Designing and Managing Integrated Marketing Channels
After reading this chapter, students should:
Know what is a marketing channel system and a value network
Know what work marketing channels perform
Know how channels should be designed
Know what decisions companies face in managing their channels
Know how companies should integrate channels and manage channel conflict
Know what is the future for e-commerce
DETAILED CHAPTER OUTLINE
Successful value creation needs successful value delivery. Holistic marketers are increasingly taking a value network view of their businesses. Instead of limiting their focus to their immediate suppliers, distributors, and customers, they are examining the whole supply chain that links raw materials, components, and manufactured goods and shows how they move toward the final consumers. Companies are looking at the suppliers’ suppliers upstream and at the distributors’ customers downstream. They are looking at customer segments and considering a wide range of different possible means to sell, distribute, and service their offerings. Companies today must build and manage a continuously evolving and increasingly complex channel system and value network.
2) MARKETING CHANNELS AND VALUE NETWORKS
Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions.
1) These intermediaries constitute a marketing channel (also called a trade channel or distribution channel).
2) Marketing channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption.
3) Some intermediaries buy, take title to, and resell the merchandise, they care called merchants.
4) Others search for customers and may negotiate on the producer’s behalf but do not take title to the goods, they are called agents.
5) Still others assist in the distribution process; but, neither takes title to goods nor negotiates purchases or sales, they are called facilitators.
The Importance of Channels: A marketing channel system is the particular set of marketing channels employed by a firm.
1) Decisions about the marketing channel system are among the most critical facing management.
2) In the United States, channel members collectively earn margins that account for 30 to 50 percent of the ultimate selling price.
3) Marketing channels also represent a substantial opportunity cost.
1) Converting potential buyers into profitable orders is one of the chief roles of marketing channels.
2) Marketing channels must not just serve markets, they must also make markets
D) The channels chosen affect all other marketing decisions:
A) The company’s pricing depends on whether it uses mass-merchandisers or high-quality boutiques.
B) The firm’s sales force and advertising decisions depend on how much training and motivation dealers need.
E) In addition, channel decisions involve relatively long-term commitments to other firms as well as a set of policies and procedures.
F) In managing its intermediaries, the firm must decide how much effort to devote to push versus pull marketing.
1) A push strategy involves the manufacturer using its sales force and trade promotion money to induce intermediaries to carry, promote, and sell the product to end user.
a. Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the stores, the product is an impulse item, and product benefits are well understood.
2) A pull strategy involves the manufacturer using advertising and promotion to induce consumers to ask intermediaries for the product, thus inducing the intermediaries to order it.
a. Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between brands, and when people choose the brand before they go to the store.
A) Channel Development
A new firm typically starts as a local operation selling in a limited market, using existing intermediaries. If the firm is successful, it might branch into new markets and use different channels in different markets.
1) International markets pose distinct challenges. Customers’ shopping habits can vary by countries.
2) The channel system evolves as a function of local opportunities and conditions.
Today’s successful companies are also multiplying the number of “go-to-market” or hybrid channels in any one-market area.
1) Companies that manage hybrid channels must make sure these channels work well together and match each target customer’s preferred ways of doing business.
2) Customers expect channel integration, characterized by the following features:
1) The ability to order a product online and pick it up at a convenient retail location
2) The ability to return an online ordered product to a nearby store of the retailer.
3) The right to receive discounts based on total online and off-line purchases.
Understanding Customer Needs: Different consumers have different needs during the purchase process.
A) Nunes and Cespedes argue that in many markets, buyers fall into one of four categories:
A) Habitual shoppers
B) High value deal seekers
C) Variety-loving shoppers
D) High-involvement shoppers
B) The same consumer may choose to use different channels for different functions in making a purchase.
C) Consumers may choose different channels for different functions in making a purchase.
A) Some consumers are willing to “trade up”.
B) Others are willing to “trade down”.
A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow. The company should first think of the target market, and then design the supply chain backward from that point.
This view has been called demand chain planning.
An even broader view sees a company at the center of a value network—a system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings.
A value network includes a firm’s suppliers, its suppliers’ suppliers, its immediate customers, and their end customers.
A company needs to orchestrate these parties to enable it to deliver superior value to the target market.
