS)
- Corporate VMS : A firm at one level of channel owns
firm at the next or subsequent levels. High degree of
control for Producer.
- Administered VMS : Dominant brand owners are able
to secure strong trade support from intermediaries.
- Contractual VMS : Producer exercises control
through contractual terms – exclusive dealers.
 Channel Structure
• Horizontal Marketing Systems (HMS) – 2 or more
unrelated Cos. join together, so as to have pooled
resources to exploit an emerging marketing
opportunity. This system takes place when a Co. lacks
financial resources or marketing know how and is
afraid to take risks on its own.

• Multi-channel Marketing Systems (MMS) – MMS

occurs when a Co. uses different channels to reach
same/different market segments, to ensure availability
of right product at right time.
 Selecting type of Channel
• Decision based on:
 Market considerations.
 Product considerations.
 Company considerations.
 Middlemen considerations.
 Factors affecting choice of
distribution channels
 Market considerations:
• Type of market – Different distribution channels are used to reach
different types of markets.
• No. of potential customers - No. of customers low, direct distribution
possible
• Geographic concentration of the market – Direct distribution practical
when there is high concentration of customers in few geographical
areas.
• High market concentration – Direct distribution channel : low cost of
serving market.
• Low market concentration – Indirect distribution channel : high cost
of reaching directly.
 Factors affecting choice of
distribution channels
 Market considerations:
• Customer service level:
• 3 sub-factors – delivery time, lot size, product
availability.
• More the need for customer service : lower deliver
time, lower lot size, lower product availability –
Indirect distribution channel more desirable.
• Direct distribution economical when either size or
total volume of business is large.
 Factors affecting choice of
distribution channels
 Product considerations:
• Unit value – Direct distribution possible when unit
value is high.
• Perishability – Low shelf life products have to be
sold through short distribution channels.
• Technical nature of product – Highly technical
products require direct distribution.
 Factors affecting choice of
distribution channels
 Company considerations:
• Desire for channel control – Producers wanting
more control over their products’ distribution
establish direct distribution.

• Ability of Management – Marketing experience

and ability influences channel decisions .
Inexperienced Companies would appoint
Marketing Agent.
 Factors affecting choice of
distribution channels
 Company considerations:

