Marketing channels:

Marketing Channels

• A set of interdependent organizations

(intermediaries) involved in the process of
making a product or service available for use or
consumption.

• Channel decisions
– affect other marketing decisions
– involve long-term commitments
 Role of Intermediaries
• Greater efficiency in making goods available
to target markets.
• Intermediaries provide
– Contacts
– Experience
– Specialization
– Scale of operation
• Match supply and demand.
 Channel Functions
•Information
•Promotion
•Point of contact
•Matching
•Physical Distribution
•Risk taking
•Ownership
Physical Distribution - Nature and Importance

- Physical distribution: Moving tangible products

through distribution channels
- Physical distribution (or logistics) consists of all
activities involved in moving the right amount of the
right products to the right place at the right time
- In the past years, the surge of e-commerce has
underscored the importance of physical distribution
 the challenge relates to fulfillment, which entails
having the merchandise that is ordered by a
customer in stock and then packing and shipping it in
an efficient, timely manner
 Intermediaries :

Create Exchange Efficiencies

Decrease the number of contacts needed to establish product
exchanges
More effective than manufacturers
Can reach many consumers
Can promote products

15-6
 Channels of Distribution of Consumer Goods

Manufacturer
Manufacturer Consumers
Consumers

Manufacturer
Manufacturer Retailers
Retailers Consumers
Consumers

Manufacturer
Manufacturer Wholesaler
Wholesaler Retailers
Retailers Consumers
Consumers

Manufacturer
Manufacturer Agent
Agent Retailers
Retailers Consumers
Consumers

Manufacturer
Manufacturer Agent
Agent Wholesaler
Wholesaler Retailers
Retailers Consumers
Consumers

15-7
 Channels of Distribution for Industrial Goods

Organizational
Organizational
Manufacturer
Manufacturer Distributors
Distributors

Organizational
Organizational Organizational
Organizational
Manufacturer
Manufacturer Distributors
Distributors Distributors
Distributors

Manufacturer Organizational
Organizational
Manufacturer Agents
Agents Distributors
Distributors

Manufacturer Agent Organizational

Organizational Organizational
Organizational
Manufacturer Agent Distributors Distributors
Distributors Distributors

15-8
Irwin/McGraw-Hill Figure 10-4 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 THE ROLE OF MARKETING CHANNELS
IN MARKETING STRATEGY
• Marketing channels are key for any
organizations
• Four functions of marketing channels:
• Channels facilitate the exchange
process.
• Distributors adjust for discrepancies in
the market’s assortment of goods and
services via sorting, channeling products
to meet the buyer’s and producer’s needs.
• Channel members tend to standardize
payment terms, delivery schedules, prices,
purchase lots, and other conditions.
•  Channels facilitate searches by both
buyers and sellers and bring them together
TYPES OF MARKETING CHANNELS
• Most channel options involve at least
one marketing intermediary, an
organization that operates between
producers and consumers or business users.
• A retailer owned and operated by someone
other than the manufacturer of the
products it sells.
• A wholesaler who takes title to the
goods it handles and then distributes
these goods to retailers, other
distributors, or sometimes end consumers.
• Service firms sell intangible products
and need to maintain personal
relationships within their channels.
DIRECT SELLING
• Direct channel—carries goods directly
from a producer to the business purchaser
or ultimate user.
• Direct selling—a marketing strategy in
which a producer establishes direct sales
contact with its product’s final users.
• Internet and direct mail are also
potentially important tools for direct
selling.
CHANNELS USING MARKETING
INTERMEDIARIES
• For some products, using intermediaries
may be more efficient, less expensive, and
 Retail Store Distribution Strategy

Intensive

Selective

Exclusive
15-12
DETERMINING DISTRIBUTION INTENSITY
• Intensive distribution Distribution of a
product through all available channels.
• Selective distribution Distribution of a
product through a limited number of channels.
• Exclusive distribution Distribution of a
product through a single wholesaler or retailer
in a specific geographic region.
•Offering a product for sale only in one outlet or the outlets of a
single company.
For example, Kodak announced in early 2007 that the firm's new line
of Easy Share printers would be available only in Best Buy stores for
the first three months.
 Number
Numberofof
Intensity
IntensityLevel
Level Objective
Objective Intermediaries
Intermediaries

Achieve
Achievemass
mass
Intensive
Intensive market
marketselling.
selling. Many
Many
Convenience
Conveniencegoods.
goods.

