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MODULE 4 MARKETING CHANNELS

28.1 IMPORTANCE/FUNCTIONS OF CHANNELS


Firms normally use intermediaries for taking their products to the
users. All such intermediaries constitute the marketing channel. Where
institutional channels like chain stores, super markets etc., are used by
the firm, they too form a part of the marketing channel. Channels play
a pivotal role in marketing; they perform # of vital distribution
functions. Their importance emanates from the functions performed by
them. Firms rely on the channels for generating customer satisfaction
& for achieving differentiation over competition. Channels are thus a
vital source of competitive advantage for the firm.

Functions Performed by Marketing Channels


Facilitates selling by being physically close to customers
Provide distributional efficiency
Break the bulk & cater to smaller requirements
Look after a part of marketing logistics
Share the financial burden of the principal
Provide salesmanship
Provide pre-sale & after-sale service
Assist in sales promotion
Assist in merchandising
Assist in introducing new products
Assist in implementing price mechanism
Assist in price negotiations
Assist in developing sales forecasts for the territory
Provide market intelligence & feedback
Maintain information records
Take care of liaison requirements
Help diffuse innovations among consumers
Act as change agents & generate demand
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MODULE 4 MARKETING CHANNELS


28.2 PATTERNS OF CHANNELS
Channel Levels/Members/Length
All marketing intermediaries do not operate at the same tier. Each
distinctive tier of intermediaries is referred to as a level in the
channel; and each link is referred to as a channel member. The # of
levels determines the length of the channel; the more the levels,
longer is the channel. The # of members does not determine the
length of the channel.

Alternative Channel Partners


Manufacturer to Manufacturers Salesmen to
Manufacturer
Showrooms/Depots
Manufacturer
Retailer
Manufacturer
Franchisees
Manufacturer
W/S Distributor Retailer
Manufacturer
Semi W/S
Manufacturer
Retailer
Manufacturer
Sole-Selling agent

User
User
User
User
User
User
User
User

Types of marketing Intermediaries

Sole-Selling agent
Marketer
CFA
Stockist
Semi-Wholesaler

Retailer/Dealer
Broker
Franchisees
Authorized Representatives
Commission Agents

Patterns of Channels
Marketing channels pose a variety of intermediaries. The simplest form
of marketing channel is the one where the product is taken to the
consumer with just one tier of intermediaries in between & which uses
just one type of intermediaries. The more complex forms involve 2 or
more tiers & 2 or more types of intermediaries.
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MODULE 4 MARKETING CHANNELS


28.3 DESIGNING CHANNEL SYSTEM
A firm can take its products to the user in many ways. It can use
different types of intermediaries & also structure its channel in
different ways. The options are indeed many:
How does the firm make choice in terms of best channel?
Should it go for own channel or intermediaries?
How many tiers should be there?
How does it intend to cover the market chosen effectively?
How many retail points are there?
What should be the relationship between the W/S & the retailers?

Steps Involved in Designing a Channel System


1.
2.
3.
4.

Formulating the channel objectives


Identifying functions to be performed by the channel
Analyzing product & linking channels to products
Evaluating distribution environment including legal aspects

5. Evaluating competitors channel design


6. Evaluating company resources & matching channels accordingly
7. Generating alternatives

Objectives Firms Commonly Seek from Channels


Effective coverage of the target market
Efficient & cost-effective distribution
Ensuring that consumers incur minimum exertion in procuring the
product
Helping the firm to carry on manufacturing uninterrupted, confident
that the channels will take care of the sale
Partnering the firm in financing & sub-distribution tasks

MODULE 4 MARKETING CHANNELS


28.4 LINKAGE BETWEEN CHANNEL DESIGN & CHANNEL OBJECTIVES

CHANNEL OBJECTIVES

CHANNEL DESIGN

Castrol India
Provide location convenience to
customers

Go for vast network of outlets

Reliance Textiles (Vimal)


Use channel to project the exclusive Go for exclusive showrooms (Vimal
image of Vimal fabrics
has a chain of >2000 showrooms)

Philips (Appliances/Personal Care products)


Cover the market
intensively/extensively

Have a 3-tier channel, with CFA,


Distributors & Retailers

Archies Gifts & Greetings


Proximity to customers

Establish outlets close to the targetbuyers the upper & hi-mid income
groups

BBLIL (Pre-merger with HLL)


Make the products available
everywhere (very strong reach)

Embrace all types of shops,


supermarkets, grocery stores, and
kirana shops as part of the firms
channel.
BBLIL has adopted a 3-tier channel
with CFA, Stockists & Retailers

Louis Philippe
Promote Louis Philippe as a
complete & premium wardrobe
line with shirts, trousers, ties,
socks, blazers, belts etc.,

