Chapter 7 Marketing Channel Strategy and Management
In this chapter, you will learn about… • The Channel-Selection Decision • The Design of Marketing Channels • Channel Selection at the Retail Level • Channel Selection at Other Levels of Distribution • Dual Distribution and Multi-Channel Marketing • Dual Distribution • Multi-Channel Marketing
In this chapter, you will learn about… • Satisfying Intermediary Requirements and Trade Relations • Intermediary Requirements • Trade Relations • Channel-Modification Decisions • Qualitative Factors in Modification Decisions • Quantitative Factors in Modification Decisions
What is a marketing channel? A marketing channel consists of individuals and firms involved in the process of making a product or service available for consumption or use by consumers and industrial users.
Role of the channel in marketing strategy • Links a producer to buyers • Performs sales, advertising, and promotion • Influences the firm’s pricing strategy • Affects product strategy through branding policies, willingness to stock and customize offerings, install, maintain, offer credit, etc.
The Channel-Selection DecisionFundamental Questions • Who are potential customers? • Where do they buy? • When do they buy? • How do they buy? • What do they buy? • Avon Cosmetics example The marketing manager must answer the following questions:
Brokers or Agents Distributors or Wholesalers Retailers or Dealers Traditional Marketing Channel Designs Producer Ultimate Buyers
INDIRECT DIST. vs. DIRECT DIST. The Design of Marketing Channels • Use intermediaries to reach target market • type • location • density • number of channel levels • Contact ultimate buyers directly • using its own sales force or distribution outlets • using the Internet through a marketing Web site or electronic storefront
The Design of Marketing Channels • Buyers are easily identifiable • Personal selling is a major component of the communication mix • Organization has a wide variety of offerings for the target market • Sufficient resources are available Direct distribution is typically used when:
The Design of Marketing Channels • Intermediaries are not available for reaching target markets • Intermediaries do not possess the capacity to service the requirements of target markets Direct distribution must be considered when:
The Design of Marketing Channels • Intermediaries can perform distribution functions more efficiently and less expensively • Customers are hard to reach directly • Organization does not have resources to perform distribution function Indirect distribution must be considered when:
The Design of Marketing Channels Electronic marketing channels employ some form of electronic communication, including the Internet, to make products and services available for consumption or use by consumers and industrial users.
Auto Manufacturer Book Publisher Airline Dell Computers Auto Dealer Book Distributor Auto-By-Tel (Virtual Broker) Amazon.com (Virtual Retailer) Travelocity (Virtual Agent) Representative Electronic Marketing Channels Autobytel.com Amazon.com Travelocity.com Dell.com Ultimate Buyers
The Design of Marketing Channels Disintermediation is the elimination of traditional intermediaries and direct distribution through electronic marketing channels.
Channel Selection at the Retail LevelChannel Selection Decisions • Which channel and intermediaries will provide the best coverage of the target market? • Which channel and intermediaries will best satisfy the buying requirements of the target market? • Which channel and intermediaries will be the most profitable?
Rolex Faberge Levi’s Sony Wrigley’s Coke Channel Selection at the Retail LevelTarget Market Coverage Intensive Exclusive Selective
Channel Selection at the Retail Level Effective Distribution occurs when a limited number of retail outlets account for a significant fraction of the market potential. Example: A marketer distributes the product through 40% of available outlets, but these outlets account for 80% of the market.
Channel Selection at the Retail LevelSatisfying Buyer Requirements • Information • Convenience • Variety • Attendant services
Channel Selection at the Retail LevelProfitability • Margins = Revenues – Channel Costs • Channel costs are: • Distribution costs • Advertising costs • Selling costs
Channel Selection at Other Levels of DistributionTypes of Wholesaler • Specialty wholesaler • Limited line of items within a product line • General-merchandise wholesaler • Wide assortment of products • General-line wholesaler • Complete assortment of items in a single retailing field • Combination
Dual Distribution • occurs when an organization distributes its offering through two or more different marketing channels that may or may not compete for similar buyers • the main consideration is whether it will provide incremental sales revenue or cannibalize existing sales
Dual Distribution When is it used • own brand and private store brand • distribution to large and small retailers • multibrand strategy • geographic factors
Dual Distribution Example Hallmark • Sells Hallmark brand cards through Hallmark stores and selected department stores • Sells Ambassador brand cards through discount drugstore chains
Multi-Channel Marketing Multi-channel marketing involves the blending of an electronic marketing channel and a traditional channel in ways that are mutually reinforcing in attracting, retaining, and building relationships with customers.