Work
Workwith
withselected
selected
intermediaries.
intermediaries.
Selective Several
Several
Selective Shopping
Shoppingandandsome
some
specialty
specialtygoods.
goods.

Work
Workwith
withsingle
single
intermediary.
intermediary.Specialty
Specialty
Exclusive
Exclusive One
One
goods
goodsand
andindustrial
industrial
equipment.
equipment.
 Intensive distribution: 
 seller's unit costs for stocking are low; 
 convenience for customer is critical.
In intensive distribution the product is everywhere.  An example would
be the retailing of toothpaste, hairoil etc.  If you look at all the major
retail outlets, they are on every corner.  In an intensive distribution, the
stocking costs are typically very low. 
Convenience for the customer is critical.  When they decide that they
need gas or toothpaste, you'd better be there. 
 Convenience is more important to the customer, whereas in selective
distribution they are willing to travel to a retail outlet and have fewer
choices for that type of product.
Example : Gillette razor blades, Lux shampoo etc.
 Selective Distribution:
• seller's unit costs for stocking are high; 
• customers are willing travel to location.
When we decide to use selective distribution, it means that there are
fewer locations where the customer can buy our product.  We are not
everywhere.
We take this approach when the cost to stock our product is very high. 
Another consideration is whether customers are willing to travel to a
location to purchase the product. 
Examples: High ticket items like cars, furniture or computers, the
customer may be willing to travel to a number of outlets.  But for items
like toothpaste, it had better be everywhere.  Because they are not willing
to travel all around to buy toothpaste, it needs to be available in every
outlet.
Exclusive distribution:

This is a situation in which only certain dealers are authorized to sell a specific
product within a particular territory.
This type of distribution agreement is usually seen with high end and luxury
products. In an example of an exclusive distribution agreement, a car manufacturer
might only agree to allow three dealers to sell its cars in a specific country.
Exclusive distribution is often mentioned in product advertising. When an ad says
something like “only available at the following stores” or provides a list of stores
where a product can be purchased, it may indicate that the manufacturer has an
exclusive agreement, and the product cannot be obtained elsewhere.
Example: Retail selling strategy typically used by manufacturers of high-priced,
generally upscale merchandise, such as cars like Rolls royce or jewellery.
WHO SHOULD PERFORM CHANNEL FUNCTIONS?
• Intermediary must provide better service at lower
costs than manufacturers or retailers can provide
for themselves.
 CHANNEL MANAGEMENT AND LEADERSHIP
• Marketers have relationships with intermediaries in
distribution channels.
• CHANNEL CONFLICT
• Horizontal conflict—disagreements among channel
members at the same level, such as two competing
discount stores.
• Vertical conflict occurs among members at different
levels of the channel.
•ACHIEVING CHANNEL COOPERATION
• Best achieved when all members of channel see
themselves as equal components; channel captain should
provide this leadership.
Tasks in Physical Distribution Management

- Physical distribution refers to the actual physical flow of

products
- In contrast, physical distribution management is the
development and operation of processes resulting in the
effective and efficient physical flow of products
- Effective physical distribution management requires
careful attention to five interrelated activities:
1. Order processing
2. Inventory control
3. Inventory location and warehousing
4. Materials handling
5. Transportation
Tasks in Physical Distribution Management

