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Marketing Channel
Strategy Chapter 3
Channel Analysis: Auditing Marketing Channels

Marketing Channel Strategy © 2015 by Pearson Education

 Audit Existing Marketing Channels
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 After identifying targeted segments of end-users

then audit existing marketing channels
 Evaluate each available channel member’s
capability to provide service outputs efficiently
 Identify what channel functions get performed by
each channel member in the existing channel
system, by whom, at what levels, and at what cost

Channel Function: The activities that produce the

service outputs demanded by end-users
Marketing Channel Strategy © 2015 by Pearson Education
 Benefits of Auditing
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 Diagnose and remedy shortcomings in the

provision or price of service outputs to
targeted segments
 Identify gaps in service outputs desired by

targeted end-user segments

 Helps members allocate channel profits

equitably

Marketing Channel Strategy © 2015 by Pearson Education

 Marketing Functions in Channels
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Physical
Possession
 

Marketing Channel Strategy © 2015 by Pearson Education

 Channel Functions
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 Specific channel members can specialize in one or

more channel functions
 You can remove a particular member from the
channel, but the specialized functions performed by
that channel member cannot simply be eliminated
 After a channel member leaves the channel, its
functions must shift to some other channel member
 Some exceptions: when a direct salesperson and an
independent sales representative call on the same
customer, they create wasted effort and cost
Marketing Channel Strategy © 2015 by Pearson Education
 Channel Function Costs
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 Every channel function contributes to the production

of valued service outputs and also produces costs
 For example:
 Physical possession: Channel activities pertaining to the
storage of goods, including transportation between
channel members
 Physical possession costs: Costs of running warehouses
and transporting products from one location to another

Marketing Channel Strategy © 2015 by Pearson Education

 Importance Weighting in Efficiency Template
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 Importance weights: Idea is to account for both the

cost of performing that function and the value added
by that same performance in the channel
 Activity-based costing (ABC): accounting method
explains how to measure the cost of performance to
one organization
 A Delphi analysis: Without quantitative measures of
cost, analysts can use qualitative techniques to
estimate the cost weights

Marketing Channel Strategy © 2015 by Pearson Education

 Evaluating Channels: The Equity Principle

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 Equity principle:
 A member’s level of compensation in the channel system should
reflect its degree of participation in the marketing functions and
the value created by such participation.
 That is, compensation should mirror the normative profit shares of
each channel member.
 Channel members must identify their actual costs
incurred and develop an agreed-upon estimate of the
value created in the channel
 In many cases, actual profit shares do not match the
normative shares suggested by the efficiency template
Marketing Channel Strategy © 2015 by Pearson Education
 Evaluating Channels: Zero-Based Channel Concept

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 One that meets the target market segment’s demands

for service outputs by performing necessary channel
functions to produce those service outputs at a
minimum cost
 Cost control in channels often depends on reducing
inventory
 Obvious ways: avoid items that sell slowly, lengthen the life
of goods, find a vendor who resupplies faster
 Reduce variety
 Aiming for a zero-based channel in the presence of
uncertainties is key goal
Marketing Channel Strategy © 2015 by Pearson Education
 New Channel Design
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 Zero-based channels may not even exist

 Planner also is likely to face managerial or
environmental barriers to establishing a zero-based
channel
 Evaluate the cost effectiveness of various channel
activities designed to generate service outputs that
end-users will appreciate

Marketing Channel Strategy © 2015 by Pearson Education

 Sources of Channel Gaps

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 Cause: Has not thought carefully about target end-

users’ demands for service outputs or about
managing the cost of running their channel
 Solution: Pay attention to both service gaps and costs
gaps
 Bounds that create gaps
 Environmental bounds
 Managerial bounds

Marketing Channel Strategy © 2015 by Pearson Education

 Service Gaps

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 Amount of a service supplied is less than the service

demanded (in shorthand, SS < SD)
 Example: standard music retailers offered insufficient bulk
breaking (few single song formats) and assortment/variety
 Example: Dollar Stores poor service. Despite the very low
prices, some end-users do not perceive sufficient value
 Amount of service supplied is greater than the amount
demanded (SS > SD)
 Younger popular music buyers prefer do-it-yourself
downloads
 Overinvestments in service outputs decrease the end-user’s
satisfaction, even asMarketing
they cost more money© 2015
Channel Strategy
to provide
by Pearson Education
 Cost Gaps
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 A cost gap exists when the total cost of performing

all channel functions is too high
 Example: a cost gap in the performance of the
promotional function in CDW
 Puts all its newly hired salespeople through a very
rigorous training program
 CDW’s annual sales force turnover rate is 25 percent
 Training costs are wasted investments; even worse,
they may have granted one of CDW’s competitors a
well-trained salesperson
Marketing Channel Strategy © 2015 by Pearson Education
 Six Possible Gaps
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COST/ SERVICE Service Gap No Service Gap Service Gap

LEVEL (SD>SS) (SD=SS) (SS>SD)

No Cost Gap Price/value Price/value

(Efficient Cost) proposition are Zero-gap proposition are
right for a less right for a more
demanding demanding
segment segment

Cost Gap Service levels are Service levels are Service levels and
(Inefficiently too low and costs right but costs are costs are too high
provided services) too high too high

Note: Service demanded (SD) and service supplied (SS)

Marketing Channel Strategy © 2015 by Pearson Education

 Combining Channel Gaps
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 Channel manager must specify which service gaps

occur for each particular service output that is valued
in the marketplace
 Cost and service gap combinations also might arise
from the links between cost decisions and the
provision of service outputs
 Postponement: put off incurring costs as long as possible
 Speculation: producing goods in anticipation of orders,
rather than in response to them

Marketing Channel Strategy © 2015 by Pearson Education

 Preferences of Postponement and Speculation
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 End-users engage in postponement sales through instant

online downloads of exactly the music tracks
 Book sales:
 Book publishers still favor speculation
 Postponement is the predominant form in electronic book channel
 End-users actually are willing to speculate, such as when
they find a particularly good price or deal on a product
 The appropriate amount of speculation in inventory

holding in the channel depends on the costs of

speculation and the intensity of demand for quick
delivery by end-users
Marketing Channel Strategy © 2015 by Pearson Education
 Evaluating Channels: Gap Analysis Template

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 Service Gap Analysis Template: identify service gaps

explicitly according to the targeted end-user segment
 Cost Gap Analysis Template
 Identifies cost gaps, the bounds that give rise to them, and
potential actions to close them
 Also can denote whether the potential actions create other,
unintended gaps
 Channel structure may often approach a zero-based
design, without being fully zero-based

Marketing Channel Strategy © 2015 by Pearson Education