Marketing Channels: Structure and Functions

14th February 2008

Middlemen are responsible for the increase in prices!!!

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Marketing Channel
is a set of

interdependent organizations involved in the process of making a product or service

available for use or consumption
The purpose of a marketing channel is to satisfy the end users in the market.

Concepts underlying the Distribution System

A middleman is an independent business concern standing between the producer and the ultimate user Either he - Takes title to the merchandise as it flows from producer to consumer - or he actively negotiates the transfer of title

Classifying Middlemen
Basis : Whether they take title to the products involved Merchant Middlemen
Wholesalers and retailers who take title

Type :

Agent Middlemen
Brokers and manufacturers agents who do not take title but actively assist in the transfer of title

Exchange without Intermediaries

Cloth

Shovels

Meat

Number of Exchanges

Vegetables

Baskets

= n(n -1) 2 = 10

Where n = number of consuming units

Number of Transactions
Without Marketing Intermediaries

In the real world the number of producing and consuming units would be far greater. Number of Units 25 100 500 1000 Number of Transactions 300 4950 124750 499500

Exchange with Intermediaries

Cloth

Shovels Trading Post

Meat

Number of Exchanges

Vegetables

= 5

Baskets

Contact Cost to Reach the Market with and without Intermediaries

Selling Directly

Manufacturers 40 Contact Lines

Retailers

Contact Cost to Reach the Market with and without Intermediaries

Selling Through One Wholesaler

Manufacturers

Wholesaler

14 Contact Lines

Retailers

Contact Cost to Reach the Market with and without Intermediaries

Selling Through Two Wholesalers
Manufacturers

Wholesalers

28 Contact Lines

Retailers

Number of Transactions and Marketing Costs

Activities involved in sale to a retailer
Contact with the retailer by salesman

Costs involved for each activity

Travel costs and selling time to canvass biz

If its a new account, credit investigation

If an order is received, processing of the order Delivery of the goods Billing

Unchanged with number of products sold

Marginal increase with increase in size of order Unchanged or relatively higher for smaller orders Unchanged

Collection of payments

Unchanged

Why are there Marketing Channels???

Demand side factors :
Facilitation of search Adjustment of assortment discrepancy

Supply side factors :

Routinization Reduction in number of contacts

What is the work of the Marketing Channels???

Performance of the Marketing Flows
The term FLOWS is used (instead of functions or activities) to emphasize that these processes flow through the channel.

Marketing Flows in Channels

Physical Possession Ownership Wholesalers Promotion Producers Negotiation Financing Risking Ordering Payment

Physical Possession Ownership

Promotion Negotiation Financing Risking Ordering Payment

Physical Possession Ownership Promotion Negotiation Financing Risking Ordering Payment Consumers Industrial and Household

Commercial Channel Subsystem

Note :Each flow carries a cost

Examples of Costs of various Flows

Marketing flow
1. 2. Physical possession Ownership

Cost represented
Storage and delivery costs Inventory carrying costs

3.
4. 5. 6. 7. 8.

Promotion
Negotiation Financing Risking Ordering Payment

Personal selling, advertising, sales promotion, public relations, publicity

Time and legal costs Credit terms, terms and conditions of sale Warranties, repair, after sales service costs Order-processing costs Collections, bad debts costs

Who Belongs to a Marketing Channel???

The key members are :

Manufacturers producer or originator of the product

Intermediaries (wholesalers, agents, brokers,

retailers) that assist producers and manufacturers (and final
users) in the performance of negotiatory functions

End-users either individual or business customers

Intermediaries
Refers to any channel member other than the manufacturer or the end-user. Three types of intermediaries : Our focus during Wholesalers
this course is on

Retailers Specialized such as insurance companies,

banks, shipping firms, advertising agencies

Market coverage Sales contact Inventory holding Order processing Market information Customer support Result?

Product availability Customer service

Effective and efficient marketing channels

For Manufacturers

Tasks performed by Wholesalers

For Consumers

Credit Assortment convenience Breaking bulk Advice and technical support

Distribution Tasks performed by Retailers

The role of a retailer in the distribution channel,
regardless of his size or type, is to : Interpret the demands of his customers Find and stock the goods these customers want

When they want them,

And in the way the want them.

Facilitating Agencies
1. Transportation agencies 2. Storage agencies 3. Order processing agencies 4. Advertising agencies 5. Financial agencies

6. Insurance companies
7. Marketing research firms

What is the best channel for a particular product???