Go for exclusive showrooms; ensure


availability of the whole line at these
outlets

ITC-Tobacco Division
Ensure easy availability of
cigarettes

Go for CFAs & W/s who will


distribute/resell to retailers (ITC has
more than 8000 K retailers)

MODULE 4 MARKETING CHANNELS


28.5 WRONG CHOICE OF CHANNEL INTENSITY: P&G/NESTLE
P&G, Nestle & HLL are FMCGs. P&G and Nestle thought that it
would be appropriate for them to follow HLL channel model. It was
only after losing some money & time that they realised that they neither
needed nor could afford channel intensity on the HLL pattern. HLL
maintains a channel consisting of over a 10 million retail points & 75K
distributors, which arrangement suited HLL very well.
HLL has large basket of products & brands covering every possible
price/demographic/geographic segment. It had > 110 actively selling
brands. HLLs marketing channel has to naturally cover every income
group & every geographical segment in the country. And HLL has an
annual sales turnover of over Rs 30K crore.
P&G and Nestle were different from HLL in all these respects.
Moreover, the HLL model comes with its associated costs. After
learning the lessons the hard way, P&G decided to forget the HLL
model & drastically downsized its distribution.
It now confined itself to class 1 & 2 towns & exited practically rural
areas. Only for some select products like Vicks & Action 500, it
continued its distribution in rural areas. It also reduced the # of pack
sizes in which it offered its products as another measure towards
reducing distribution costs.
Nestle too decided to move away from the HLL model. Earlier,
embracing the HLL model, it had gone in for high channel-intensity.
For ex, between 1993 & 96, Nestle had added on 350K retail points to
its distribution, the bulk of them in smaller towns & rural areas.
As its sales were nowhere near the HLL level, it could not sustain the
channel-intensity. It reduced it considerably. It also compressed its
product mix & product line.

MODULE 4 MARKETING CHANNELS


28.6 EXITING ESTABLISHED CHANNEL DIFFICULT P&G
Over the years, it became clear to P&G that it did not need HLL
structure, as in business growth & pattern of sale, it differed from
HLL. P&G then went in for a reorganization of the channel set-up. It
had to face several problems.
P&G had earlier gone in for nearly 200 Stockists & 40K dealers. But
sales had remained limited. A large # of the Stockists & dealers were
not notching up enough sales. P&Gs channel productivity had become
low. The firm was incurring a disproportionately large cost on channel.
And maximum sale was coming from urban areas.
P&G then downsized & revamped its channel structure, drastically
pruning the # of Stockists. In the revised scheme, it appointed state-wise
sole distributors & de-recognized >150 ongoing Stockists in the
bargain. At the retail level too, 000s of dealers became causality.
P&G also went in for the ECP (efficient consumer response) approach.
ECP focuses on containing costs & improving bottom lines. In the ECP
approach, stocks are replenished at the retail shops at more frequent
intervals. This enables the retailers to operate with smaller inventories.
And consequently, a cut in retailers margins would be in order.
P&G drastically cut the trade margins on its best selling products. It
cut stockists margin from 10 to 3% & retailers margin from 12 to 8%.
P&G did inform the Stockists beforehand about the new scheme. But
many stockists had set up a lot of infrastructure over the past 2
decades, much of it specifically for marketing P&G products & with
the loss of P&G stockist role, they faced financial hardship. They went
on a warpath. In a collective bargaining move, most of them banned
P&G products. The retailers too, especially those in rural areas, went
on a warpath & banned P&G products.

MODULE 4 MARKETING CHANNELS


28.7 SELECTING APPROPRIATE VARIANT
Usually within a given channel design different variants can be thought
of. For ex, firm A & firm B may opt for the same channel design
consisting of conventional W/Ss & retailers. Still, their approaches
within the model can vary from one another. Firm a may opt out for a
W/S-weighted system, while firm B for a retailer-weighted system.

Forethought is Essential
Once a channel structure is created & channel members are put in
place & channel compensations are streamlined, it will be difficult for
the firm to exit from the structure & put an alternative in its place. As a
general rule, an eye on the future is essential while adopting a channel
system & structure.

One Unified System


The firm has to handle wholesaling, retailing & other forms of selling as
one unified system & not as separate entities. The linkage among them
in terms of functions, costs & efficiency being quite strong, looking at
them as independent entities will lead to sub-optimization of the
channel management as a whole.

Building Channel System by Bottom-up Method


The purpose of having marketing channels is to serve customer needs
effectively. This means that the prime task in channel design is to
determine the type of retailers who are best suited to serve customer
needs in the specific context & develop the distribution system by the
bottom-up method. Once the type of retailers suited for the context is
determined, the wholesaling arrangement that would best suite the
chosen retail arrangement can be chosen & put in place.

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