1. Order Processing
- The starting point in a physical distribution system is order
processing, which is a set of procedures for receiving,
handling, and filling orders promptly and accurately
- Electronic data interchange (EDI):
- Between customer and supplier orders, invoices, and
other business functions are transmitted by computer
- Originally, EDI required a direct computer link between
supplier and customer, now it is being conducted via the
Internet
- EDI can trim the cost of order processing significantly,
which in turn may reduce purchase prices
Tasks in Physical Distribution Management

2. Inventory Control
- The goal of inventory control is to satisfy the order-
fulfillment expectations of customers while minimizing
both the investment and fluctuations in inventories
- Just-in-Time:
- JIT combines inventory control, purchasing, and
production scheduling
- Applying JIT, a firm buys in small quantities that arrive
just in time for production and then it produces in
quantities just in time for sale
Tasks in Physical Distribution Management

2. Inventory Control (continued)

- Just-in-Time:
- …
- Benefits of JIT are:
- Dramatic cost savings
- Shortened and more flexible and reliable production and
delivery schedules
- Quick responses to quality problems
- Market-Response Systems:
- The central promise is that those who intend to consume a
product should activate a process to produce and deliver
replacement items
- In this way, a product is pulled through a channel on the
basis of demand
Tasks in Physical Distribution Management

3. Inventory Location and Warehousing

- Management must make critical decisions about the
size, location, and transportation of inventories
- These areas are interrelated, often in complex ways
- One key consideration in managing inventories is
warehousing, which embraces a range of
functions, such as assembling, dividing, and
storing products and preparing them for
reshipping
Tasks in Physical Distribution Management

4. Materials Handling
- Selecting the proper equipment to physically
handle products, including the warehouse building
itself, is the materials handling subsystem of
physical distribution management
- Equipment that is well matched to the task can
minimize losses from breakage, spoilage, and theft
- Efficient equipment can reduce handling costs as
well as time required for handling
Tasks in Physical Distribution Management

5. Transportation
- Management must decide on both the mode of
transportation and the particular carriers
- The leading modes of transportation are railroads,
trucks, pipelines, water vessels, and airplanes
- Using two or more modes of transportation to move
freight is termed intermodal transportation; this
approach is intended to seize the advantages of
multiple forms of transportation
 PUSH AND PULL
STRATEGIES:

27
  Push strategy
Low brand loyalty
Product benefits to be made aware of
Brand choice made in store

Marketing
Activities Demand
Intermediari
Producer
es End users
Demand
28
 Pull strategy
High brand loyalty
High involvement product
Consumers able to perceive differences between brands
Brand chosen before store

Demand Demand
Intermediari
Producer End users
es

29 Marketing Activities
 Bucklin’s Theory
Bucklin’s Theory:
channel systems remain viable by performing duties that reduce
end-users’ search, waiting time, storage and other costs…the service
outputs determining channel structure.
Consumers determine channel structure by purchasing combinations
of service outputs.
The best channel forms when no other group of institutions
generates more profits or more consumer satisfaction per dollar of
product cost.
 Bucklin concluded that functions will be shifted from one channel
member to another in order to achieve the most efficient and
effective channel structure.
Meeting Service Output Demands.

30
The factors that might influence channel structure include:
   1. Outsourcing.
   2. Postponement and speculation.
   3. Speed.
   4. Technological, cultural, physical, social, and political
factors.
   5. Physical factors - geography, size of market area,
location of production centers, and concentration of
population.
   6. Local, state, and other laws.
 Bucklin’s Theory: determining channel
structure
channel systems remain viable by performing duties
that reduce end-users’ search, waiting time, storage
and other costs…the service outputs”
Bulk–breaking
Spatial Convenience :Transportation and Info search
costs
Wait time
Product Variety
Customer Service
Information provision

32
Designing the Marketing Channel
Channel Design:

Decisions involving the development of

new marketing channels either where none
had previously existed or to the
modification of existing channels
Channel Design
Distinguishing points of the definition include:

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
 Who Engages in Channel Design?