An Analytic Framework for Channel Design and Implementation

Designing the Right Channel

The steps in designing the Right Channel are :
Segmenting the market by service outputs

desired
Positioning

Targeting

Segmentation for Marketing Channel Design: Service Outputs

The Marketing Channel System Design and Management requires starting with the

END USERs
each of whom will have differential preference for service output levels that reduce their Search, Waiting time, Storage and other Costs

Segmenting for Channel Design

Segmenting on the basis of the demands for the outputs of the marketing channel

Service outputs include : Bulk breaking Assortment Variety Waiting and delivery time Spatial convenience

Role of Service Output Demand Analysis in Marketing Channel Design

After segmenting the market on the basis of SODs, the channel manager can easily 1. Assess segment attractiveness 2. Target a subset of the segments identified

3. Customize the marketing channel system

solution for each targeted segment

Service Output Demand Differences

SERVICE OUTPUT Bulk-breaking FAMILY SERVICE OUTPUT DESCRIPTOR
DEMAND LEVEL

OFFICE EMPLOYEE SERVICE DESCRIPTOR

OUTPUT DEMAND LEVEL

I buy groceries weekly for my family, and all of us like soft drinks I drive to the supermarkets in my area to shop
We usually have some extra cans of soft drinks in the house, so Ill just come back the next time if I cant find the drinks I want on this trip My husband and I like Coke and Pepsi, but our kids arent permitted to drink caffeinated soft drinks. They like caffeine-free fruitflavored soft drinks

LOW

Im on my coffee break and I have only have time for one can of soft drink
I only have 15 minutes for my break, so I need to buy whatever is handy

HIGH

Spatial convenience Quick delivery

LOW

HIGH

LOW

If I dont get my soft drink right at 3:00 when my break starts, Ill never have a chance to go back later and get one I cant be too particular about which soft drink I pick. Its important to me to get one, as long as it has caffeine

HIGH

Assortment and variety

HIGH

MODERATE

Service Output Demand Template

for Laptop Computers
SERVICE OUTPUT DEMAND: SEGMENT NAME/ DESCRIPTOR OTHER SERVICE OUTPUT DEMANDS BULK BREAKING
SPATIAL CONVENIENCE

DELIVERY/ WAITING TIME

ASSORTMENT/ VARIETY

1. Business buyer 2. Home buyer 3. Student

Low

High

High

Low

High

High

Low

High

High

High

High

High

4.

5.

Targeting
The segments to be targeted would depend upon :

Internal environment the constraints the company faces External environment such as legal constraints, trade practices, channel power.

Channel design : Positioning

Each segment will have its own set of service output demands The channel designer must therefore decide : 1. The type - optimal channel structure to produce the channel flows 2. The identity exact identity of the channel partner to use at each
level of the channel

3. The intensity how many of each type of channel members of the channel members at each level At the minimum channel flow cost

Channels of Distribution - Levels Consumer Goods

Manufacturer
Zero Level

Manufacturer

Retailer
One Level

Manufacturer

Wholesaler

Retailer
Two Level

Manufacturer

Agent

Wholesaler

Retailer

CONSUMER

Channels of Distribution Industrial Goods

Manufacturer
CONSUMER

Manufacturer

Manufacturers Agent

Manufacturer

Industrial Supply House

Channel Design
Establish new channels Zero based channel design

Modify existing channels after a Gap Analysis (the differences between the zero
based and actual channels)

Demand and Supply Side Gaps

Demand Side Gaps at least one of the service output demands is not being appropriately met by the channel.
Undersupplied Service Output Oversupplied High cost leading to drop in sales and market share Dissatisfaction

Supply Side Gaps at least one flow in the channel is carried out at too high a cost

Channel Power
A channel members power to control the decision variables in the marketing strategy of another member

in a given channel at a
different level of distribution

Channel Conflict
When one channel members actions prevents the channel from achieving its goal, there is Channel Conflict.
Types of Channel Conflicts : * Goal conflict * Domain conflict * Perceptual conflict

Channel Management Schematic

1. SEGMENTATION 2. POSITIONING 3. TARGETING Choose segments to target, subject to: Environmental bounds 4A. ESTABLISH NEW CHANNELS Channel flow performance Channel structure 4B. REFINE EXISTING CHANNELS Gap Analysis Channel flow performance Channel structure

Define SODs by segment

Identify environmental characteristics and constraints

Define optimal channel flow performance for each segment

Define optimal channel structure for each segment

Managerial bounds

Competitive Benchmarks

CHANNEL DESIGN PROCESS

THATS ALL FOR TODAY!!!