• Financial resources – Financially strong Co. would go

in for direct distribution.
• Financially weak Co.s appoint middlemen.
• Availability of Working Capital: High – Direct
distribution channel. Low – Indirect distribution
channel.
• Services provided by seller – Highly promoted products
would have wider retail coverage.
 Factors affecting choice of
distribution channels
 Middlemen considerations:
• Services provided by middlemen – Middlemen must
provide the service which the producers are unable to
provide.
• Availability of desired middlemen - The middlemen
desired by a Producer may not be available, so alternate
channels would have to be considered.
• Attitude of middlemen towards Producer’s policies – If
middlemen are unwilling to join a producer’s channel
because of disagreement on policies, then the producer
has fewer options.
 Selecting type of Channel
 Tiers of distribution channel:
• Zero Tier: Producer  Consumer.
• One Tier: Producer  Retailer  Consumer.
• 2 Tier: Producer  Distributor  Retailer 
Consumer.
• 3 Tier: Prod  Super Dist/Con.Agt  Distr 
Ret  Cons.
• 4 Tier: Prod  Mktg Agt  S.D/C.A  Dist
Ret  Cons.
 Selecting type of Channel
 Tiers of distribution channel:
• More widely dispersed the customers – Greater
the tiers.
• Zero tier & 1 tier – Specialised products,
technologically advanced products, industrial
products, consumer durables, branded garments.
• 2 Tier – Consumer durables, branded FMCG.
• 3 & 4 tier – Smaller/unbranded FMCG.
 Intensity of Distribution
• Intensive – Distribution through every
reasonable outlet in the market.
• Selective - Distribution through multiple,
but not all outlets. Lies midway between
extensive and exclusive distribution.
• Exclusive – Distribution through a single
outlet in the market.
 Types of Intermediaries
• Marketing Agent.
• C&F Agent/Consignee Agent/ Super Distributor.
• Distributor/Stockist.
• Wholesaler/Semi-wholesaler.
• Retailer – General Merchant, Chemists &
Druggist, Grocer, Dept. Store, Exclusive Outlet,
Cooperative Stores, Food Products Store, Pan Bidi
Shop.
 Functions of intermediaries
• Physical possession function: Hold and distribute stocks.
• Retail function: Buy in large quantities and sell in small
quantities. Cover local market in absence of Producer’s
salesmen. Supply retail orders booked by Co. salesman.
• Promotion function: Help in carrying out local
promotion activities.
• Information function: Provide feedback information on
Producer’s and competitive products and activities. 
• Financing function: Could buy on advance or COD
terms from Producers and sell on credit to retailers.
 Functions of Intermediaries
 Marketing Agent
• Provides full function sales and local promotion support to
Producer. Stocks received could be purchased or on “stock
transfer” basis. If stocks purchased, then income is on basis of
commission on sales, otherwise could be on cost plus basis.
Producer does not employ own sales force.
 C & F Agent
• Acts on behalf of the Producer. Holds Producer’s stock.
Basically provides warehousing and stock delivery facility in
state where he is based. Distributes stock to market level
distributors. Receives income on cost plus basis Is appointed to
avoid payment of L.S.T. Producer deploys own sales force.
 Functions of Intermediaries
 Consignee Agent/ Super Distributor
• Functionally both are same. Super Distributor buys
stock on “C” Form by paying full CST. Consignee
Agent buys stock on “F” Form. Both hold stocks bought
from Producer and distribute it to area level distributors
• Income from commission on sales.
 Distributors/Stockists
• Purchases stock from CA/SD/C&FA or directly from
Co. In turn distributes stocks to area level retailers.
Income from commission on sales.
 Identification of Channel
Partners
 Prospecting for Agents/Distributors
• Advertisements – Newspapers/T.V/Cable.
• Word of mouth publicity through retail trade
• References from retail trade.
• References from sales staff of other Companies.
• References from friends and acquaintances.
• Reference from tertiary sources – Banks,
Suppliers, etc.
 Selection of Channel Partners
 Criteria of selection for Agents/Distributors
• Management strength
• Financial standing:–
 Whether overtrading.
 Terms of business with other Cos.
 Terms of business with retail trade
• Infrastructure:–
 Office set up: location, space, computers, telephone/fax, etc.
 Godown: Space, location, security, etc.
 Delivery vehicles: mechanised – 3,4 wheelers, manual.
• No. of years in business, Reputation/goodwill.
 Selection of Channel Partners
 Criteria of selection for Agents/Distributors
• Manpower
 Office staff, numbers and expertise.
 Salesmen, number and expertise.
• Market coverage and relations.
• Other businesses, turnover.
• Reputation of other Agencies handled.
• Willingness to work.
Appointment of Intermediaries
• Prospective appointees contacted by Co. salesman
who does initial appraisal and also discusses Co.
terms and conditions. Fills up Appraisal Form.

• If initial appraisal is positive, and prospective

appointee also agrees with terms, then a second
appraisal is carried out by a superior officer.

