Marketing Channel Design

CHAPTER 6
Designing Marketing Channels
Part 2: Developing the Marketing Channel

① Channel Design
② Who engages in channel design
Learning Objectives
③ Channel design paradigm

④ When to make a channel design
⑤ Distribution objectives
⑥ Distribution tasks
⑦ Channel structure decisions
⑧ Variables affecting channel structure
⑨ Heuristics in channel design
⑩ Choosing an optimal channel st ructure 2
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Objective
Channel Design
1
Channel Design: Decisions

involving the development of new
marketing channels either where
none had previously existed or
to the modification of
existing channels

Channel Design
Distinguishing points of the definition include:
1. A decision made by the marketer
2. The creation or modification of channels
3. The active allocation of distribution tasks in an

attempt to develop an efficient structure
4. The selection of channel members
5. A strategic tool for gaining a differential

advantage

Objective
Who Engages in Channel Design?
2
Wholesalers Retailers
Firms
• Producers,
manufacturers, service
• Look both up • Look up
providers, franchisors
and the
down channel
• Look down the
the channel to secure
channel
toward the market
suppliers
Objective
Channel Design Paradigm
3
1. Recognize the need for
channel design decision
7. Select 2. Set & coordinate

channel members distribution objectives
6. Choose the “best” 3. Specify

channel structure distribution tasks
5. Evaluate 4. Develop alternative

relevant variables channel structures
Objective
When to Make a Channel
4 Design Decision
• Developing a new product or product line
• Aiming an existing product at a new market
• Making a major change in some other component
of the marketing mix
• Establishing a new firm

• Adapting to changing intermediary policies that
may inhibit attainment of distribution
objectives

When to Make a Channel
Design Decision
 Dealing with changes in availability of particular

kinds of intermediaries
 Opening up new geographic marketing areas
 Facing the occurrence of major environmental

changes
 Meeting the challenge of conflict or other behavioral

problems
 Reviewing and evaluating

Objective
Distribution Objectives
5
Setting distribution objectives

requires knowledge of
which, if any, existing
objectives
& strategies may impinge
on these distribution
objectives.
Eg Frito Lays
The Need for Congruency
Firm’s
overall
objectives
&
strategies
General
marketing
objectives &
strategies
Product Pricing Promotion Distribution

marketing marketing marketing marketing
objectives & objectives & objectives & objectives &
strategies strategies strategies strategies
Objective
6
Distribution Tasks
Outlining distribution tasks is specific
and situationally dependent on the firm.
For example: Distribution tasks for a

manufacturer of consumer products
differs from those for products sold
in industrial markets.
=
Distribution tasks are a function of the distribution
objectives and the types of firms involved.
Objective
Channel Structure Dimensions
7
1. Number of levels 2. Intensity at

in the channel the various
levels
Allocation Alternatives
3. Types of
intermediaries at each
level
Number of Levels
• Range from two to five or more

• Number of alternatives is limited to two
or three choices
• Limitations result from the following
factors:
 Particular industry practices
 Nature & size of the market
 Availability of intermediaries

Intensity at the Various Levels
Relationship between the intensity of

distribution dimension & number of retail
intermediaries used in a given market
area.
Intensive Intensity
Selective
Dimension Exclusive
Numbers of Intermediaries (retail level)

Many Few One
Types of Intermediaries
 Numerous types
 Manager’s emphasis on types of
distribution tasks performed by these
intermediaries
 Watch emerging types
 Electronic online auction firms (eBay)
 Industrial products sold in B2B markets
(Chemdex, Converge.com)

Objective
Variables Affecting Channel Structure
8
Categories of Variables
1. Market Variables
2. Product Variables
3. Company Variables
4. Intermediary Variables
5. Environmental Variables
6. Behavioral Variables

Market Variables
Market Geography Location, geographical size,

& distance from producer
Number of customers in a
Market Size market
Number of buying units

