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Chapter 10 CHANNEL CONCEPTS: DISTRIBUTING THE PRODUCT Role of distribution channels Methods used in organizing channels Management of underlying behavioral dimensions present in most channels Elements of a channel strategy Tasks assigned to various channel institutions Learning Objectives

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chapter 10

Chapter 10


Role of distribution channels

Methods used in organizing channels

Management of underlying behavioral dimensions present in most channels

Elements of a channel strategy

Tasks assigned to various channel institutions

Learning Objectives

Primary purpose: creation of time and place utility

Extremely complex process, often the only element of marketing where cost savings still possible

Channel selection is a dynamic part of marketing planning

Channel needs to be managed to work

Composed of individuals and groups with unique traits that may conflict, may need to be motivated

Channel of Distribution

Exchange: sale of the product to various members of the distribution channel

Physical distribution: moves products through the exchange channel, simultaneously with title and ownership

Key role: satisfying customer’s and achieving profit for the firm

Customer satisfaction: maximizing time and place utility to the organization’s suppliers, intermediate and final customers

Dual Functions

Barter to industrial specialization in goods products to service products

Marketing channel: sets of interdependent organizations involved in the process of making a product/service available for use/consumption; providing a payment mechanism for the provider

Institutions: some under producer’s control, some not; but all must be recognized, selected, integrated into efficient arrangement

Process: continuous management, monitoring, reappraisal

Objectives: make an acceptable profit


Multiple linkages that tie channel members and other agencies together







Movement of the physical product from the manufacturer through all the parties who take physical possession of the product until it reaches the ultimate consumer e.g., transportation company to public warehouse to supermarkets


Institutions associated with the actual exchange process e.g., bottlers and beer distributors to supermarkets


Shows the movement of title through the channel e.g., from bottlers and beer distributors to supermarkets


Identifies the individuals who participate in the flow of information either up or down the channel e.g., from transportation company to public warehouse to bottlers and distributors to supermarkets


Flow of persuasive communication in the form of advertising, personal selling, sales promotion and public relations e.g., from advertising agency to bottlers and beer distributors to supermarkets


Producer of the product – craftsman, manufacturer, farmer or other extractive industry producer

User of the product – individual, household, business buyer, institution, government

Certain middlemen at the wholesale or retail level


Transactional: buying, selling, risk assumption

Logistical: assembly, storage, sorting, transportation

Facilitating: post-purchase service and maintenance, financing, information dissemination, channel coordination or leadership

Channel Functions

While channel institutions can be eliminated or substituted, the functions of those institutions cannot be eliminated

All institutional members are part of many channel transactions at any given point in time

Satisfaction of transactions is based on routinization benefits

When available middlemen are incompetent, unavailable or the producer feels he can perform the task better, the best channel arrangement is direct, from the producer to the ultimate user

Service marketers face the problem of delivering their product in the form, at the place and time their customer demands, solutions: banks- ATMs


Members and non-members

Members perform negotiation functions, participate in negotiation and/or ownership; non-members do not

Producer and manufacturer

Retailing: department stores, chain stores, supermarkets, discount houses, warehouse retailing, franchises, planned shopping centers/malls


Retailing: home-selling, automated vending, mail order, online marketing, catalog marketing, kiosks

Wholesaling: independent, part of vertical marketing system


Firms extract, grow or make products; vary in size from one-person operation to those that employ several thousands people, generate billions in sales

Channel members can be useful in designing, packaging, pricing, promoting of the product through the most effective channels

Producer & Manufacturer

All activities needed to market consumer goods, services to the ultimate consumer who are motivated to buy for individual/family needs e.g., computer at Circuit City

Sales also made through means other than stores


Department stores: wide product mixes e.g., hardware, clothing, each product in different sections in the store e.g., Sears

Chain stores: large size enable buying of a wide variety of items in large quantity discounts; prices lower than small competitors; convenient locations; increased market share e.g., Pizza Hut

Departments and Chains

Large, self-service stores with central checkout facilities; extensive line of food items, often nonfood products e.g., Safeway