• Both sides agreeing, an Appointment letter is then

issued by the Co.
 Training of Intermediaries
• Channel members have to be trained at
the start and also from time to time
regarding:
 Company policies and products.
 Latest marketing strategies adopted by
Co. and also competitors.
 Changes in the environment.
 Training of Intermediaries
Training Methods
• If just one or two distributors are being
appointed at the time, then the training is
provided by senior Company personnel at
the place of business.
• If more are being appointed at the same
time, then a separate training session is
organised by the Company.
 Training of Intermediaries
 Training sessions:
• Provide a platform to the parties involved to
communicate and understand each others point of
view.
• A forum where a manufacturer can understand the
needs of the dealers and gather information about the
market.
• Makes the intermediary feel valued.
• Combined with a holiday package are used as reward
motivators by the Cos.
 Evaluating Channel Members
• Evaluation is an on-going exercise.
• Constant evaluation and fine tuning
required to keep abreast of changes in
market place, nature of competition, etc.
• Producers should also evaluate coherence
between product and channels, as
requirements may change over period of
time.
 Evaluating Channel Members
 Evaluation Criteria:
• Achievement of targeted sales and growth
generated.
• Adherence to payment norms.
• Maintenance of average inventory levels.
• Treatment of damaged and returned goods
• Co-operation in promotional and training
programmes.
 Evaluating Channel Members
 Channel member relationship life cycle:
• Birth – Exciting stage. Members work together getting to
know each other, but if things are not working out, they
should get out immediately.
• Growth – Dictates hard work for both parties. Energy
should be directed towards solving problems.
• Maturity – Watch for trouble, as the only way to go is
down. Parties required to communicate as it is the key to
efficiency.
• Death – Too many problems kill efficiency. So get out
fast.
 Motivating Channel Members
• Motivation is a continuous activity.

• A Producer has to exert power to motivate the

members to take into consideration a macro
perspective and work together.

• Power is the ability of Producer or a channel

member to get another channel member to do what
otherwise they would not have done.
 Motivating Channel Members
• Power is an essential ingredient required to motivate
and direct efforts of non-identical organisations and
individuals.

• A Producer uses power to elicit cooperation:

coercive, reward. legitimate, expert and referent.