Multi-Channel MarketingJustifications • An electronic marketing channel can provide incremental revenue (Victoria’s Secret) • An electronic marketing channel can leverage the presence of a traditional channel (Ethan Allen) • Multi-channel marketing can satisfy buyer requirements (Clinique division of Estée Lauder)
Multi-Channel MarketingConsiderations • Actual incremental revenue or merely cannibalization? • Incremental cost to launch and sustain an electronic forefront • Disintermediation – a traditional intermediary member is replaced by electronic storefront
Satisfying Intermediary Requirements and Trade RelationsIntermediary Requirements • Improvements in product assortments • Trade discounts • Fill-rate standards • Promotional support • Lead-time requirements • Product-service exclusivity agreements
Satisfying Intermediary Requirements and Trade RelationsTrade Relations Channel Conflict arises when one channel member believes another channel member is engaged in behavior that is preventing it from achieving its goals.
Satisfying Intermediary Requirements and Trade RelationsSources of Channel Conflict • Channel member bypasses another member and sells or buys direct (Wal-Mart) • Uneven distribution of profit margins among channel members (Michelin) • Manufacturer believes channel member is not giving its products adequate attention (Heinz) • Manufacturer engages in dual distribution (Elizabeth Arden)
Satisfying Intermediary Requirements and Trade RelationsChannel Power Channel Captain is a channel member that takes on the role of coordinating, directing, and supporting other channel members.
Satisfying Intermediary Requirements and Trade RelationsForms of Channel Captain Power • Ability to reward or coerce other members (Microsoft and Wal-Mart) • Expertness (American Hospital Supply) • Identification with a particular channel member (Ralph Lauren) • Legitimate right to dictate the behavior of other members (franchising)
Channel-Modification DecisionsReasons • Shifts in the geographical concentration of buyers • Inability of existing intermediaries to meet the needs of buyers • Costs of distribution
Channel-Modification DecisionsBasic Objectives • Provide the best coverage of the target market sought • Satisfy the buying requirements of the target market • Maximize revenue and minimize cost
Channel-Modification DecisionsQualitative Factors • Will the change improve the effective coverage of the target markets sought? How? • Will the change improve the satisfaction of buyer needs? How? • Which marketing functions, if any, must be absorbed in order to make the change? • Does the organization have the resources to perform new functions? • What effect will the change have on other channel participants? • What will be the effect of the change on the achievement of long-range organizational objectives?
Channel-Modification DecisionsQuantitative Assessment …considers the financial impact of the change in channel members in terms of revenues and expenses
Channel-Modification DecisionsQuantitative Assessment Example Margin to wholesalers $5,000,000 Service expense 500,000 Total cost $5,500,000 Suppose an organization is considering replacing its wholesalers with its own distribution centers. The cost of wholesalers includes:
Channel-Modification DecisionsQuantitative Assessment Example Sales to retailers $1,500,000 Sales administration 250,000 Inventory cost 935,000 Delivery and storage 1,877,000 Accounts receivable 438,000 Total cost $5,000,000 The cost of Distribution Centers:
Channel-Modification DecisionsQuantitative Assessment Example Determining the dollar value of: • Market coverage • Satisfaction of buyer needs • Channel-participant response Since using wholesalers costs $3.5 million and the cost of distribution centers would be $5 million, a cost perspective suggests selection of the latter option. However, the effect on revenues must be considered by: