Principles of Marketing

Chapter 12:
Marketing Channels
Delivering Customer Value
Topics

• Supply Chains and the Value Delivery Network

• The Nature and Importance of Marketing
Channels
• Channel Behavior and Organization
 Marketing Channels

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 Supply Chains and the
Value Delivery Network
Producing a product or service and making it available to
buyers requires building relationships not only with
customers but also with key suppliers and resellers in
the company’s supply chain. This supply chain consists
of upstream and downstream partners.
Upstream partners are firms that supply raw materials,
components, parts, information, finances, and
expertise needed to create a product or service.
Downstream partners include the marketing channels or
distribution channels that look toward the customer,
including retailers and wholesalers.
Supply chain “make and sell” view includes the firm’s raw
materials, productive inputs, and factory capacity.
• The term supply chain may be too limited; a better term
would be demand chain because it suggests a sense-
and-respond view of the market.

Demand chain “sense and respond” view suggests that

planning starts with the needs of the target customer.
Under this view, planning starts by identifying the needs
of target customers, to which the company responds by
organizing a chain of resources and activities with the
goal of creating customer value.
 Supply Chains and the
Value Delivery Network
Yet, even a demand chain view of a business may be too
limited because it takes a step-by-step, linear view of
purchase-production-consumption activities. Instead,
most large companies today are engaged in building and
managing a complex, continuously evolving value delivery
network.
Value delivery network is composed of the company,
suppliers, distributors, and, ultimately, customers who
partner with each other to improve the performance of
the entire system.
 The Nature and Importance of
Marketing Channels
Few producers sell their goods directly to final users.
Instead, most use intermediaries to bring their
products to market.
Marketing channel (distribution channel) is a set of
interdependent organizations that help make a product
or service available for use or consumption by the
consumer or business user.
Distribution channel decisions often involve long-term
commitments to other firms. Therefore, management
must design its channels carefully, with an eye on both
today’s likely selling environment and tomorrow’s as
well.
• Why do producers give some of the selling job to channel partners?
After all, doing so means giving up some control over how and to
whom they sell their products.
• Producers use intermediaries because they create greater efficiency
in making goods available to target markets. Through their contacts,
experience, specialization, and scale of operation, intermediaries
usually offer the firm more than it can achieve on its own.
• Transform the assortment of products into assortments wanted by
consumers (Producers make narrow assortments of products in large
quantities, but consumers want broad assortments of products in
small quantities. Marketing channel members buy large quantities
from many producers and break them down into the smaller
quantities and broader assortments desired by consumers).

• Bridge the major time, place, and possession gaps that separate
goods and services from users
 How Channel Members Add Value
Intermediaries reduce the amount of work that must be
done by both producers and consumers.
 How Channel Members Add Value

Information Promotion Contact

Physical
Matching Negotiation
distribution

Financing Risk taking

• Information: Gathering and distributing marketing research and
intelligence information about actors and forces in the
marketing environment needed for planning and aiding
exchange.
• Promotion: Developing and spreading persuasive
communications about an offer.
• Contact: Finding and communicating with prospective buyers.
• Matching: Shaping and fitting the offer to the buyer’s needs,
including activities such as manufacturing, grading, assembling,
and packaging.
• Negotiation: Reaching an agreement on price and other terms
of the offer so that ownership or possession can be transferred.
• Physical distribution: Transporting and storing goods.
• Financing: Acquiring and using funds to cover the costs of the
channel work.
• Risk taking: Assuming the risks of carrying out the channel work
 Number of Channel Levels – channel length

The number of intermediary levels indicates the length of a channel.

