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Marketing Channels

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Learning Objectives
• What is a marketing channel system and value
network?
• What work do marketing channels perform?
• How should channels be designed?
• What decisions do companies face in managing
their channels?
• How should companies integrate channels and
manage channel conflict?
• What are the key issues with e-commerce and
m-commerce?

What Is a Marketing Channel?

A marketing channel system is the particular

set of interdependent organizations involved
in the process of making a product or service
available for use or consumption.

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Hybrid channels
Hybrid channels or multichannel marketing
occurs when a single firm uses two or more
marketing channels to reach customer
segments.

Channel member Functions

(Role)
• Physical reach
• Customer contact
• Building relationships
• Market feedback
• Understand market trends and keep principals
informed
• Handle price risks
• Finances market credit and inventory holdings

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Channel Member Functions

• Gather information
• Develop and disseminate persuasive
communications
• Reach agreements on price and terms
• Acquire funds to finance inventories
• Assume risks
• Provide for storage
• Oversee actual transfer of ownership

Distribution Channels
• Take care of the following ‘discrepancies’
– Spatial
– Temporal
– Breaking bulk
– Assortment and
– Financial support

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Spatial Discrepancy
• The channel system helps reduce the
‘distance’ between the producer and
the consumer of his products.
– Consumers are scattered
– Have to be reached cost effectively
• Example: companies produce products
in one location even for global needs

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Temporal Discrepancy
• The channel system helps in speeding up in
meeting the requirement of the consumers
– Time when the product is made and when it is
consumed is different
– Limited number of production points but hundreds
of consumers
• Maruti plant in Gurgaon – cars and spares
are available when the consumer wants

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Breaking Bulk
• The channel system reduces large quantities
into consumer acceptable lot sizes
– Production has to be in large quantities to benefit
from economies of scale
– Consumption is necessarily in small lot sizes
• India is the ultimate example in breaking
bulk – you can buy one cigarette, one
Anacin, one toffee etc

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Need for Assortment

• The channel system helps aggregate a
range of products for the benefit of the
consumer – it could be made by one
company or several of them.
– For the same product, it could be a variety
of brands and pack sizes
• MICO makes fuel injection equipment,
spark plugs etc in different plants but its
dealer will sell the entire range.
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Financial Support
• The channel system provides critical
working capital to its customers by
extending credit.
• Some channel members like stockists
and wholesalers finance the business of
their customers.
– Medical diagnostic equipment to hospitals

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Channel-Management
Decisions
Selecting Training
channel channel
members members

Evaluating
Global channel channel
considerations members

Channel Modifying
modification channel
decisions design

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Channel-Design Decisions

• Analyzing customer needs and wants

 Desired lot size

 Waiting and delivery time
 Spatial convenience
 Product variety
 Service backup

Service-Output delivered template

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Channel Flows
• Forward flow – company to its
customers – goods and services
• Backward flow – customers to the
company – payment for the goods.
Returned goods.
• Flows both ways - information

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Marketing Flows in the Marketing Channel

for Forklift Trucks

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Three Flows Recognized

FORWARD
Goods and Services

BACKWARD
Payment for goods / returns

BOTH WAYS
Information

Company Customers

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Reverse-Flow Channels

Reverse-flow channels are important to:

(1)reuse products or containers (such as
refillable chemical-carrying drums);
(2)refurbish products for resale (such as circuit
boards or computers)
(3)recycle products (such as paper)
(4)dispose of products and packaging

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall

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Marketing Channel Levels

 Zero-level channel (direct marketing channel)

 One-level channel
 Two-level channel
 Three-level channel

Figure 17.3
Consumer/Industrial Marketing
Channels

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Channel-Design Decisions
• Establishing objectives and constraints

Channel-Design Decisions
• Identifying major channel alternatives

Types of intermediaries

Number of intermediaries

Terms/responsibilities of
channel members

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Training and Motivating Channel

Members
• Channel power

Coercive

Reward

Legitimate

Expert

Referent

• • Coercive power. A manufacturer threatens to withdraw a resource or terminate

a relationship if intermediaries fail to cooperate. This power can be effective, but
its exercise produces resentment and can lead the intermediaries to organize
countervailing power.
• • Reward power. The manufacturer offers intermediaries an extra benefit for
performing specific acts or functions. Reward power typically produces better
results than coercive power, but intermediaries may come to expect a reward
every time the manufacturer wants a certain behavior to occur.
• • Legitimate power. The manufacturer requests a behavior that is warranted
under the contract. As long as the intermediaries view the manufacturer as a
legitimate leader, legitimate power works.
• • Expert power. The manufacturer has special knowledge the intermediaries
value. Once the intermediaries acquire this expertise, however, expert power
weakens. The manufacturer must continue to develop new expertise so
intermediaries will want to continue cooperating.
• • Referent power. The manufacturer is so highly respected that intermediaries are
proud to be associated with it. Companies such as IBM, Caterpillar, and Hewlett-
Packard have high referent power.

