Marketing Channels and Distribution

LEARNING OBJECTIVES Understand how marketing channels add time, place, and possession utilities for final customer and how channel structure evolves to provide these utilities effectively and efficiently. Identify the five major flows in marketing channels and how each contributes to making products conveniently available to many millions of customers. Understand how marketing channels add time, place, and possession utilities for final customer and how channel structure evolves to provide these utilities effectively and efficiently Identify the five major flows in marketing channels and how each contributes to making products conveniently available to many millions of customers

LEARNING OBJECTIVES Realize that marketing channels are not only economic systems, but also social systems, in which power and conflict play an important role Recognize and explain all six decision areas of channel management and be familiar with the main issues associated with each of those decisions Appreciate the crucial role played by logistics in the creation and operation of high- performance marketing channels Realize that marketing channels are not only economic systems, but also social systems, in which power and conflict play an important role. Recognize and explain all six decision areas of channel management and be familiar with the main issues associated with each of those decisions. Appreciate the crucial role played by logistics in the creation and operation of high-performance marketing channels.

MARKETING CHANNEL DEFINED Marketing channel is the network of organizations that creates time, place, and possession utilities.

Utilities Form Utility – created by manufacturing Time Utility – having products available for use when consumers want them. Place Utility – having products where consumers want them. Possession Utility – having the ability to take possession of products.

MARKETING CHANNEL STRUCTURE Channel structure consists of all the businesses and institutions (including producers or manufacturers and final customers) who are involved in performing the functions of buying, selling, or transferring title.

MARKETING CHANNEL STRUCTURE Three Dimensions Length of channel Intensity at various levels Types of intermediaries

MARKETING CHANNEL STRUCTURE Length of marketing channel 2 level 3 level 4 level 5 level Manufacturer Manufacturer Manufacturer Manufacturer Agent Wholesaler Wholesaler Retailer Retailer Retailer Consumer Consumer Consumer Consumer

MARKETING CHANNEL STRUCTURE Intensity at various levels Exclusive Distribution Selective Distribution Intensive Distribution

MARKETING CHANNEL STRUCTURE Intensity at various levels Exclusive Distribution Practiced when a manufacturer restricts product distribution to a single retailer in a particular market or just a relatively few retailers Products that are expensive, infrequently purchased, are sought after by consumers (i.e. specialty goods), or which require considerable after-sale servicing are the most likely candidates for exclusive distribution

MARKETING CHANNEL STRUCTURE Intensity at various levels Selective Distribution Selectively distributed brands are available in multiple retail outlets in a particular market Shopping products, or those that consumers seek out, are sold through selective distribution

MARKETING CHANNEL STRUCTURE Intensity at various levels Intensive Distribution Used when convenience products are sold through virtually every available retail outlet in a particular market, e.g. soft drinks, candy, gum, cigarettes

MARKETING CHANNEL STRUCTURE Types of Intermediaries – include the different kinds of intermediary institutions that can be used at the various levels of the channel.

DETERMINANTS OF CHANNEL STRUCTURE Determinants of channel structure include: Distribution tasks Economics of distribution tasks Management's desire for distribution control

Distribution Tasks Discrepancies in quantity – buffer mass produced goods. Discrepancies in assortment – allow producers to focus while providing customer selection.

Distribution Tasks Discrepancies in time – hold goods until ready. Discrepancies in place – connects producers and consumers.

The Economics of Performing Distribution Tasks Economics of distribution tasks Transaction efficiency Mfg. A Mfg. B Mfg. C Without intermediaries 1 2 3 4 5 6 7 8

The Economics of Performing Distribution Tasks Economics of distribution tasks Transaction efficiency Mfg. A Mfg. B Mfg. C With intermediaries Intermediary 1 2 3 4 5 6 7 8

Management’s Desire for Control of Distribution The shorter the channel structure the higher the control Needed when a manufacturer must protect product image, etc.

FLOWS IN MARKETING CHANNELS Product Flow The movement of the product from manufacturer through all parties who take physical possession Negotiation Flow Interplay of buying/selling tasks associated with title transfer

FLOWS IN MARKETING CHANNELS Ownership Flow Movement of title of the product Information Flow Information to and from the manufacturer Promotion Flow Flow of persuasive communication (advertising, personal selling, etc.)

FLOWS IN MARKETING CHANNELS

MARKETING CHANNELS AS SOCIAL SYSTEMS Power in Marketing Channels – the capacity of one channel member to influence the behavior of another channel member. Conflict in Marketing Channels – when one channel member believes that another channel member is impeding the attainment of its goals.

MARKETING CHANNEL MANAGEMENT Marketing channel management – the analysis, planning, organizing, and controlling of a firm’s marketing channels. Interorganizational context – channel management that extends beyond a firm’s own organization into independent businesses.

