Chapter 7
Marketing Channel Strategy and Management
BY Roger A. Kerin and Robert A.
Peterson
Assoc. Prof. Dr. Teoman Duman
Students: Iskra Handukic, Nedzma Begic and Azra Muratovic
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A marketing channel consists of
individuals and firms involved in the
process of making a product or
service available for consumption or
use by consumers and industrial
users.
What is a marketing channel?
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● Links a producer to buyers
● Performs sales, advertising, and promotion
● Influences the firm’s pricing strategy
● Affects product strategy through branding
policies, willingness to stock and customize
offerings, install, maintain, offer credit, etc.
Role of the channel in marketing strategy
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The Channel-Selection DecisionFundamental Questions
● Who are potential customers?
● Where do they buy?
● When do they buy?
● How do they buy?
● What do they buy?- Avon Cosmetics example
The marketing manager must answer the following questions:
Traditional Marketing Channel Designs
Producer
Ultimate Buyers
Retailers or Dealers
Distributors or Wholesalers
Brokers or Agents
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The Design of Marketing Channels
Use intermediaries to reach target market
typelocationdensitynumber of channel levels
Contact ultimate buyers directly
using its own sales force or distribution outletsusing the Internet through a marketing Web site or electronic storefront
vs.INDIRECT DIST. DIRECT DIST.
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The Design of Marketing Channels
● Buyers are easily identifiable
● Personal selling is a major component of the communication mix
● Organization has a wide variety of offerings for the target market
● Sufficient resources are available
Direct distribution is typically used when:
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● Intermediaries are not available for reaching target markets● Intermediaries do not possess the capacity to service the requirements of target markets
Direct distribution must be considered when:
The Design of Marketing Channels
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● Intermediaries can perform distribution functions more efficiently and less expensively● Customers are hard to reach directly● Organization does not have resources to perform distribution function
Indirect distribution must be considered when:
The Design of Marketing Channels
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The Design of Marketing Channels
Electronic marketing channels employ some form of electronic communication, including the Internet, to make products and services available for consumption or use by consumers and industrial users.
Ultimate Buyers
Amazon.com Dell.comTravelocity.com
Representative Electronic Marketing Channels
Autobytel.com
Book Publisher
Book Distributor
Amazon.com (Virtual Retailer)
Dell ComputersAirline
Travelocity (Virtual Agent)
Auto Manufacturer
Auto Dealer
Auto-By-Tel (Virtual Broker)
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The Design of Marketing Channels
Disintermediation is the elimination of traditional intermediaries and direct distribution through electronic marketing channels.
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Channel Selection at the Retail LevelChannel Selection Decisions
1. Which channel and intermediaries will provide the best coverage of the target market?
2. Which channel and intermediaries will best satisfy the buying requirements of the target market?
3. Which channel and intermediaries will be the most profitable?
Channel Selection at the Retail LevelTarget Market Coverage
Exclusive IntensiveSelective
Levi’sSony
RolexFaberge
Wrigley’sCoke
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Channel Selection at the Retail Level
Effective Distribution occurs when a limited number of retail outlets account for a significant fraction of the market potential.
Example: A marketer distributes the product through 40% of available outlets, but these outlets account for 80% of the market.
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Channel Selection at the Retail LevelSatisfying Buyer Requirements
● Information
● Convenience
● Variety
● Attendant services
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Channel Selection at the Retail LevelProfitability
● Margins = Revenues – Channel Costs
● Channel costs are:
- Distribution costs
- Advertising costs
- Selling costs
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● Specialty wholesaler– Limited line of items within a product line
● General-merchandise wholesaler– Wide assortment of products
● General-line wholesaler– Complete assortment of items in a single
retailing field
Combination
Channel Selection at Other Levels of Distribution
Types of Wholesaler
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● occurs when an organization distributes its offering through two or more different marketing channels that may or may not compete for similar buyers
● the main consideration is whether it will provide incremental sales revenue or cannibalize existing sales
Dual Distribution
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● own brand and private store brand
● distribution to large and small retailers
● multiband strategy
● geographic factors
Dual DistributionWhen is it used
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Hallmark
● Sells Hallmark brand cards through Hallmark stores and selected department stores
● Sells Ambassador brand cards through discount drugstore chains
Dual DistributionExample
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Multi-channel marketing involves the
blending of an electronic marketing
channel and a traditional channel in
ways that are mutually reinforcing in
attracting, retaining, and building
relationships with customers.