• However, ultimate motivator is the creation of an

atmosphere of mutual trust that understands the
mutual goals of network partnerships.
 Motivating Channel Members
• 2 types of motivation:
• Monetary – Reward motivator (positive
reinforcement).
• Non-monetary
 Coercion (negative reinforcement).
 Expert knowledge.
 Identification basis
 Legitimate power motivator
 Motivating Channel Members
 Monetary motivators:
• Reward motivator – Based on channel member’s
belief that the other party has an ability to give
something of value to him. This reward will be
available to him only if he adheres to the wishes of
the other party. Known as positive reinforcement
as reward is used to motivate the individual to
repeat the behaviour.
 Motivating Channel Members
 Reward motivators:
• Granting larger margins.
• Higher promotional activities/allowances.
• Functional discount schemes.
• Easier payment terms.
• Faster settlement of claims.
• Granting exclusive territories or large individual accounts.
• Sales force compensation/incentive schemes.
• Lower inventory holding norms.
 Motivating Channel Members
 Non monetary motivators:
• Coercive power – Refers to power of one intermediary over
another, when a member expects punishment for his failure
to comply with the wishes of the former party. Opposite of
reward motivators. Should be adopted only when all other
tools fail to bring about the desired changes in the channel
member, as it can act as a de-motivator. Main tools are:
 Reduction in margins.
 Withdrawal of rewards previously granted.
 Slowing down of supplies.
 Tougher operational norms.
 Motivating Channel Members
• Non monetary motivators:
• Expert knowledge – When a channel member perceives
Producer to have some specialised knowledge, it results
in Producer having control over the intermediary. Expert
knowledge provides the Producer with knowledge
leverage to manipulate behaviour of the intermediary.
Tools include:
 Managerial counselling.
 Sales training for employees.
 Sales promotion counsel.
 Advice on sources of items not stocked by intermediaries.
 Motivating Channel Members
Non monetary motivators:
• Identification basis – Whenever dealer
prides himself with dealing with a certain
Producer, this results in referent power for
the Producer. This can be used as a
motivator by those Producers who have
earned a high degree of customer loyalty.
Motivating Channel Members
 Non monetary motivators:
• Legitimate power motivator – When a Producer
uses its agreements to modulate the behaviour of a
channel partner, it is called legitimate power. It is
usually used as a referent power – avoiding a
channel member from behaving in a manner
which could be detrimental to the goodwill of the
Producer.
 Channel Conflict
• Channel conflict occurs whenever channel
members have distinctly different opinions
or perceptions about distribution channel
affairs. If no interdependence exists, there
would be no basis for conflict. Mutual
dependence creates the basis for conflict.
 Types of Channel Conflict
• 3 types:
 Horizontal conflict
 Intertype conflict
 Vertical conflict
 Types of Channel Conflict
• Horizontal Conflict – Occurs amongst similar
firms at the same level in a distribution channel.
• Intertype – Occurs amongst different
intermediaries at the same level in a channel.
Differs from horizontal in that bit occurs among
dissimilar institutions.
• Vertical - Occurs amongst different levels within a
channel of distribution.
 Causes of Channel Conflict
• Goal incompatibility – Though channel members
share the common goal of maximising their joint
effectiveness, each is a separate legal entity.
• Each has its own employees, owners and interest
groups who help shape goals and strategies, some
of which may not be totally compatible with those
of other channel members.
• This incompatibility may be the underlying cause
of stress, ultimately creating conflict.
 Causes of Channel Conflict
• Position, Role and Domain Incongruency –
Changes in specification of position or poorly
defined roles may cause conflict.
• Incompatibility develops within channel
arrangements as roles and methods of operation
change.
• Conflict also arises when there is lack of
agreement concerning appropriate domain of
members.
 Causes of Channel Conflict
• Communication Breakdown – Often is the
reason for channel conflict. Could occur in
2 ways:
 1) When a firm fails to exchange vital
information with other channel members.
 2) Through noise and distortion
 Causes of Channel Conflict
• Different Perceptions of Reality – Conflict
occurs when different channel members
differ in methods of achieving mutual goals
or have different solutions to a mutual
problem.
• Even when they have a strong desire to
cooperate, conflict can result from different
perceptions of the facts.
 Causes of Channel Conflict
• Ideological Differences – Are similar to
those resulting from differences in
perceived roles and expected behaviours.
Can result from big-business and small-
business perceptions of the appropriate role
of management.
Resolution of Channel Conflict
• Various methods of resolving channel
conflict.
 Problem Solving.
 Persuasion
 Negotiation
 Politics
 Withdrawal
Resolution of Channel Conflict
• Problem Solving: Two techniques

 Superordinate Goals : Essentially a goal that all channel members

desire but that cannot be achieved by anybody acting alone..
Development of a superordinate goal overrides individual member
goals.

 Communication Processes : Seeks to alleviate communication

noise in distribution channels. More efficient communications in
the channel will permit channel members to find solutions to their
problems based on common objectives. Meetings and trade
publications allow members to develop solutions to common
problems and reinforce relationships.
 Resolution of Channel Conflict
• Persuasion – Emphasis is on influencing
behaviour through persuasion rather than only
sharing information. Specifically, it seeks to
reduce conflict about domain.

• Negotiation – The objective is to halt a conflict, no

attempt is made to fully satisfy a channel member.
Could lead to a compromise, once basic reason for
stress is arrested.
Resolution of Channel Conflict
• Politics – Refers to the resolution of conflict by the
involvement of new parties in the process of reaching an
agreement. 3 solutions exist:
 Coalition formation : Refers to formation of trade bodies. This is
an attempt to alter channel power structure.
 Mediation & Arbitration : In mediation, the 3rd party may suggest a
solution to the conflict but the channel members are not bound to
accept that solution, whereas in arbitration the solution suggested
is binding upon the conflicting parties.
 Lobbying & Judicial Appeal : Channel members may resort to the
Govt. process to resolve conflicts. Attempts to influence the
legislative process through lobbying activities are frequent. Court
litigation is another means.
Resolution of Channel Conflict
• Withdrawal – If all other methods fail, then
the last option for the termination of
conflict is for one firm to withdraw from the
relationship.