Chapter 13Marketing Channels Professor Jason C. H. Chen, Ph.D. School of Business Administration Gonzaga University Spokane, WA 99223 firstname.lastname@example.org
After studying this chapter, you should be able to: • Explain the functions and key activities of marketing channels. • Discuss the role of intermediaries in marketing channels. • Distinguish between direct and indirect marketing channels.
After studying this chapter, you should be able to: • Illustrate how some firms use multiple channels successfully. • See how marketing-channel decisions are related to other key marketing decision variables. • Understand how power, conflict, and cooperation affect the operation of a marketing channel. • Give examples of ethical and legal issues encountered in the operations of marketing channels.
Product Place Price Promotion C Overview of Marketing Strategy Planning Process Narrowing down to focused strategy with quantitative and qualitative screening criteria Customers Needs and other Segmenting Dimensions S. W. O. T. Segmentation & Targeting Company Objectives & Resources Segmentation & Positioning Competitors Current & Prospective External Market Environment Technologies Political and Legal Cultural and Social Economic
Consumer and Business-to-Business Marketing Channels P C P R C P W R C P A W R C Key: P =Producer A =Agent C =Consumer W =Wholesaler R =Retailer Consumer and business-to-business marketing channels Exhibit 13-1 Consumer channels
Key: P =Producer A =Agent C =Consumer W =Wholesaler R =Retailer Consumer and Business-to-Business Marketing Channels Consumer and business-to-business marketing channels Exhibit 13-1 Business-to-business channels P BB P W BB P A BB P A W BB
Place Decisions in the Marketing Mix • Making products available in the right quantities and locations—when customers want them • Channels of distribution • Focus on institutions involved in getting product to the customer • Logistics • Focus on the physical flow of the product • Facilities needed for storing and transporting • Customer service levels to satisfy customers
Strategy Decision Areas in Place Place Objectives Type of channel Customer services level desired Inventory level Transportation Arrangements Facilities needed Information technology needed Direct Indirect Degree of market Exposure desired (intensive, selective, or exclusive) Middlemen/ facilitator needed (many types, Chapters 12-13) How to manage Channel relationships
The Importance of Marketing Channels • Marketing channels determine how and where customers buy.
Key Functions Performed in Marketing Channels • Marketing Communications • Advertising the Product • Providing P-O-P Displays • Providing a salesforce that offers information & service to customers • Inventory Management • Ordering appropriate merchandise assortment • Maintaining adequate stock to meet customer demand • Storing merchandise in an appropriate facility • Physical Distribution • Delivering products • Coordinating delivery schedules to meet customer expectations • Arranging for the return of defective merchandise
Key Functions Performed in Marketing Channels • Market Feedback • Serving on manufacturer advisory boards • Informing other channel members of competitive activity • Participating in test market evaluations • Financial Risk • Offering credit • Managing risks related to product loss or deterioration • Managing risks related to product safety and liability
Contributions of Intermediaries • Provide Economic Value • Provide Social Value • Provide Marketing Support • Impact Supply-chain Management • Add Value to the Market Offering
Types of Marketing Channels • Direct Channels • Indirect Channels • Single Marketing Channels • Multiple Marketing Channels • Vertical Marketing Systems
Companies Using Direct Marketing Channels Exhibit 13-3 Companies using direct marketing channels Personal selling Business buyer: Truck manufacturers Producer: Cummins Engine Co. (International market) Diesel engine Telemarketing, direct response advertising Consumer Producer: Munder Capital Man- agement (International market) Mutual Fund Producer: Dell Computer Corp. (International market) Personal computers Toll-free phone/fax ordering, internet Consumer
Companies Using Indirect Marketing Channels Exhibit 13-4 Examples of indirect channels A B Producer: Thousands of manufacturers Examples: Black & Decker, Stanley Tools, 3M, Weedeater Producer: Beecham Products Examples: Aqua-Fresh toothpaste, Mennen aftershave, Sucrets lozenges Wholesaler: Orgill Brothers, one of the world’s largest hardware Wholesalers, located in Memphis, Tennessee Retailers: Thousands of hardware stores Retailers: Thousands of drug, grocery & discount stores Examples: Wal-mart, Kroger, Eckerd Drugs, Walgreens Ultimate consumers: Millions of people in the United Stated, Mexico, South & Central America Ultimate consumers: Millions of people around the world
Companies Using Vertical Marketing Systems Exhibit 13-5 Types of vertical marketing systems Channel systems Corporate Forward integration: Polo, Laura Ashley, Gulf States Paper Corp. Backward integration: Winn-Dixie grocery chain Description One channel member owns one or more other channel members Contractual Wholesaler-sponsored voluntary groups: Ace Hardware, Western Auto Retailer-sponsored cooperative groups: Affiliated Grocers, Cotter & Company (True Value Hardware) Franchise system: McDonald’s, Holiday Inns, Personnel Pool of America Description Channel members operate according to contractual agreement Administered Abbott Labs, General Electric, Rolex Description Channel members operate according to agreed-upon plan
Vertical Marketing Systems • Whole channel focuses on the same target market at the end of the channel • Corporate channel systems • corporate ownership all along the channel • often involves vertical integration • Administered channel systems • informal agreements among channel members • Contractual channel systems • legal contracts among channel members • Alliances are also popular • Usually short term, and may involve a whole network of firms
