Setting Distribution Channels

Value Delivery Network

VDN consist of “upstream” and “downstream” partners

Down stream

Upstream
 The Nature of Marketing Channels
• Today few products sell their products directly to the final
users

• Instead, they try to build a “Marketing Channel”

(Distribution Channel)

A set of interdependent organizations that

help to make a product or service available
for use or consumption by the consumers
or business users.
 The Importance of Marketing
Channels
- Right time and in the right place

- Major impact on both customer satisfaction and company

cost

- Distribution channel decisions often involve long term

commitments

Therefore organizations must design

its channels carefully.
 Channel Design Decisions

• Analyzing consumer demand

• Setting channel objectives
• Identify major channel alternatives
• Evaluating the major alternatives
• Managing channel members
 Analyzing Consumer Demand
Finding out what target consumers want from the channel.

• Do consumers want to buy from near by locations or are they willing to

travel to more distant ?

• Would they rather by in person, over the phone, through the mail, or
online ?

• Do they prefer specialization or breadth of assortment ?

• Do consumers want many add on services (delivery, credit repairs,

installation ) or will they obtain it elsewhere

• Do they need fast delivery ? Lot size ? Waiting time ?

 Analyzing Consumer Demand

• The company must balance consumer needs not

only against the feasibility and the cost of
meeting these needs but also against customer
price preference.

• In discount stores consumers will often accept lower

service levels in exchange for lower prices.
 Setting Channel Objectives
Marketing channel objectives should be set in terms of
consumer service level.

The company’s channel objectives are also influenced by the ;

- Nature of the company (Size & Financial resources)
- Nature of the product
- Competitors
- Environment (E.g. Legal constraints)
 Identifying Major Channel
Alternatives
Types of intermediaries

– Company’s own outlets

– Sales representatives
– Agents
– Wholesalers
– Retailers
– Independent distributors
 Channel Levels
0-level channel
Manufacturer Consumer

1-level channel
Manufacturer Retailer  Consumer

2-level channel
Mfg  Wholesaler Retailer  Consumer

3-level channel
Mfg  Wholesaler Agent  Retailer  Consumer

The number of intermediary levels indicates the length of a channel

 Identifying Major Channel
Alternatives
Number of intermediaries

– Intensive Distribution
A strategy in which company stock their products in
as many outlets as possible.

E.g. Coca – cola, toothpaste

 Identifying Major Channel
Alternatives
Number of intermediaries

– Exclusive Distribution

A strategy in which product is available only in

limited number of outlets (Few in the country)
E.g. Luxury automobiles, prestige clothing

Image
 Identifying Major Channel
Alternatives
Number of intermediaries

– Selective Distribution
The use of more than few, but fewer than all of the
intermediaries who are willing to carry the
company’s products. (One store in every large city)

E.g. Durable items, (TV, Furniture

home appliances)
 Evaluating the Major Alternatives

• Economic criteria : Compares the likely sales, cost

& profitability of different channel alternatives.

• Control criteria : Ability to control the distribution of

the product.

• Adaptive criteria : Level of flexibility so that it can

adapt to environmental changes.
 Managing Channel Members

The producer and the intermediaries need to agree

on the terms and responsibilities of each channel
member. They should agree on ;
- Price policies
- Conditions of sale
- Territorial rights
- Specific requirements
How Channel Members Add Value
• Producers use intermediaries because they create
greater efficiency in making goods available to
target markets.

• Through their contacts, experience, specialization,

and scale of operation, intermediaries usually offer
the firm more than it can achieve on its own.
How Channel Members Add
Value

1
2
3

4 Number of contacts
5 without a distributor
6 MxC=3X3=9

7
8
9
= Manufacturer = Customer
How Channel Members Add
Value

1 Number of contacts
4 with a distributor
MxC=3+3=6
Store
2 5

6
3

= Manufacturer = Customer = Distributor

Key Functions Performed by Marketing
Channel Members
• Information : Gather & distribute marketing research and
marketing intelligence information about actors and forces in
the marketing environment.

• Promotion : Spread persuasive communications about an

offer.

• Matching : Finding perspective buyers

Key Functions Performed by Marketing
Channel Members
• Negotiation : Reaching an agreement on price and other
terms of the offer so that ownership and possession can be
transferred.

• Physical distribution: Transporting & storing goods.

Key Functions Performed by Marketing
Channel Members
• Financing : Acquiring and using funds to cover the costs of
the channel work.

• Risk Taking : Assuming the risk of carrying out the channel

work.

In diving the work of the channel, the various functions should

be assign to the channel members who can add the most
value for the cost.
From the producer’s point of view, a greater number of
levels means less control and greater channel complexity

All of the institutions in the channel are connected by

several types of flows

• Physical flow
• Flow of ownership
• Payment flow
• Information flow
• Promotion flow
 Conventional Distribution Channels
Producers, wholesalers and retailers performing independently
- Each is a separate business seeking to maximize its own
profits.
- No channel members has much control over the other.

- No formal system exists for assigning roles and resolving

channel conflicts.
 Vertical Marketing System (VMS)
Vertical Marketing System : Producers, wholesalers and
retailers acting as a unified system.
 Horizontal Marketing Systems

Another channel development is Horizontal Marketing

system, in which two or more companies join together to
follow a new marketing opportunity.
E.g. Commercial Bank branches in Arpico outlets.
Multichannel Distribution Systems
In the past, many companies used a single channel to sell
to a single a market or segment.

Today more and more companies have adopted

multichannel distribution systems. (Hybrid Marketing
Channels)
Hybrid Marketing Channel