Retailers
Firms Wholesalers

• Producers,
manufacturers, service • Look up the
providers, franchisors • Look both up and channel
down to secure
• Look down the the channel suppliers
channel
toward the market
Channel Design Paradigm
1.1. Recognize
Recognizethe
theneed
needfor
for
channeldesign
channel designdecision
decision

7.7.Select
Select 2.2.Set
Set&&coordinate
coordinate
channelmembers
channel members distributionobjectives
distribution objectives

6.6.Choose
Choosethe
the“best”
“best” 3.3.Specify
Specify
channelstructure
channel structure distributiontasks
distribution tasks

5.5.Evaluate
Evaluate
4.4.Develop
Developalternative
alternative
relevantvariables
relevant variables channelstructures
structures
channel
 When to Make a Channel
Design Decision
 Dealing with changes in
 Developing a new product or
 Developing a new product or  Dealing with changes in
productline
line availabilityofofparticular
availability particularkinds
kindsofof
product
 Aiming an existing product at a intermediaries
intermediaries
 Aiming an existing product at a
 Opening up new geographic
newmarket
new market  Opening up new geographic
 Making a major change in some marketingareas
marketing areas
 Making a major change in some  Facing the occurrence of major
othercomponent
other componentofofthethe  Facing the occurrence of major
marketingmix mix environmentalchanges
environmental changes
marketing
 Establishing a new firm  Meeting the challenge of conflict
 Establishing a new firm  Meeting the challenge of conflict
 Adapting to changing
 Adapting to changing ororother
otherbehavioral
behavioralproblems
problems
 Reviewing and evaluating
intermediarypolicies
intermediary policiesthat
thatmay
may  Reviewing and evaluating
inhibitattainment
inhibit attainmentofofdistribution
distribution
objectives
objectives
 Distribution Objectives

Setting distribution objectives

requires knowledge of which,
if any, existing objectives
& strategies may impinge
on these distribution objectives.
 Channel Structure Dimensions
1. Number of
levels in the channel

2. Intensity at the
various levels

Allocation Alternatives

3. Types of
intermediaries
at each level
Number of Levels
Range from two to five or more
Number of alternatives is limited to two or three
choices
Limitations result from the following factors:
Particular industry practices
Nature & size of the market
Availability of intermediaries
Intensity at the Various Levels

Relationship between the intensity of distribution

dimension & number of retail intermediaries used in a
given market area

Intensity Dimension

Intensive Selective Exclusive

Numbers of Intermediaries (retail level)

Many Few One

 Types of Intermediaries
Numerous types
Manager’s emphasis on types of distribution tasks
performed by these intermediaries
Watch emerging types
Electronic online auction firms (eBay)
Industrial products sold in B2B markets
(Chemdex, Converge.com)
 Variables Affecting Channel Structure
Categories of Variables

1. Market Variables
2. Product Variables
3. Company Variables
4. Intermediary Variables
5. Environmental Variables
6. Behavioral Variables
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 industrial firms)
per unit of land area

Market Behavior Who buys, & how, when, and

where customers buy
Product Variables

Bulk & Weight

Perishability
Unit Value
Degree of Standardization
Technical versus Nontechnical
Newness
 6
Company Variables
Size The range of options is
relative to a firm’s size

Financial The greater the capital, the

Capacity lower the dependence on
intermediaries

Managerial Intermediaries are necessary

Expertise when managerial experience
is lacking

Objectives Marketing & objectives may

& Strategies limit use of intermediaries
 6

Intermediary Variables
Availability Availability of intermediaries
influences channel structure.

Cost Cost is always a consideration in

channel structure.

Services Services that intermediaries offer are closely

related to the
selection of channel members.
Environmental Variables
Competitive
Economic
Sociocultural

The impact of environmental forces is

a common reason for making
channel design decisions.

Technological Legal
Behavioral Variables

Develop congruent roles for channel members.

Be aware of available power bases.

Attend to the influence of behavioral problems

that can distort communications.