Market Density (consumers or industrial
firms) per unit of land area
Market Who buys, & how, when, and

Behavior where customers buy

Product Variables
Bulk & Weight

Perishability
Unit Value
Degree of Standardization
Technical versus Nontechnical
Newness

Company Variables
Size The range of options is
relative to a firm’s size
Financial The greater the capital, the

lower the dependence on
Capacity intermediaries
Managerial Intermediaries are necessary

Expertise when managerial experience is lacking
Objectives Marketing & objectives may

& Strategies limit use of intermediaries

Intermediary Variables
Availability Availability of intermediaries

influences channel structure.
Cost Cost is always a consideration

in channel structure.
Services Services that intermediaries

offer are closely related to the
selection of channel
members.

Environmental Variables
The impact of environmental forces
is a common reason for making
channel design decisions.
Economic Forces
Competitive Forces
Legal Forces
Technological Forces
Sociocultural Forces

Behavioral Variables
Develop congruent roles for

channel members.
Be aware of available power

bases
Attend to the influence of behavioral problems

that can distort communications.

Objective
9 Heuristics in Channel Design
Benefit Limitation
Fairly simple Mostly useful as

prescriptions for rough guide to
channel structure decision making

Objective
Choosing an Optimal
10 Channel Structure
Why is choosing an optimal channel structure
not possible?
1. Management is incapable of knowing all

possible alternatives.
2. Precise methods for calculating the

exact
payoffs associated with each
alternative structures do not exist.
BUT
Techniques exist for developing
Approaches for Choosing
Channel Structure
• “Characteristics of Goods & Parallel

Systems” Approach
• Financial Approach
• Transaction Cost Analysis
Approach
• Management Science
Approaches
• Judgmental-Heuristic
Approach
“Characteristics of Goods &
Parallel Systems” Approach
Main emphasis for choosing a channel structure

should be based upon product variables.
Each product characteristic is identified with a
particular color on the spectrum.
These variables are:
1.Replacement rate
2. Gross margin
3. Adjustment
4. Time of consumption
5. Searching time
• This approach offers the channel manager a neat way
of describing and relating a number of heuristics
about how product characteristics might affect
channel structure.
• Major problem with this method is that it puts too

much emphasis on product characteristics as the
determinant of channel structure
Financial Approach
• Argues that the most important variables for
choosing a channel structure are financial.
• Basically, this decision involves comparing estimated
earnings on capital resulting from alternative channel
structures in light of the cost of capital to determine
the most profitable channel.
• By viewing the channel as a long-term investment
that must more than cover the cost of capital
invested in it and provide a better return than other
alternative uses for capital, the criteria for choosing a
channel structure is more rigorous.
Transaction Cost Analysis
(TCA) Approach
• Addresses the choice of marketing channel structure

only in the most general case situation of choosing
between the manufacturer performing all of the
distribution tasks itself through vertical integration
versus using independent intermediaries to perform
some or most of the distribution tasks.
• Focus is on the cost of conducting the transactions
necessary for a firm to accomplish its distribution tasks.
• It deals only with the most general channel structure
dichotomy of vertical integration versus use of
independent channel members.
Management Science
Approaches
• Desirable if the channel manager could take all
possible channel structures, along with all the
relevant variables, and “plug” these into a set of
equations, which would then yield the optimal
channel structure.
• These approaches still need much more development

before they are likely to find widespread application
to channel choice.
Judgmental-Heuristic
Approaches
Some attempt to formalize the decision-making process
whereas others attempt to incorporate cost and revenue
data.
Straight Qualitative Judgment Approach- The various

alternative channel structures that have been generated
are evaluated by management in terms of decision
factors that are thought to be important.
Distribution Costing Approach- estimates of costs and

revenues for different channel alternatives are made,
and the figures are compared to see how each
alternative compares to another.
Judgmental-Heuristic Approaches
IF Management’s ability to make

