Session 1 - Marketing Channels, Structure and Functions

Marketing Channels:

Structure and Functions

14th February 2008

Middlemen are responsible for the increase in prices!!!

You have good reasons to agree to this statement….

Comment!!!

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.

Many entities

are involved

Not an event

The purpose of

the process

Concepts underlyingthe Distribution System

A middleman is an independent business concern standing between the producer and the ultimate userEither 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

Type : Merchant MiddlemenWholesalers and retailers who take title

Agent MiddlemenBrokers and manufacturer’s agents who do not take title but actively assist in the transfer of title

Exchange without Intermediaries

Cloth

Shovels

Vege-tables Baskets

Meat

Number of Exchanges

= n(n -1) 2 = 10

Where n = number of consuming units

Number of TransactionsWithout Marketing Intermediaries

In the real world the number of producing and consuming units would be far greater.

Number of Number of Units Transactions

25 300 100 4950 500 124750 1000 499500

Exchange with Intermediaries

Cloth

Shovels

Vege-tables Baskets

Meat

Number of Exchanges

= 5

Trading Post

Contact Cost to Reach the Market with and without Intermediaries

Manufacturers

Retailers

40 Contact Lines

Selling Directly

Contact Cost to Reach the Market with and without Intermediaries

Selling Through One Wholesaler

Manufacturers

Wholesaler

Retailers

14 Contact Lines

Contact Cost to Reach the Market with and without Intermediaries

Selling Through Two Wholesalers

Manufacturers

Wholesalers

Retailers

28 Contact Lines

Number of Transactions and Marketing Costs

Activities involved in sale to a retailer

Costs involved for each activity

Contact with the retailer by salesman

Travel costs and selling time to canvass biz

If it’s a new account, credit investigation

Unchanged with number of products sold

If an order is received, processing of the order

Marginal increase with increase in size of order

Delivery of the goods Unchanged or relatively higher for smaller orders

Billing Unchanged

Collection of payments Unchanged

Why are there Marketing Channels???

• Facilitation of search

• Adjustment of assortment discrepancy

• Routinization• Reduction in number of contacts

Demand side factors :

Supply side factors :

End-users’ point of view

Sellers’ point of view

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 PossessionOwnership

Promotion

Negotiation

Financing

Risking

Ordering

Payment

 Physical PossessionOwnership

Promotion

Negotiation

Financing

Risking

Ordering

Payment

 Physical PossessionOwnership

Promotion

Negotiation

Financing

Risking

Ordering

Payment

Pro

du

cers

Wh

oles

aler

s

Ret

aile

rs

Con

sum

ers

Ind

ust

rial

a

nd

Hou

seh

old

Commercial Channel Subsystem

Note :Each flow carries a cost

Examples of Costs of various Flows

Marketing flow

Cost represented

1. Physical possession Storage and delivery costs

2. Ownership Inventory carrying costs

3. Promotion Personal selling, advertising, sales promotion, public relations, publicity

4. Negotiation Time and legal costs

5. Financing Credit terms, terms and conditions of sale

6. Risking Warranties, repair, after sales service costs

7. Ordering Order-processing costs

8. Payment 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 :

• Wholesalers

• Retailers

• Specialized – such as insurance companies, banks, shipping firms, advertising agencies

Our focus during this course is on

Market coverage

Sales contact

Inventory holding

Order processing

Market information

Customer support

Product availability

Customer service

Credit

Assortment convenience

Breaking bulk

Advice and technical support

Tasks performed

by Wholesalers

Result?

Effective and efficient marketing channelsFo

r Man

ufa

cture

rs For

Con

sum

ers

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 – USERseach 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 timeSpatial convenience

Service outputs : value added

services created by channel

members and consumed by

end-users along with the

product purchased

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  FAMILY OFFICE EMPLOYEE

SERVICE OUTPUT

DESCRIPTOR SERVICE OUTPUT DEMAND LEVEL

DESCRIPTOR SERVICE OUTPUT DEMAND

LEVEL

Bulk-breaking “I buy groceries weekly for my family, and all of us like soft drinks”

 LOW

“I’m on my coffee break and I have only have time for one can of soft drink”

 HIGH

Spatial convenience

“I drive to the supermarkets in my area to shop”

 LOW

“I only have 15 minutes for my break, so I need to buy whatever is handy”

 HIGH

Quick delivery “We usually have some extra cans of soft drinks in the house, so I’ll just come back the next time if I can’t find the drinks I want on this trip”

LOW

“If I don’t get my soft drink right at 3:00 when my break starts, I’ll never have a chance to go back later and get one”

HIGH

Assortment and variety

“My husband and I like Coke and Pepsi, but our kids aren’t permitted to drink caffeinated soft drinks. They like caffeine-free fruit-flavored soft drinks”

HIGH

“I can’t be too particular about which soft drink I pick. It’s important to me to get one, as long as it has caffeine”

MODERATE

Service Output Demand Templatefor Laptop Computers

  SERVICE OUTPUT DEMAND:

SEGMENT NAME/ DESCRIPTOR

BULK BREAKING

SPATIAL CONVENIENCE

DELIVERY/ WAITING

TIME

ASSORTMENT/ VARIETY

OTHER SERVICE OUTPUT

DEMANDS

 1. Business buyer 

  Low

 2. Home buyer 

 3. Student 

 4. 

 5. 

High

High

High

High

High

High

High

High

High

Low

Low

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 : PositioningEach 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 levelAt the minimum channel flow cost

Channels of Distribution - LevelsConsumer Goods

Manufacturer

Manufacturer Agent Wholesaler Retailer

CO

NS

UM

ER

Manufacturer

Manufacturer Wholesaler

Retailer

Retailer

Zero Level

One Level

Two Level

Channels of DistributionIndustrial Goods

Manufacturer

CO

NS

UM

ER

ManufacturerManufacturer’s

Agent

ManufacturerIndustrial

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.

Service Output

Undersupplied

Oversupplied

Dissatisfaction

High cost leading to dropin sales and market share

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

Channel Power

A channel member’s

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 member’s actions prevents the channel from achieving its goal, there is Channel Conflict.

Types of Channel Conflicts :

* Goal conflict

* Domain conflict

* Perceptual conflict

Channel Management Schematic1.

SEGMENTATION

Define SODs by segment

Identify environmental characteristics and constraints

2.POSITIONING

Define optimal channel flow

performance for each segment

Define optimal channel

structure for each segment

4A. ESTABLISH NEW CHANNELS

Channel flow performance

Channel structure

3.TARGETING

Choose segments to target, subject to:

Environmental bounds

Managerial bounds

Competitive Benchmarks

4B. REFINE EXISTING

CHANNELS

Channel flow performance

Channel structure

Gap Analysis

CHANNEL DESIGN PROCESS

THAT’S ALL FOR TODAY!!!