Mass-merchandising, low-cost distribution methods

Availability of large assortments of a variety of goods like food, household cleaning, maintenance products at a minimal price


Cut-rate retailers e.g., Walmart

Emphasis on price as the main sales appeal

Merchandise assortments are broad including hard and soft goods, but limited to most popular items, colors and sizes

Large self-service operations with long hours, free parking, relatively simple fixtures

Discount Houses


Relatively new type

Catalog showrooms largest type e.g., Costco


Response to competition from large chain stores

Only sell the products of the franchiser

Operate the business to some extent as the manufacturer wishes

e.g., dealer of Chevrolet

Warehouse & Franchise

Wide assortment of products, many alternatives in one location

Regional : larger centers that have one or more major department stores as major tenants

Community: moderately sized with junior department stores

Neighborhood: small with the key store a supermarket

Local clusters: shopping districts grown over time around key intersections, courthouses

String street locations: along major traffic routes

Isolated locations: freestanding sites not necessarily in heavy traffic areas; use promotion to attract shoppers

Shopping Centers/Malls

In-home selling: pre-select prospects, cold calls e.g., Avon

Demonstration party: one customer acts as host and invites friends e.g., Tupperware

In-home, Demonstration party

Mail order: product description through flyer, catalog convenience, larger geographic coverage, limited service e.g., CD Now

Catalog: companies mail one or more product catalogs to select addresses that have a high likelihood of placing an order e.g., J.C. Penny’s

Kiosks: “customer-order placing machines” located at airports, stores e.g., Florsheim Shoe Company

Mail-order, Catalog, Kiosks

Coin-operated, self-service machines, variety of products, services at convenient locations e.g., banking transactions

Automated Vending

Commercial online channels: both retailer and consumer need computer and modem; companies set up online information and marketing services that can be assessed by those who have signed up and paid a monthly fee

Internet: global web that allows instantaneous and decentralized global communication; users can send e-mails, exchange views, shop for products, access real-time news; marketers can use e-mails, participate in forums, newsgroups, bulletin boards, place ads online, create electronic storefront


All activities required to market goods, services to businesses, institutions, industrial users motivated to buy for resale or to produce and market other goods, services e.g., a bank buying computer for data processing


Warehousing: receiving, storing, packaging

Inventory control and order processing: track physical inventory, manage its composition and level, process transactions

Transportation: arranging physical movement of goods

Information: supplying information about markets to producers and about products and suppliers to buyers

Selling: personal contact with buyers

Planning, financing, developing marketing mix

Wholesaling Functions

Full-service merchandise: general, limited-line

Limited service merchant: cash and carry, rack jobbers, drop shippers, mail orders

Agents and brokers: agents – buying agents, selling agents, commission merchants, manufacturer’s agents; brokers – real estate, food, other products

Manufacturer’s sales

Facilitator: warehouses, finance companies, transportation companies, trade marts

Types of Wholesaling

Take title to the merchandise; assume the risk involved in an independent operation; buy and resell products; offer a complete range of services

Same as full but offer a limited range of services

Full vs. Limited

Do not take title to the merchandise; bring buyers and sellers together; negotiate the terms of the transactions

Agents merchants represent either the buyer or seller, usually on a permanent basis

Brokers bring parties together on a temporary basis

Agents and Brokers

Owned directly by the manufacturers; performs wholesaling functions for the manufacturer

Perform some specialized functions such as financing or warehousing; to facilitate the wholesale transactions; may be independent or owned by producer or buyer

Manufacturer's sales, Facilitator

Provide the bridge between production activities and markets that are spatially and temporally separated

Process of strategically managing the movement and storage of materials, parts, finished inventory from suppliers, between enterprise facilities, and to customers

Valuable marketing tool to stimulate consumer demand

Physical Distribution

Defining the physical distribution (P.D.) standards that channel members want

Making sure the proposed P.D. program designed by an organization meets the standard of channel members

Selling channel members on P.D. programs

Monitoring the results of P.D. once it has been implemented


Conventional channels

Vertical Marketing systems

Horizontal channel systems

Organizing Channels

Group of independent businesses, each motivated by profit, having little concern about any other member of the distribution sequence