sharp judgments is high
+ Good empirical data on costs

and revenues is available
It’s possible to make highly satisfactory

channel-choice decisions using
judgmental-heuristic approaches

Discussion Question #1
Best Buy Co., the largest consumer electronics retailer in the
world, is famous for its giant 40,000 square-foot “big-box” stores.
This channelhas served Best Buy well over the years
as consumers wandered through the giant product displays
in the cavernous stores, and competitors such as Circuit
City were literally driven out of business by Best Buy’s
dominant stores. But by the end of the first decade of the Twenty-first
century, Best Buy made a channel design decision that focused on
adding a retail channel consisting of much smaller 3,000 square-foot
stores to its large-store channel. The new smaller stores will be
located in shopping malls as well as in urban downtown venues. Best
Buy designed this new small-store channel structure mainly to do
a better job of reaching the still-growing market
for mobile phones, especially smartphones. These smaller stores will
sell almost one hundred different phones as well as the services of
nine carriers.
Do you think Best Buy’s channel design decision is a good one?

What other channel design options might Best Buy have pursued to
Vending machines have existed as a mechanical channel
for distributing a variety of products
for many decades. Traditionally the typical products found
in vending machines were soft drinks, candy,
cigarettes, and snack foods. But in recent years the
variety of products sold through vending machine
channels has broadened dramatically.
Consumers can now buy digital cameras, DVDs, iPods, baby
diapers, and in Germany, even solid gold bars for which the
price charged changes every two minutes with the ups and
downs of the price of gold.
From a channel design standpoint, what do you see as

the key variables to consider in determining whether vending
machines could be a feasible channel choice for any given
product of your choice?
Marketing channels should be designed to
make products and services conveniently available to
customers, how, when, and where they want them. This is
exactly what several franchises such as Cousins Submarines Inc.,
Tasti D-Lite LLC frozen yogurt, and Toppers Pizza Inc. intend
to do by changing their channel structures to include mobile
channels consisting of fully equipped trucks and vans that can
bring many of the products sold in their bricks and mortar stores
right to customers where they work and play. How will potential
customers know when and where these truck and van
mini-restaurants will appear? Simple customers can track
the whereabouts of the vendors by going to Facebook,Twitter,
and FourSquare.
Do you think this type of mobile channel is just a novelty in

fast-food channels or does it have the potential to be a major
force for change in the channel structure of fast-food and other

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CHAPTER 6

Designing Marketing Channels

Part 2: Developing the Marketing Channel

③ Channel design paradigm

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Channel Design: Decisions

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1. A decision made by the marketer

2. The creation or modification of channels

3. The active allocation of distribution tasks in an

4. The selection of channel members

5. A strategic tool for gaining a differential

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7. Select 2. Set & coordinate

6. Choose the “best” 3. Specify

5. Evaluate 4. Develop alternative

• Establishing a new firm

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 Dealing with changes in availability of particular

 Opening up new geographic marketing areas

 Facing the occurrence of major environmental

 Meeting the challenge of conflict or other behavioral

 Reviewing and evaluating

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Setting distribution objectives

Product Pricing Promotion Distribution

For example: Distribution tasks for a

1. Number of levels 2. Intensity at

• Range from two to five or more

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Relationship between the intensity of

Numbers of Intermediaries (retail level)

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Market Geography Location, geographical size,

Number of buying units

Market Who buys, & how, when, and

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Bulk & Weight

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Financial The greater the capital, the

Managerial Intermediaries are necessary

Objectives Marketing & objectives may

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Availability Availability of intermediaries

Cost Cost is always a consideration

Services Services that intermediaries

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Develop congruent roles for

Be aware of available power

Attend to the influence of behavioral problems

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9 Heuristics in Channel Design

Fairly simple Mostly useful as

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1. Management is incapable of knowing all

2. Precise methods for calculating the

• “Characteristics of Goods & Parallel