Each layer of marketing intermediaries that performs some work in
bringing the product and its ownership closer to the final buyer is a
channel level.
• All the institutions in the channel connected by
several types of flows
• Physical flow of products
• Flow of ownership
• Payment flow
• Information flow
• Promotion flow
Channel Behavior and Organization

• Channel Behavior
• Channel organization
• Vertical Marketing Systems
• Horizontal Marketing Systems
• Multichannel Distribution Systems
• Changing Channel Organization
 Channel Behavior and Organization
Channel Behavior
Marketing channels consist of firms that have partnered
for their common good with each member playing a
specialized role.
Here, we look at channel behavior and how members
organize to do the work of the channel.
 Channel Behavior
Channel conflict refers to disagreement among channel members
over goals, roles, and rewards.
• Horizontal conflict occurs among firms at the same level of the
channel.
• For instance, some firms may complain others steal sales from
them by pricing too low or advertising outside their assigned
territories. Other complaints may involve overcharging or giving
poor service, hurting the overall image of the channel members.
 Channel Behavior
• Vertical conflict, conflict between different levels of the
same channel, is even more common.
• For example, McDonald’s has recently faced growing
conflict with its corps of almost 3,000 independent
franchisees. In a recent company Webcast, based on rising
customer complaints that service isn’t fast or friendly
enough, McDonald’s told its franchisees that their cashiers
need to smile more. At the same time, it seems, the
franchisees weren’t very happy with McDonald’s, either
because of a recent slowdown in systemwide sales that has
both sides on edge.
 Channel Organization
Conventional Marketing Channels
Conventional distribution systems consist of one or more
independent producers, wholesalers, and retailers, each
separate business seeking to maximize its own profits,
perhaps even at the expense of profits for the system as
a whole.
Historically, conventional distribution channels have lacked
leadership and power, often resulting in damaging
conflict and poor performance. One of the biggest
channel developments over the years has been the
emergence of vertical marketing systems that provide
channel leadership.
Vertical Marketing Systems
 Vertical Marketing Systems

Vertical marketing systems (VMSs) provide channel

leadership and consist of producers, wholesalers,
and retailers acting as a unified system. One channel
member owns the others, has contracts
with them, or wields so much power that they must
all cooperate.

• Corporate marketing systems

• Contractual marketing systems
• Administered marketing systems
 Vertical Marketing Systems
Corporate vertical marketing systems combine
successive stages of production and distribution under
single ownership.
Contractual vertical marketing systems consist of
independent firms at different levels of production and
distribution who join together through contracts.
Franchise organization is a contractual vertical
marketing system in which a channel member, called a
franchisor, links several stages in the production-
distribution process.
Administered vertical marketing system is a VMS that
coordinates successive stages of production and
distribution through the size and power of one of the
parties.
 Horizontal Marketing Systems
Horizontal marketing system is a channel
arrangement in which two or more companies at
one level join together to follow a new marketing
opportunity.

For example, Walmart partners with noncompetitor

McDonald’s to place “express” versions of
McDonald’s restaurants in Walmart stores.
McDonald’s benefits from Walmart’s heavy store
traffic, and Walmart keeps hungry shoppers from
needing to go elsewhere to eat.
.
 Multichannel Distribution Systems
Multichannel distribution systems are systems in
which a single firm sets up two or more marketing
channels to reach one or more customer
segments.
 Changing Channel Organization

• Changes in technology and the explosive growth

of direct and online marketing are having a
profound impact on the nature and design of
marketing channels.
• Disintermediation is the cutting out of marketing
channel intermediaries by producers or the
displacement of traditional resellers by new
intermediaries.
 Channel Design Decisions
Identifying Major Alternatives
Number of Marketing Intermediaries

Intensive distribution

Exclusive distribution

Selective distribution

Copyright © 2016 Pearson Education, Inc. 12-36

 Channel Design Decisions
• Intensive distribution strategy: a strategy in which
producers stock their products in as many outlets as
possible. Producers of convenience products and
common raw materials typically seek it. These products
must be available where and when consumers want
them.
• Selective distribution strategy: the use of more than one
but fewer than all of the intermediaries who are willing
to carry a company’s products. Most consumer
electronics, furniture, and home appliance brands are
distributed in this manner.
• Exclusive distribution strategy: the producer gives only a
limited number of dealers the exclusive right to distribute
its products in their territories. Exclusive distribution
is often found in the distribution of luxury brands.