Multi-Channel Marketing
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● An electronic marketing channel can provide incremental revenue (Victoria’s Secret)
● An electronic marketing channel can leverage the presence of a traditional channel (Ethan Allen)
● Multi-channel marketing can satisfy buyer requirements (Clinique division of Estée Lauder)
Multi-Channel MarketingJustifications
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Multi-Channel MarketingConsiderations
● Actual incremental revenue or merely cannibalization?
● Incremental cost to launch and sustain an electronic forefront
● Disintermediation – a traditional intermediary member is replaced by electronic storefront
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● Improvements in product assortments
● Trade discounts
● Fill-rate standards
● Promotional support
● Lead-time requirements
● Product-service exclusivity agreements
Satisfying Intermediary Requirements and Trade Relations
Intermediary Requirements
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Satisfying Intermediary Requirements and Trade Relations
Trade Relations
Channel Conflict arises when one
channel member believes another
channel member is engaged in behavior
that is preventing it from achieving its
goals.
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● Channel member bypasses another member and sells or buys direct
● Uneven distribution of profit margins among channel members
● Manufacturer believes channel member is not giving its products adequate attention
Satisfying Intermediary Requirements and Trade Relations
Sources of Channel Conflict
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Satisfying Intermediary Requirements and Trade Relations
Channel Power
Channel Captain is a channel member
that takes on the role of coordinating,
directing, and supporting other channel
members.
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● Ability to reward or coerce other members
● Expertness
● Identification with a particular channel member (Referent Power)
● Legitimate right to dictate the behavior of other members
Satisfying Intermediary Requirements and Trade Relations
Forms of Channel Captain Power
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Channel-Modification DecisionsReasons
● Shifts in the geographical concentration of buyers
● Inability of existing intermediaries to meet the needs of buyers
● Costs of distribution
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Channel-Modification DecisionsBasic Objectives
1. Provide the best coverage of the target market sought
2. Satisfy the buying requirements of the target market
3. Maximize revenue and minimize cost
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1. Will the change improve the effective coverage of the target markets sought? How?
2. Will the change improve the satisfaction of buyer needs? How?
3. Which marketing functions, if any, must be absorbed in order to make the change?
4. Does the organization have the resources to perform new functions?
5. What effect will the change have on other channel participants?
6. What will be the effect of the change on the achievement of long-range organizational objectives?
Channel-Modification DecisionsQualitative Factors
Case Study Analysis: Swisher Mower and Machine Company
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MARKETING PROBLEM DEFINITION
• In early 1996, Wayne Swisher, president and chief executive officer (CEO) of Swisher Mower and Machine Company (SMC) received a certified letter from a major national retail merchandise chain inquiring about a private brand distribution arrangement for SMC line of riding mowers.
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MARKETING PROBLEM DEFINITION
• The national retail merchandise chain expected to make an annual order of approximately 8200 units. The chain wanted to purchase the mowers at a price 5 percent lower than SMC manufacturer’s list price for its standard model. The chain wanted that the mower be different from SMC Ride King
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COMPANY OVERVIEW
• -Swisher Mower and Machine Company was formed in 1945 by Max Swisher.
• -He received his first patent for a gearbox drive assembly when he was 18-years old, he develop a self-propelled push mower utilizing this drive assembly.
• -He began selling these mowers to neighbors after converting his parent’s garage into small manufacturing operation
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COMPANY OVERVIEW• SMC produced limited but differentiated
products. SMC’s flagship product, the Ride King, was credited with the first zero-turning-radius riding mower.
• SMC also produced a trail-mower called T-44 with a cutting width of 44 inches. SMC planed to broaden SMC product line in 1996 by introducing a high-wheel string trimmer product, Trim-Max, a high-wheel, walk-behind product.
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COMPANY OVERVIEW
• About 75% of sales of SMC were made in non-metropolitan areas.
• SMC sold 30% through wholesalers, 25% through direct-to-dealer, 40% as private-label, and the rest 5% as exports.
• It sold the Ride King through wholesalers, who located throughout the country, focusing on farm dealers situated in the south central and southeastern US.
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INDUSTRY OVERVIEW
• Riding lawn mowers are classified as lawn and garden equipment with two basic configurations, the front-engine lawn tractors and rear engine riding mowers.
• However there are some mid-engine riding mowers on the market, such as those produced by SMC.
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INDUSTRY OVERVIEW
• Competition in riding lawn mower market was fierce with ten manufacturers comprising major competitors in 1995, while SMC only occupied around 0.3%, based on sales units.
• All these companies made Riding mowers under a nationally branded name and at the same time were engaged in private-label production.
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INDUSTRY OVERVIEW
• Each riding mower manufacturer priced its products at price points.
• The representative retail prices for national and private-label riding mowers typically ranged from $800 to $5,000.
• The manufacturer’s price of Ride King of SMC, $ 650, was quite comparative, compared with industry average.
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CONSUMER ANALYSIS
• National retail merchandise chains - 24%
• OPE/Farm Equipment & supply stores - 22%
• Lawn/Garden Stores – 19 %• Discount department stores - 13%• Home centers – 10%• Hardware stores – 2 %• Others – 10%
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COMPETITION POSITIONING
• Ten manufacturers comprised the major competitors in the riding lawn mower market in 1995: American Yard Products, Ariens, Honda, John Deere, Kubota, MTD Inc, Murray of Ohio, Snapper, Toro, and Garden Way/Troy-Bilt. Ariens, Honda, John Deere, Kubota, MTD Inc, Murray of Ohio, Snapper, Toro, and Garden Way/Troy-Bilt
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POSITIVE NEGATIVE
INTE
RNAL
FACT
ORS
STRENGTHS
Distinct products
High quality, simple design, easy to
use and maintain , no significant
claim
Interchangeable parts
Competitive price
Personal relationship with dealer,
distributors and end-customers
One new product on the way (Trim
Max)
WEAKNESSES
Limited range of products
Perception on rear and mid engine –not
as strong and durable as front engine
One man makes all the decision
Small business mentality
Insufficient attention for promotion and
advertising campaign
No national distribution network
EXTE
RNAL
FACT
ORS
OPPORTUNITIES
Limited market coverage (south
central, southeastern). Potential
expansion to the west
New target market include
consumer housing, in addition to
farms
Private labels business may be
growing
Possibility for automation by
technology development in long
term (production streamline, cost
reduction)
THREATS
Many big competitors like Honda, John
Deere, American Yard Production etc
with stronger financial resources and
economic size of capacity
Cyclical industry
After next year, industry may be down
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SWOT ANALYSIS
ALTERNATIVES AVAILABLE
• Enter distribution Arrangement with Retail Merchandise Chain:
• It could be to SMC’s advantage to enter the arrangement because it would provide them the chance to reach consumers they currently do not.
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ALTERNATIVES AVAILABLE
• Continue Current Operations: • By continuing current operations as they
are, SMC could avoid the added costs and put the funds toward other expansion possibilities.
• However, if SMC rejects this proposal, then they will be missing out on what makes up approximately 70 percent of industry sales.
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SOLUTION
• SMC should sign the proposal with the retail merchandise chain.
• This proposal holds too many opportunities for SMC to let it pass or fall into the hands of another competitor.
• The results of accepting the proposal look far better than the alternative.
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Thank you for your attention!