Chapter 7 Marketing Channel Strategy and Management

7-2 In this chapter, you will learn about… 1.The Channel-Selection Decision The Design of Marketing Channels Channel Selection at the Retail Level Channel Selection at Other Levels of Distribution 2.Dual Distribution and Multi-Channel Marketing Dual Distribution Multi-Channel Marketing

7-3 In this chapter, you will learn about… 3.Satisfying Intermediary Requirements and Trade Relations Intermediary Requirements Trade Relations 4.Channel-Modification Decisions Qualitative Factors in Modification Decisions Quantitative Factors in Modification Decisions

7-4 A marketing channel consists of individuals and firms involved in the process of making a product or service available for consumption or use by consumers and industrial users. What is a marketing channel?

7-5 Links a producer to buyers Performs sales, advertising, and promotion Influences the firm’s pricing strategy by the makeup and discount policies. Affects product strategy through branding policies, willingness to stock and customize offerings, install, maintain, offer credit, etc. Role of the channel in marketing strategy

The Channel-Selection Decision ◆ not single act but a process of making various component decisions. Involving specifying the type, location, density, and functions of intermediaries. Market analysis must be conducted in order to identify the target markets that will be served by a prospective marketing channel. 7.1 The Channel-Selection Decision ◆ not single act but a process of making various component decisions. Involving specifying the type, location, density, and functions of intermediaries. Market analysis must be conducted in order to identify the target markets that will be served by a prospective marketing channel. The marketing manager must answer the following questions: Who are potential customers? Where do they buy? When do they buy? How do they buy? What do they buy? -Avon Cosmetics example

7.1.1 The Design of Marketing Channels Traditional Marketing Channel Designs Producer Ultimate Buyers Retailers or Dealers Distributors or Wholesalers Brokers or Agents

The Design of Marketing Channels cont. Use intermediaries to reach target market type location density number of channel levels Contact ultimate buyers directly using its own sales force or distribution outlets using the Internet through a marketing Web site or electronic storefront vs. INDIRECT DIST. DIRECT DIST.

The Design of Marketing Channels Buyers are easily identifiable Personal selling is a major component of the communication mix Organization has a wide variety of offerings for the target market Sufficient resources are available Direct distribution is typically used when:

7-10 Intermediaries are not available for reaching target markets Intermediaries do not possess the capacity to service the requirements of target markets Direct distribution must be considered when: The Design of Marketing Channels

7-11 Intermediaries can perform distribution functions more efficiently and less expensively Customers are hard to reach directly Organization does not have resources to perform distribution function Indirect distribution must be considered when: The Design of Marketing Channels

The Design of Marketing Channels Electronic marketing channels employ some form of electronic communication, including the Internet, to make products and services available for consumption or use by consumers and industrial users.

Ultimate Buyers Amazon.comDell.comTravelocity.com Representative Electronic Marketing Channels Autobytel.com Book Publisher Book Distributor Amazon.com (Virtual Retailer) Dell Computers Airline Travelocity (Virtual Agent) Auto Manufacturer Auto Dealer Auto-By-Tel (Virtual Broker)

The Design of Marketing Channels Disintermediation is the elimination of traditional intermediaries and direct distribution through electronic marketing channels.

Channel Selection at the Retail Level Channel Selection Decisions 1.Which channel and intermediaries will provide the best coverage of the target market? 2.Which channel and intermediaries will best satisfy the buying requirements of the target market? 3.Which channel and intermediaries will be the most profitable?

1.Channel Selection at the Retail Level ■ Target Market Coverage Exclusive Intensive Selective Levi’s Sony Rolex Faberge Wrigley’s Coke

Channel Selection at the Retail Level cont. The popularity of selective distribution has come about also because of a phenomenon. Effective Distribution: a limited number of retail outlets account for a significant fraction of the market potential. Example: A marketer distributes the product through 40% of available outlets, but these outlets account for 80% of the market.