Characteristics of Traditional and Vertical Marketing Systems Type of Channel Vertical marketing Systems Characteristics Traditional Administered Contractual Corporate Fairly good to good Complete Amount of cooperation Little or none Some to good Control Maintained by None Economic Power and leadership Contracts Ownership By one company General Electric, Miller Beer, O.M. Scott & Sons (lawn Products) Examples Typical Channel Of “ inde- pendents” McDonald s, Holiday Inn, IGA, Ace Hardware, Super Valu, Coca-Cola, Chevrolet Florsheim Shoes, Sherwin- Williams, Mothers Work
Factors Related to the Use of Direct Distribution • Direct (producer to customer) distribution is more common when: • the customer is a business or organization (rather than a final consumer) • an aggressive personal selling effort is required and/or when customers need special technical service • the product is primarily a service rather than a physical good • when working with middlemen would make it difficult to maintain control of the marketing mix • the producer can perform marketing functions more efficiently (economically) by itself • Internet websites are making direct distribution easier and more common
Managing Marketing Channels Exhibit 13-7 Managing marketing channels • Develop channel • strategy & • Objectives • Buyer preferences • Relationship orientation • Degree of market coverage • Evaluate channel • alternatives • Capabilities & costs • Internal • Intermediaries • Collaborators/ strategic allies • Compatibility • Product considerations • Pricing considerations • Marketing communications considerations • Availability • Determine • channel structure • Direct versus indirect channel • Single versus multiple channels • Vertical marketing system • Implement • channel strategy • Trial period & thereafter • Set performance expectations • Create communications network • Evaluate • channel • performance • Financial performance • Working relationships • Ethical & legal issues • Future considerations Formulate firm’s marketing objectives & strategy
Formulating Marketing Objectives and Strategies • Marketing channel objectives and strategies must be compatible with overall marketing strategy.
Developing Channel Objectives and Strategy • The development of channel strategies requires decisions in three key areas: • Buyer Preferences • Relationship Orientation • Degree of Market Coverage
Evaluating Channel Alternatives • Evaluation of Capabilities and Costs • Evaluation of Channel Compatibility: • Product Considerations • Pricing Considerations • Marketing Communications Considerations • Evaluation of Availability
Determining Channel Structure • The key question is “What channel structure is best for us to use?” Direct of Indirect Channels? Single or Multiple Channels? Vertical Marketing Systems?
Implementing Channel Strategy • Run a Trial Period • Set Performance Expectations • Create Communication Networks
Channel Captain • A manager who helps direct the activities of the whole channel • Tries to develop cooperation and avoid or resolve conflicts • May be either a producer or middleman • Big retail chains increasingly taking this role • Guides the whole channel to compete better with other channels • Effective allocation of functions • A common product-market commitment
Evaluating Channel Performance • Financial Evaluation • Evaluate Working Relationships • Evaluate Legal and Ethical Issues
Financial Evaluation In the short run channel members will accept low levels of financial performance In the long run channel members must have positive financial results to sustain channel relationships
How Channel Functions May Be Shifted and Shared in Different Channel Systems. A. How strategy decisions are handled in a producer-led channel, and B. How strategy decisions are handled in a retailer-led channel
Intensive Distribution Exclusive Distribution A Continuum of Distribution Intensity Selective Distribution PepsiCo Soft Drinks Florsheim Shoes Steinway Pianos Wrigley Chewing Gum Maytag Appliances Stride Rite (Kids & Baby Smart) At Target
Level of Market Exposure • Intensive • selling through all responsible and suitable wholesalers and retailers who will stock and/or sell the product • Selective • selling through only those middlemen who will give the product special attention • Exclusive • selling through only one middleman in a particular geographic region
Selective Distribution • Sell only through middlemen who give the product special attention • Avoids dealing with middlemen who: • have poor credit standing • make too many returns • require too much service • place only small orders • can't or won't do a satisfactory job • Becoming more popular • less expensive than intensive distribution • better cooperation among channel members
Reverse Channels of Distribution • Reverse channels are channels used to retrieve products that customers no longer want • Examples of situations: • recall of unsafe products • return of products from incorrectly filled order • return of products under warranty • return of products customer orders in error • return of products customer orders online • return of products to be recycled (bottles, etc.)
Evaluating Working Relationships • Channel Power • Reward Power • Legitimate Power • Expert Power • Referent Power • Coercive Power • Channel Leader Power • Channel Conflict • Channel Cooperation
Evaluate Legal and Ethical Issues • Are any laws being violated? • Are any exclusive territories set up? • Are any exclusive dealing arrangements being made? • Are resellers being bound to tying contracts?
Future Considerations for Channel Management • Firms must always ask “How well can this channel be expected to perform in the future?” • Companies will be forced to alter their channels because of: • Changing consumer preferences • Intense competition • Innovation in information technology