Marketing Channels

Marketing Channel Strategy (Place); the fourth “P” in the Marketing Mix has

been largely neglected

Marketing Channel Strategy is Growing in

Importance. Why?

Five Reasons(1) (1) Search for Sustainable Competitive AdvantageSearch for Sustainable Competitive Advantage

(2) (2) Growing Power of Retailers in Marketing Growing Power of Retailers in Marketing ChannelsChannels

(3) (3) The Need to Reduce Distribution CostsThe Need to Reduce Distribution Costs

(4) (4) The Increased Role and Power of TechnologyThe Increased Role and Power of Technology

(5) (5) The New Stress on GrowthThe New Stress on Growth

I. The Search for Sustainable

Competitive Advantage

Sustainable Competitive Advantage:

• A sustainable competitive advantage is becoming more difficult to attain through:

Product StrategyProduct Strategy- rapid technology rapid technology transfer enables competitors to transfer enables competitors to quickly produce similar productsquickly produce similar products

Pricing StrategyPricing Strategy- global economy global economy allows competitors to find low cost allows competitors to find low cost production to match pricesproduction to match prices

Promotion StrategyPromotion Strategy- high cost, clutter, high cost, clutter, and short life promotional campaigns and short life promotional campaigns limit competitive advantagelimit competitive advantage

• A competitive advantage that cannot be quickly and easily copied by A competitive advantage that cannot be quickly and easily copied by competitorscompetitors

A sustainable competitive advantage is becoming more difficult to attain

through:Product StrategyProduct Strategy- rapid technology transfer enables rapid technology transfer enables competitors to quickly produce similar productscompetitors to quickly produce similar products

Pricing StrategyPricing Strategy- global economy allows competitors global economy allows competitors to find low cost production to match pricesto find low cost production to match prices

Promotion StrategyPromotion Strategy- high cost, clutter, and short life high cost, clutter, and short life promotional campaigns limit competitive advantagepromotional campaigns limit competitive advantage

Competitive Advantage Based on

Superior Marketing Channel Strategy. Which is More

Difficult for Competitors to Copy Because:

• Channel Strategy is Long TermChannel Strategy is Long Term• Requires a Channel StructureRequires a Channel Structure• Depends on Relationships and PeopleDepends on Relationships and People• Requires Effective Interorganizational ManagementRequires Effective Interorganizational Management

II. Growing Power of Retailers in Marketing

ChannelsRetailersRetailers

Retailers....

Are Growing LargerAre Growing Larger

Enjoy Substantial Channel PowerEnjoy Substantial Channel Power

Act as Buying Agents for Customers Rather Act as Buying Agents for Customers Rather than Selling Agents for Suppliersthan Selling Agents for Suppliers

Often Operate on Low Price / Low Margin Often Operate on Low Price / Low Margin ModelModel

Operate in Saturated Markets and Fight for Operate in Saturated Markets and Fight for Market Share Market Share

Concentration of Sales Among theConcentration of Sales Among theTop 50 Retail FirmsTop 50 Retail Firms

Kinds of Retailers Where Largest Four Firms Kinds of Retailers Where Largest Four Firms Account for At Least 50% of Total SalesAccount for At Least 50% of Total Sales

Conventional Conventional Department StoresDepartment Stores

DiscountDiscountMass MerchandisersMass Merchandisers

Variety StoresVariety Stores

Misc. GeneralMisc. GeneralMerchandisersMerchandisers

Athletic FootwearAthletic Footwear Toy StoresToy Stores

Percentage Distribution of Retail Firms and SalesPercentage Distribution of Retail Firms and Salesby Size of Firmsby Size of Firms

•Enjoy Substantial Channel Power

Retailer

Retailers Act as Buying Agents Retailers Act as Buying Agents for Customers Rather than as for Customers Rather than as Selling Agents for SuppliersSelling Agents for Suppliers

Retailers Often Operate on Low Retailers Often Operate on Low Price / Price / Low Margin ModelLow Margin Model

Retailers Operate in Saturated Retailers Operate in Saturated Markets and Fight for Market Markets and Fight for Market ShareShare

Power or Dominant Retailers are therefore the

“Gatekeepers” into the Consumer Marketplace

Thus, Effective Channel Strategy Thus, Effective Channel Strategy for Dealing with for Dealing with

Power Retailers is CrucialPower Retailers is Crucial

III. The Need to Reduce Distribution Costs

DistributionDistributionCostsCosts

Distribution Costs Often Account for a Significant

Percentage of the Final Price of Products

Sometimes Distribution Costs Sometimes Distribution Costs are are Higher Higher than the Manufacturing than the Manufacturing

Cost or the Costs of Raw Cost or the Costs of Raw Materials and Component PartsMaterials and Component Parts

Some Examples...

