Channel Design

Role and Design Decisions

Role of Distribution Channels
• Distribution channels: Sets of interdependent organizations participating
in the process of making a product or service available for use or
consumption
• Some intermediaries—such as wholesalers and retailers—buy, take title to,
and resell the merchandise; they are called merchants.
• Others—brokers, manufacturers’ representatives, sales agents—search for
customers and may negotiate on the producer’s behalf but do not take title
to the goods; they are called agents.
• Still others— transportation companies, independent warehouses, banks,
advertising agencies—assist in the distribution process but neither take
title to goods nor negotiate purchases or sales; they are called facilitators.
Role of Distribution Channels
• Gather information about potential and current customers, competitors, and
other actors and forces in the marketing environment.
• Develop and disseminate persuasive communications to stimulate purchasing
and foster brand loyalty.
• Negotiate and reach agreements on price and other terms so that transfer of
ownership or possession can be effected.
• Place orders with manufacturers.
• Acquire the funds to finance inventories at different levels in the marketing
channel.
• Assume risks connected with carrying out channel work.
• Provide buyers with financing and facilitate payment.
• Provide for buyers’ payment of their bills through banks and other financial
institutions.
• Oversee actual transfer of ownership of goods from one organization or person to
another
Role of Distribution Channels
• Forward Flow: Some of these functions (storage and movement, title,
and communications) constitute a forward flow of activity from the
company to the customer.

• Backward Flow: Ordering and payment constitute a backward flow

from customers to the company.

• Both forward and backward flow: Information, negotiation, finance,

and risk taking occur in both directions
Different Kinds of Marketing Flows
Consumer and Industrial Marketing Channels
Channel Management Decisions
• Establishing objectives and constraints: Marketers should state their
channel objectives in terms of the service output levels they want to
provide and the associated cost and support levels. Channel
objectives vary with product characteristics.

• Marketers must adapt their channel objectives to the larger

environment. When economic conditions are depressed, producers
want to move goods to market using shorter channels and without
services that add to the final price. Legal regulations and restrictions
also affect channel design.
Channel Management Decisions
• Exclusive distribution:
• Exclusive distribution severely limits the number of intermediaries.
• It’s appropriate when the producer wants to ensure more knowledgeable and dedicated efforts by the resellers, and it often
requires a closer partnership with them.
• Exclusive distribution is used for new automobiles, some major appliances, and luxury apparel and accessories.
• Both channel partners benefit from exclusive arrangements: The producer obtains more loyal and dependable outlets, and
the retailer gets a steady supply of special products and stronger seller support.
• Exclusive arrangements are legal as long as they do not substantially lessen competition or tend to create a monopoly and as
long as both parties enter into them voluntarily.
• Selective distribution:
• Selective distribution relies on some but not all of the intermediaries willing to carry a particular product.
• Unlike exclusive distribution, in which individual retailers do not directly compete with one another (for example, because
they are assigned non-overlapping geographic areas), selective distribution might include retailers that compete for the
same customers.
• Intensive distribution:
• Intensive distribution places the goods or services in as many outlets as possible.
• This strategy works well for snack foods, soft drinks, newspapers, candies, and gum—products that consumers buy
frequently or in a variety of locations.
Channel Management Decisions
• Three main characteristics of franchising:
• The franchisor owns a trade or service mark and licenses it to franchisees in
return for royalty payments
• The franchisee pays for the right to be part of the system
• The franchisor provides its franchisees with a system for doing business.
• Franchise formats:
• Manufacturer-sponsored retail franchise
• Manufacturer-sponsored wholesale franchise
• Service-firm-sponsored retailer franchise
Channel Management Decisions
• Channel power
• The ability to alter channel members’ behavior so they take actions they would not have
taken otherwise
• Types of power:
• 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 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.
• Legal power: The manufacturer requests a behavior that is warranted under the contract. As
long as the intermediaries view the manufacturer as a legitimate leader, legal power works.
• Expert power: The manufacturer has special knowledge that intermediaries value. Once the
intermediaries acquire this expertise, however, expert power weakens. The manufacturer
must continue to develop new expertise so that 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 HP have high referent power.
Channel Management Decisions
• Channel partnerships
• Conventional marketing channels:
• Independent producer
• Wholesaler(s)
• Retailer(s)

• Vertical marketing systems: A unified system of producer, wholesale(s), and retailer(s)

• A corporate vertical marketing system combines successive stages of production and distribution under single ownership. For
years, Sears obtained more than half the goods it sold from companies it partly or wholly owned. Sherwin-Williams makes
paint but also owns and operates 3,500 retail outlets.
• An administered vertical marketing system coordinates successive stages of production and distribution through the size and
power of one of the members. Manufacturers of dominant brands can secure strong trade cooperation and support from
resellers.
• A contractual vertical marketing system consists of independent firms at different levels of production and distribution
integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone.
Sometimes thought of as “value adding partnerships,” contractual vertical marketing systems come in three types: (1) In
wholesaler sponsored voluntary chains, wholesalers organize voluntary chains of independent retailers to help standardize
their selling practices and achieve buying economies. 2) In retailer cooperatives, retailers take the initiative and organize a new
business entity to carry on wholesaling and possibly some production. (3) In franchise organizations, a channel member
(franchisor) might link several successive stages in the production–distribution process.

• Horizontal marketing systems: Horizontal marketing systems involve two or more unrelated companies
putting together resources or programs to exploit an emerging marketing opportunity. Each company lacks
the capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The
companies might work together on a temporary or permanent basis or create a joint venture company.
Channel Management Decisions
• Producers must periodically evaluate intermediaries’ performance against
such standards as sales quota attainment, average inventory levels,
customer delivery time, treatment of damaged and lost goods, and
cooperation in promotional and training programs.

• A producer will occasionally discover it is overpaying particular

intermediaries for what they are actually doing. One manufacturer that
had been compensating a distributor for holding inventories found its
goods were being held in a public warehouse at its own expense.

• Producers should set up functional discounts in which they pay specified

amounts for the trade channel’s performance of each agreed-upon service.
Underperformers need to be counseled, retrained, motivated, or
terminated.