No all-inclusive goals

Assignment of tasks and evaluation process are totally informal; can create deficiencies


Solution to problems of conventional networks

When a member (usually the manufacturer) assumes a leadership role and attempts to coordinate the efforts of the channel so that mutually beneficial goals like better profits, product exposure, can be attained

Vertical Marketing Systems

Administered: informally guided by goals and programs developed by one or a limited number of firms in the existing channel; channel captain: administrative skills and power of one individual may be the driving force of the channel e.g., Xerox; problems of polarization

Contractual: members formalize relationship; provides additional control; spells out marketing functions

Corporate: members on different levels are owned and operated by one organization; forward (own various intermediaries e.g., Dannon Yogurt) or backward (retailer who takes over wholesaling and manufacturing e.g., Sears) integration

Types of VMS

When two or more companies do not have the capital, technical or production know-how to effectively market their products alone

Establish temporary or quasi-permanent relationship in order to work with each other to create the channel mechanism needed to reach their target markets

Horizontal Channel Systems

Analyze the customer

Establish objectives

Specify distribution tasks

Evaluate and select channel alternatives

Evaluating channel member performance

Correct or modify

Management Process

Whom to sell the merchandise immediately?

Who is the ultimate buyer and user?

Discover buying specifications of the ultimate user e.g., comparison of prices, willingness to bear with inconvenience

Helps to decide on the type of wholesaler or retailer through which a product should be sold

Discover buying specifications of resellers


Growth in sales: reach new markets, and/or increase sales in existing one

Maintenance or improvement of market share: educate or assist members in their efforts to increase the amount of product they handle

Achieve a pattern of distribution: structure to achieve certain time, place, form, information utilities

Create an efficient channel: improve performance by modifying flow mechanisms


Fully identify tasks, define how tasks can change with situation, assign costs

Provide delivery within a specific period of time

Offer adequate storage space

Provide credit to other intermediaries

Facilitate a product return network

Provide readily available inventory (quantity, type)

Provide for absorption of size and grade obsolescence

Specify Distribution Tasks


Number of levels: two to several

Intensity of the levels: actual number of components

Types of intermediaries at each level

Application of selection criterion to channel alternatives

Evaluate, Select Alternatives

Exclusive: single/few outlets; high dealer loyalty, sales support; greater control; limits potential sales volume; success dependent on the ability of single intermediary e.g., Ethan Allen

Intensive: maximum number of intermediaries; increased sales, recognition, impulse purchasing; low price, margin, small order sizes; difficult to stimulate and control large number of intermediaries e.g., Candies

Selective: intermediary strategy, outlets number dependent on market potential, density of population, dispersion of sales, competitor’s policies; some strengths and weaknesses of the other two; difficult to determine optimal number of intermediaries e.g., Baskin Robbins

Types of Intermediaries

Passive to active; very negative, based on fear and punishment, to very positive, based on encouragement and reward

Manufacturer: if control of the product (merchandising, repair) is critical and if the design and redesign of the channel is best done by the manufacturer

Wholesaler: where the manufacturers and retailers have remained small in size, large in number, relatively scattered geographically, are weak in finance, marketing expertise

Retailer: when product development and demand stimulation are relatively unimportant, personal attention to the customer is important


Sales popular criteria: current vs. historical; comparison with other members; comparison of member’s sales with predetermined quotas

Maintenance of adequate inventory

Selling capabilities

Attitudes of intermediaries toward product

Competition from other intermediary, from other product line carried by manufacturer’s own channel members

Evaluate Performance

Role: clearly defining role/tasks prescriptions of various participants and communicating them in order to achieve desired results

Communication: sending and receiving information relevant to operation; detect behavioral problems that inhibit effective flow of information and resolve them

Conflict: personal and direct; often confrontational; manage by establishing mechanisms to detect, appraise the effect of and resolve conflict

Power: willingness to use force in a relationship; means of influencing/controlling behavior of the other party

Human Aspects