PERSPECTIVES FOR CHANNEL MANAGEMENT Down the channel toward the product Up the channel toward the manufacturer

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Realize only the place ‘P’ provides protection from imitation Distribution strategies can provide sustainable competitive advantage Design channel structure Select channel members Motivate channel members Coordinate with marketing mix Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Set distribution objectives Design channel structure Specify tasks to be performed by the channel Select channel members Motivate channel members Consider alternative structures Coordinate with marketing mix Choose optimal structure Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Optimal structure identified by considering: Market variables Product variables Company variables Intermediary variables Behavioral variables External environment variables Design channel structure Select channel members Motivate channel members Coordinate with marketing mix Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Develop selection criteria Size Credit and Financial Condition Design channel structure Attitude Sales Strength Select channel members Prospective channel member Management Ability Product Lines Motivate channel members Management succession Coordinate with marketing mix Reputation Sales Performance Market Coverage Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Find prospective channel members Evaluate prospective channel members Convert prospectives into actual channel members Design channel structure Select channel members Motivate channel members Coordinate with marketing mix Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Learn about the needs and problems of channel members Advisory committees Offer support Informal support Strategic alliances, partnerships Provide ongoing leadership Continuing focus Design channel structure Select channel members Motivate channel members Coordinate with marketing mix Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Product and Channel Retailers (a channel member) play an important role in product positioning Display fixtures Personal selling Design channel structure Select channel members Motivate channel members Coordinate with marketing mix Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Pricing and Channel Relevant to channel members: Profit margins available to channel members Pricing policies Incentives Design channel structure Select channel members Motivate channel members Coordinate with marketing mix Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Promotion and Channel Promotions interface with channel members Point-of-purchase displays Inventory levels Sales person training Design channel structure Select channel members Motivate channel members Coordinate with marketing mix Evaluate member performance

DECISION AREAS OF CHANNEL MANAGEMENT Formulating channel strategy Assessment of success of channel members in implementing strategies Requires good information flows between members Point-of-sale systems, EDI Design channel structure Select channel members Motivate channel members Coordinate with marketing mix Evaluate member performance

LOGISTICS IN MARKETING CHANNELS Logistics make products available to customers Also called physical distribution (PD) Supply chain management (SCM) are logistical systems that facilitate close cooperation among firms in a channel

LOGISTICS IN MARKETING CHANNELS Total Cost Approach and Systems Concept Systems Concept Transportation Materials Handling Management views logistics as a system of interrelated components Management tries to reduce cost of using the components as a whole Order Processing Inventory Control Warehousing Packaging Total Cost Approach

LOGISTICS IN MARKETING CHANNELS INSERT Table 10.1

Marketing Channel Logistics Almost all products must be moved Generally one of the highest percentage costs Use in-house transport or common carriers? What rates are available? What are competitors doing? Transportation Materials Handling Order Processing Inventory Control Warehousing Packaging

Marketing Channel Logistics Growing use of cross-docking How to minimize distances? What equipment should be used? How to use labor efficiently? Transportation Materials Handling Order Processing Inventory Control Warehousing Packaging

Marketing Channel Logistics Order cycle time (time between order and delivery) How to reduce errors in order processing? How to develop standards for different product types? Transportation Materials Handling Order Processing Inventory Control Warehousing Packaging

Marketing Channel Logistics Economic order quantity (EOQ) is the lowest total cost (inventory carry cost + ordering costs) How to balance inventory levels with order sizes? Transportation Materials Handling Order Processing Inventory Control Warehousing Packaging

Marketing Channel Logistics Growth of single item shipments Where to locate a warehouse? Number of warehousing units and size of units? Ownership question? Transportation Materials Handling Order Processing Inventory Control Warehousing Packaging

Marketing Channel Logistics Effective packaging can help control inventory carry costs and help logistics efficiency What type of package is required (sturdiness, etc.)? Transportation Materials Handling Order Processing Inventory Control Warehousing Packaging

OUTPUT OF THE LOGISTICS SYSTEM Customer service is the output of logistics systems

Supplemental Material

Types of intermediaries Channel Structure Types of intermediaries Merchant Middlemen Functional Middlemen

Types of intermediaries Channel Structure Types of intermediaries Do not take title to products; they simply facilitate the exchange process by performing buying and/or selling functions. Functional Middlemen

Types of intermediaries Channel Structure Types of intermediaries Take title to products and resell them. Merchant Middlemen

Social Aspects of Marketing Channels Marketing channel power The influence one channel member has over other members’ behaviors Marketing channel conflict Goal impeding behavior by one or more channel members Territorial encroachment

Determinants of Power Reward Power Coercive Power Legitimate Power Ability to offer an award (e.g. granting of exclusive distribution) Coercive Power Legitimate Power Expert Power Referent Power

Determinants of Power Reward Power Coercive Power Legitimate Power Threat of punishment (e.g. a manufacturer might threaten a retailer with loss of exclusive distribution) Coercive Power Legitimate Power Expert Power Referent Power

Determinants of Power Reward Power Coercive Power Legitimate Power Power from contract agreement or organizational relationships Coercive Power Legitimate Power Expert Power Referent Power

Determinants of Power Reward Power Power resulting from technological expertise or proprietary reasons Coercive Power Legitimate Power Expert Power Referent Power

Determinants of Power Reward Power Power resulting from ability to influence further action Coercive Power Legitimate Power Expert Power Referent Power

Vertical Marketing Systems Administered VMS Corporate Systems Contractual Systems Conventional channel with one channel member (a manufacturer, wholesaler, or retailer) informally acting as the channel leader.

Vertical Marketing Systems Administered VMS Corporate Systems Contractual Systems Combines all levels of the marketing channel under one company’s ownership

Vertical Marketing Systems Administered VMS Corporate Systems Contractual Systems Are integrated via contractual agreement Franchising is the major form of contractual VMS. Others include voluntary chains and cooperatives