Autos Autos SoftwareSoftware GasolineGasoline Fax MachinesFax Machines Packaged FoodsPackaged Foods

DistributionDistribution

ManufacturingManufacturing

Raw MaterialsRaw Materialsandand

ComponentsComponents

15%15%

40%40%

45%45%

25%25%

65%65%

10%10%

28%28%

19%19%

53%53%

30%30%

30%30%

40%40%

41%41%

33%33%

26%26%

While terms such as “restructuring”, “flattening out”, “downsizing”, and “rightsizing” have usually been mentioned in the context of corporate organizations, they also apply to Marketing Channels. The latest term....

DisintermediatDisintermediationion

IV. Increasing Role and Usefulness of Technology

Technology has the power to greatly enhance the

effectiveness and efficiency of Marketing

Channels and is changing the entire structure of distribution around the

world.

Some Examples...

The InternetThe Internet

Wireless CommunicationsWireless Communications

Cell PhonesCell Phones

Global TelecommunicationsGlobal Telecommunications

Robotics & Automated WarehousingRobotics & Automated Warehousing

Computerized Computerized ““SalespeopleSalespeople””

Firms that make effective use of these technologies in their channel strategy can gain a substantial competitive

advantage

CompetitionCompetition

V. The New Stress on Growth Strategy

In American Business Circles “Growth” has Overtaken “Restructuring” as the #1

Buzzword OutOut

ReengineeringReengineering

RestructuringRestructuring

DownsizingDownsizing

Flat Flat OrganizationsOrganizations

Lean and MeanLean and Mean

In In GrowthGrowth

ExpansionExpansion

New MarketsNew Markets

Market ShareMarket Share

Top Line Top Line RevenueRevenue

QUESTION

In a relatively slow growth economy, how can an individual company selling mature products in mature markets grow?

ANSWER

Share of Mind = Share of Market

By getting channel members to focus on yourBy getting channel members to focus on yourproducts to a greater extent than yourproducts to a greater extent than your

competitors, you gain market share and competitors, you gain market share and growthgrowth

Summary

(1) (1) Search For Competitive AdvantageSearch For Competitive Advantage

(2) (2) Growing Size and Power of Growing Size and Power of

RetailersRetailers

(3) (3) Need to Reduce Distribution CostsNeed to Reduce Distribution Costs

(4) (4) Power and Potential of TechnologyPower and Potential of Technology

(5) (5) Stress on Growth Instead of Stress on Growth Instead of

Downsizing Downsizing

Bottom Line

Marketing Channel Marketing Channel Strategy Has Become Strategy Has Become Critically Important For Critically Important For Most BusinessesMost Businesses

Strategy in Marketing Channels

Channel Strategy

The broad principles by The broad principles by which a firm expects to which a firm expects to achieve its distribution achieve its distribution objectives for satisfying objectives for satisfying

its customersits customers

Basic Strategic Questions(1) (1) What role should distribution play in the firmWhat role should distribution play in the firm ’’s overall s overall

objectives and strategies?objectives and strategies?

(2) (2) What role should distribution play in the marketing mix?What role should distribution play in the marketing mix?

(3) (3) How should the firmHow should the firm’’s marketing channels be designed to s marketing channels be designed to achieve its distribution objectives?achieve its distribution objectives?

(4) (4) What kinds of channel members should be selected to meet What kinds of channel members should be selected to meet the firmthe firm’’s distribution objectives?s distribution objectives?

(5) (5) How can the marketing channel be managed to implement How can the marketing channel be managed to implement the firmthe firm’’s channel design effectively and efficiently on a s channel design effectively and efficiently on a continuing basis?continuing basis?

The Relationship between customer satisfaction and the company’s marketing mix can be represented as:

CCss = f (P = f (P11, P, P22, P, P33, P, P44))

where:where:

CCss= degree of customer satisfaction= degree of customer satisfaction

PP11= product strategy= product strategy

PP22= pricing strategy= pricing strategy

PP33= promotional strategy= promotional strategy

PP44= place (channel strategy)= place (channel strategy)

Distribution Channel Strategy should receive especially heavy emphasis if

one or more of the following conditions prevails:

Distribution appears to be the most relevant Distribution appears to be the most relevant variable for satisfying customersvariable for satisfying customers

Parity exists among competitors in the other Parity exists among competitors in the other three marketing mix variablesthree marketing mix variables

High degree of vulnerability exists because of High degree of vulnerability exists because of competitorscompetitors’’ neglect of distribution neglect of distribution

Distribution channel strategy can foster Distribution channel strategy can foster synergiessynergies

Classic Marketing Channel Strategies Still Relevant

TodayDual DistributionDual Distribution

Exclusive DealingExclusive Dealing

Full-Line ForcingFull-Line Forcing

Price DifferentiationPrice Differentiation

Price MaintenancePrice Maintenance

Refusal to DealRefusal to Deal

Resale RestrictionsResale Restrictions

Tying AgreementsTying Agreements

The Most Basic Questions in the Design of Marketing

ChannelsWhen Do Customers Buy?When Do Customers Buy?

Where Do Customers Buy?Where Do Customers Buy?

How Do Customers Buy?How Do Customers Buy?

Who Buys?Who Buys?

Who makes the actual purchase?Who makes the actual purchase?

Who uses the product?Who uses the product?

Who takes part in the buying Who takes part in the buying decision?decision?

Supply Chain Management

QUESTION

Is this just another “buzzword” for logistics - getting the right product in the right quantity, at the right time and right place?ORIs there something more substantive to this term?

ANSWER

There is something more than semantics here:

Supply Chain Management Supply Chain Management takes a broader perspective takes a broader perspective by viewing logistics as an by viewing logistics as an integral part of the integral part of the marketing channel marketing channel relationshiprelationship

Supply Chain Management Can Therefore be Defined as:A long-term A long-term ““partnershippartnership”” among marketing channel among marketing channel

participants aimed at reducing inefficiencies, costs, participants aimed at reducing inefficiencies, costs, and redundancies in the logistical system in order to and redundancies in the logistical system in order to provide high levels of customer serviceprovide high levels of customer service

Factor

Inventory ManagementInventory Management

Total Cost ApproachTotal Cost Approach

Time HorizonTime Horizon

Information Sharing and Information Sharing and

MonitoringMonitoring

Joint PlanningJoint Planning

Compatibility of CorporateCompatibility of Corporate

PhilosophiesPhilosophies

Channel LeadershipChannel Leadership

Sharing of Risks andSharing of Risks and

RewardsRewards

Inventory FlowInventory Flow

Traditional

Logistics SystemLogistics System

Independent EffortIndependent Effort

Minimize Firm CostsMinimize Firm Costs

Short-TermShort-Term

Limited to Needs ofLimited to Needs of

Current TransactionCurrent Transaction

Transaction BasedTransaction Based

Not RelevantNot Relevant

Not NeededNot Needed

Each Channel MemberEach Channel Member

on Their Ownon Their Own

““WarehouseWarehouse”” Mentality Mentality

Storage Safety StocksStorage Safety Stocks

Supply Chain Mgmt. System

Joint Effort to ReduceJoint Effort to Reduce

Channel InventoriesChannel Inventories

Channel-Wide Cost EfficienciesChannel-Wide Cost Efficiencies

Long-TermLong-Term

Continuous Effort toContinuous Effort to

Gather and MonitorGather and Monitor

OngoingOngoing

Important for Major InitiativesImportant for Major Initiatives

Required for Required for

Coordination and FocusCoordination and Focus

Risks and Rewards SharedRisks and Rewards Shared

over Long-rangeover Long-range

““Distribution CenterDistribution Center””

Orientation-JIT, Quick Orientation-JIT, Quick

Response, Cross DockingResponse, Cross Docking

Contrasts Between a Traditional Logistics System and Supply Chain Based SystemContrasts Between a Traditional Logistics System and Supply Chain Based System

Strategic Alliances and Partnerships in

Marketing Channels

Definition:Continuing and mutually Continuing and mutually

supportive relationship between supportive relationship between the manufacturer and its channel the manufacturer and its channel members in an effort to provide members in an effort to provide a more highly motivated team, a more highly motivated team, network, and alliance of channel network, and alliance of channel partnerspartners