Channel Selection at the Retail Level ■ Satisfying Buyer Requirements Information Convenience Variety Attendant services

Channel Selection at the Retail Level ■ Profitability Margins = Revenues – Channel Costs Channel costs are: -Distribution costs -Advertising costs -Selling costs

7-20 Specialty wholesaler –Limited line of items within a product line General-merchandise wholesaler –Wide assortment of products General-line wholesaler –Complete assortment of items in a single retailing field Combination Channel Selection at Other Levels of Distribution ◆ Types of Wholesaler

7-21 occurs when an organization distributes its offering through two or more different marketing channels that may or may not compete for similar buyers the main consideration is whether it will provide incremental sales revenue or cannibalize existing sales 7.2 Dual Distribution and Multi- Channel Marketing Channel Marketing Dual Distribution

7-22 own brand and private store brand distribution to large and small retailers geographic factors Multi-brand strategy Dual Distribution cont. When is it used

7-23 Hallmark Sells Hallmark brand cards through Hallmark stores and selected department stores Sells Ambassador brand cards through discount and drugstore chains Dual Distribution Example Example

7-24 Multi-channel marketing involves the blending of an electronic marketing channel and a traditional channel in ways that are mutually reinforcing in attracting, retaining, and building relationships with customers Multi-Channel Marketing Marketing

7-25 An electronic marketing channel can provide incremental revenue (Victoria’s Secret) An electronic marketing channel can leverage the presence of a traditional channel (Ethan Allen) Multi-channel marketing can satisfy buyer requirements (Clinique division of Estée Lauder 雅诗兰黛 / 倩碧 ) Multi-Channel Marketing Justifications

Multi-Channel Marketing Considerations Actual incremental revenue or merely cannibalization? Incremental cost to launch and sustain an electronic forefront Disintermediation – a traditional intermediary member is replaced by electronic storefront

7-27 Improvements in product assortments Trade discounts Fill-rate standards Promotional support Lead-time requirements Product-service exclusivity agreements 7.3 Satisfying Intermediary Requirements and Trade Relations Intermediary Requirements

Trade Relations ▲ an important consideration in marketing channel management and strategy. Conflicts arise in trade relations. 1. Channel Conflict arises when one channel member believes another channel member is engaged in behavior that is preventing it from achieving its goals.

7-29 Channel member bypasses another member and sells or buys direct (Wal-Mart) Uneven distribution of profit margins among channel members (Michelin) Manufacturer believes channel member is not giving its products adequate attention (Heinz) Manufacturer engages in dual distribution (Elizabeth Arden) Trade Relations 1. channel conflict cont. Sources of Channel Conflict Trade Relations 1. channel conflict cont. Sources of Channel Conflict

Trade Relations 2. Channel Power Conflict has destructive effects on the workings of a marketing channel. To reduce the likelihood of conflict, one of channel members seeks to… Channel Captain is a channel member that takes on the role of coordinating, directing, and supporting other channel members.

7-31 Ability to reward or coerce other members (Microsoft and Wal-Mart) Expertness (American Hospital Supply) Identification with a particular channel member (Ralph Lauren) Legitimate right to dictate the behavior of other members (franchising) Trade Relations 2. Channel Power Forms of Channel Captain Power

Channel-Modification Decisions Reasons Shifts in the geographical concentration of buyers Inability of existing intermediaries to meet the needs of buyers Costs of distribution

Channel-Modification Decisions Basic Objectives 1.Provide the best coverage of the target market sought 2.Satisfy the buying requirements of the target market 3.Maximize revenue and minimize cost

Will the change improve the effective coverage of the target markets sought? How? 2.Will the change improve the satisfaction of buyer needs? How? 3.Which marketing functions, if any, must be absorbed in order to make the change? 4.Does the organization have the resources to perform new functions? 5.What effect will the change have on other channel participants? 6.What will be the effect of the change on the achievement of long-range organizational objectives? 7.4 Channel-Modification Decisions Qualitative Factors

7-35 …considers the financial impact of the change in channel members in terms of revenues and expenses 7.4 Channel-Modification Decisions Quantitative Assessment

7-36 Margin to wholesalers$5,000,000 Service expense 500,000 Total cost$5,500,000 Suppose an organization is considering replacing its wholesalers with its own distribution centers. The cost of wholesalers includes: 7.4 Channel-Modification Decisions Quantitative Assessment Example

7-37 Sales to retailers$1,500,000 Sales administration 250,000 Inventory cost 935,000 Delivery and storage 1,877,000 Accounts receivable 438,000 Total cost$5,000,000 The cost of Distribution Centers: 7.4 Channel-Modification Decisions Quantitative Assessment Example

Channel-Modification Decisions Quantitative Assessment Example Since using wholesalers costs $5.5 million and the cost of distribution centers would be $5 million, a cost perspective suggests selection of the latter option. However, the effect on revenues must be considered by: Determining the dollar value of: –Market coverage –Satisfaction of buyer needs –Channel-participant response

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