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Training and Motivating Channel

Members
• Channel partnerships
and ECR practices
– Demand-side
management
– Supply-side
management
– Enablers and
integrators

Conflict, Cooperation,
and Competition
• Channel conflict
– Generated when one channel member’s
actions prevent another channel member
from achieving its goal
• Channel coordination
– Occurs when channel members are
brought together to advance the goals of
the channel instead of their own potentially
incompatible goals

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Conflict, Cooperation,
and Competition
• Types of conflict and competition

Horizontal channel conflict

Vertical channel conflict

Multichannel conflict

Conflict, Cooperation,
and Competition
• Causes of channel conflict

 Goal incompatibility
 Unclear roles and rights
 Differences in perception
 Intermediaries’ dependence on
manufacturer

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Conflict, Cooperation,
and Competition

• Strategic Justification In some cases, a convincing strategic justification that they serve distinctive
segments and do not compete as much as they might think can reduce potential for conflict among
channel members.

• Dual Compensation Dual compensation pays existing channels for sales made through new channels.

• Superordinate Goals Channel members can come to an agreement on the fundamental or superordinate
goal they are jointly seeking, whether it is survival, market share, high quality, or customer satisfaction.

• Employee Exchange A useful step is to exchange persons between two or more channel levels. Thus
participants can grow to appreciate each other’s point of view.

• Joint Memberships Similarly, marketers can encourage joint memberships in trade associations.

• Co-optation is an effort by one organization to win the support of the leaders of another by including them
in advisory councils, boards of directors, and the like.

• Diplomacy, Mediation, and Arbitration When conflict is chronic or acute, the parties may need to resort to
stronger means. Diplomacy takes place when each side sends a person or group to meet with its
counterpart to resolve the conflict. Mediation relies on a neutral third party skilled in conciliating the two
parties’ interests. In arbitration, two parties agree to present their arguments to one or more arbitrators
and accept their decision.

• Legal Recourse If nothing else proves effective, a channel partner may choose to file a lawsuit.

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Conflict, Cooperation,
and Competition
• Dilution and cannibalization
– Marketers must be careful not to dilute their
brands through inappropriate channels
• Legal and ethical issues in channel
relations
– Exclusive dealing/territories, tying
agreements, and dealers’ rights

Designing a
Marketing Channel System
• Analyze customer needs
• Establish channel objectives
• Identify major channel alternatives
• Evaluate major channel alternatives

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Service Outputs of Channels

Lot size

Waiting and delivery time

Spatial convenience

Product variety

Service backup

Terms and Responsibilities

of Channel Members
• Price policy
• Condition of sale
• Distributors’ territorial rights
• Mutual services and responsibilities

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The Value-Adds versus

Costs of Different Channels

Source: Oxford Associates, adapted from Dr. Rowland T. Moriarty. Cubex Corp.

Break-Even Cost Chart

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What is the channel expected to

deliver ?
• Variety of products to suit her needs
• Located close to the location of the consumer (Spatial
convenience)
• Speed of delivery – Waiting time should be NIL
• Product should be available in a ‘lot size’ to suit the
consumer
• Retailers may provide additional benefits such as home
delivery, credit and well packed staple food items
• Support for installation
• After sales service support
• Financing support

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Channel Systems Costs and

Margins
• Costs include capital investment
(infrastructure) and working capital (credit,
inventory) and operating expenses.
• Companies assure a reasonable ROI to
channel partners and not just margins.
• Different channel partners make different
kinds of margins – lower for C&FAs and
increasing with distributors, wholesalers
and retailers.
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Channel Power

Coercive

Reward

Legitimate

Expert

Referent

Integrated Marketing Channel

System
An integrated marketing channel system is
one in which the strategies and tactics of
selling through one channel reflect the
strategies and tactics of selling through one or
more other channels.

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The Hybrid Grid

E-Commerce
Marketing Practices
• E-commerce
– Uses a Web site to transact or facilitate the
sale of products and services online
• Pure-click vs. brick-and-click companies

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M-Commerce
Marketing Practices
• Mobile channels and media can keep
consumers as connected and
interacting with a brand as they choose
– Advertising and promotion
– Geofencing
• Privacy issues

Summary : Key Learnings

• Marketing channels are responsible for flows –
physical possession, title, payments, information and
promotion covered by forward, backward and flows
both ways
• Channels evolved from initially supporting farm
produce on to industrial products
• Selling as an approach brought in independent
intermediaries like wholesalers and retailers.
• Each channel partner has a different role in
supporting customer service through suitable channel
flows
• Number of categories operating in a channel system
define the channel levels as one, two etc
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Key Learnings
• Channel system deliverables are: bulk breaking,
place utility, reduced waiting time, providing
assortment, financial help, installation and after sales
support.
• Customer service has to be done at optimum cost
• Channel costs include infrastructure and working
capital.
• Marketing channel systems are categorised as
vertical, horizontal and multi-channel depending on
the structure and the functionality

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Thank you

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