Requirements for Partnerships or Strategic

Alliances in Marketing Channels

(1) (1) Recognition of interdependence of channel Recognition of interdependence of channel membersmembers

(2) (2) Close cooperation between channel membersClose cooperation between channel members

(3) (3) Careful specification of roles, rights, and Careful specification of roles, rights, and responsibilities in the relationshipresponsibilities in the relationship

(4) (4) Coordinated effort focused on common goalsCoordinated effort focused on common goals

(5) (5) Good communications and trust between Good communications and trust between channel memberschannel members

Relationship Marketing via the Marketing Channel

Relationship Marketing

The practice of building long-term relations with key parties - The practice of building long-term relations with key parties -

customers, suppliers, distributors- in order to retain their customers, suppliers, distributors- in order to retain their

long-term preference and businesslong-term preference and business

Because of the importance of channels of distribution, building Because of the importance of channels of distribution, building

good relationships in the marketing channel is key to good relationships in the marketing channel is key to

successful relationship marketingsuccessful relationship marketing

Building Relationships with Channel Members

Find Out the Needs and Problems of Channel Find Out the Needs and Problems of Channel MembersMembers

-informal information system (-informal information system (““grapevinegrapevine””))

-research studies of channel members-research studies of channel members

-research studies by outside parties-research studies by outside parties

-marketing channel audit-marketing channel audit

-distributor advisory councils-distributor advisory councils

Offer Support to Channel Members that is Offer Support to Channel Members that is Consistent with Their Needs and Helps Solve their Consistent with Their Needs and Helps Solve their ProblemsProblems

-cooperative arrangements-cooperative arrangements

-partnerships and strategic alliances-partnerships and strategic alliances

-distribution programming-distribution programming

Provide Leadership to Motivate Channel Members Provide Leadership to Motivate Channel Members

-use power effectively-use power effectively

-recognize causes of conflict-recognize causes of conflict

-resolve conflicts-resolve conflicts

Bases of Power in the Marketing Channel

Reward PowerReward Power

Coercive PowerCoercive Power

Legitimate PowerLegitimate Power

Referent PowerReferent Power

Expert PowerExpert PowerEffective Channel Management Depends Effective Channel Management Depends

on How Well These Power Bases are on How Well These Power Bases are Combined and UsedCombined and Used

Causes of Marketing Channel Conflict

Role IncongruitiesRole Incongruities

Resource ScarcitiesResource Scarcities

Perceptual DivergenciesPerceptual Divergencies

Expectational DifferencesExpectational Differences

Decision Domain DisagreementsDecision Domain Disagreements

Goal IncompatabilitiesGoal Incompatabilities

Communication DifficultiesCommunication Difficulties

Ten Trends in Marketing Channels as We Move into the

Next Millennium1. 1. Growing Emphasis on Marketing Channel Growing Emphasis on Marketing Channel

StrategyStrategy

2. 2. More and More Stress on TechnologyMore and More Stress on Technology

3. 3. Focus on Efficiency and Reducing Distribution Focus on Efficiency and Reducing Distribution CostsCosts

4. 4. Shortening and Flattening of Distribution Shortening and Flattening of Distribution Channels (Disintermediation)Channels (Disintermediation)

5. 5. Development of New Types of Intermediaries in Development of New Types of Intermediaries in Channels (Reintermediation)Channels (Reintermediation)

Trends Continued...

6. 6. Continued Growth in Partnerships and Continued Growth in Partnerships and Alliances (Relationship Marketing)Alliances (Relationship Marketing)

7. 7. Increasing Power for Retailers and Increasing Power for Retailers and Wholesalers (Gatekeepers)Wholesalers (Gatekeepers)

8. 8. Mergers and Acquisitions to Gain Mergers and Acquisitions to Gain Distribution CloutDistribution Clout

9. 9. Flexible and Focused Distribution to Match Flexible and Focused Distribution to Match Micro, Niche, and Database MarketingMicro, Niche, and Database Marketing

10. 10. Attention to the Behavioral Dimensions of Attention to the Behavioral Dimensions of Distribution to Augment TechnologyDistribution to Augment Technology

Lets look at where a product fits into all of this

Iphone

Apple