E) Demand chain planning yields several insights:
1) The company can estimate whether more money is made upstream or downstream.
2) The company is more aware of disturbances anywhere in the supply chain that might cause costs, prices, or supplies to change suddenly.
3) Companies can go online with their business partners to carry on faster and more accurate communications, transactions, and payments to reduce costs, speed up information, and increase accuracy.
F) Managing this value network has required companies to make increasing investments in information technology (IT) and software.
G) Marketers have traditionally focused on the side of the value network that looks toward the customer. In the future, they will increasingly participate in, influence their companies’ upstream activities, and become network managers.
THE ROLE OF MARKETING CHANNELS
Why would a producer delegate some of the selling job to intermediaries? Delegation means relinquishing some control over how and to whom the products are sold. Producers do gain several advantages by using intermediaries.
A) Many producers lack the financial resources to carry out direct marketing.
B) Producers who do establish their own channels can often earn a greater return by increasing investment in their main business.
C) In some cases, direct marketing simply is not feasible.
D) Intermediaries normally achieve superior efficiency in making goods widely available and accessible to target markets.
1) Through their contacts, experiences, specialization, and scale of operations, intermediaries usually offer the firm more than it can achieve on its own.
Channel Functions and Flows
A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time, place, and possession gaps that separate goods and services from those who need and want them.
a. Members of the marketing channel perform a number of key functions.
B) Some functions constitute a forward flow of activity from the company to the customer.
C) Other functions constitute a backward flow from customers to the company.
D) Still others occur in both directions.
E) The question is not whether various channel functions needs to be performed but rather, who is to perform them.
F) All channel functions have three things in common:
A) They use up scarce resources.
B) They can often be performed better though specialization.
C) They can be shifted among channel members.
Channel Levels: The producer and the final consumer are part of every channel.
1) A zero-level channel (also called a direct-marketing channel) consists of—a manufacturer selling directly to the final consumer.
2) A one-level channel contains one selling intermediary—such as a retailer.
3) A two-level channel contains two intermediaries—wholesaler and a retailer.
4) A three-level channel contains—wholesalers, jobbers, and retailers.
Channels normally describe a forward movement of products from source to user.
A) One can also talk about reverse-flow channels.
B) Reverse-flow channels are important in the following cases:
1) To reuse products or containers
2) To refurbish products for resale
3) To recycle products
4) To dispose of products and packaging
C) Several intermediaries play a role in reverse-flow channels.
Service Sector Channels
Marketing channels are not limited to the distribution of physical goods. Producers of services and ideas also face the problem of making their output available and accessible to target populations.
Marketing channels also keep changing in “person” marketing.
As the Internet and other technologies advance, service industries are operating through new channels.
Designing a marketing channel system involves analyzing customer needs, establishing channel objectives, identifying major channel alternatives, and evaluating major channel alternatives.
Analyzing Customers’ Desired Service Output Levels
In designing the marketing channel, the marketers must understand the service output levels desired by target customers.
c. Channels produce five service outputs:
1) Lot size
2) Waiting and delivery time
3) Spatial convenience
4) Product variety
5) Service backup
d. The marketing-channel designer knows that providing greater service outputs means increased channel costs and higher prices for customers.
F) Establishing Objectives and Constraints: Channel objectives should be stated in terms of targeted service output levels.
A) Channel institutions should arrange their functional tasks to minimize total channel costs and still provide desired levels of service outputs.
B) Planners can identify several market segments that want different service levels.
C) Channel objectives vary with product characteristics.
D) Channel design must take into account the strengths and weaknesses of different types of intermediaries.
E) Legal regulations and restrictions also affect channel design.
Identifying and Evaluating Major Channel Alternatives
Companies can choose from a wide variety of channels for reaching customers—from sales forces, to agents, distributors, dealers, direct mail, telemarketing, and the Internet.
A) Each channel has unique strengths as well as weaknesses.
B) Most companies now use a mix of channels.
C) Each channel hopefully reaches a different segment of buyers and delivers the right products to each at the least cost.
D) A channel alternative is described by three elements:
1) The types of available business intermediaries
2) The number of intermediaries needed.
3) The terms and responsibilities of each channel member.
Types of Intermediaries
A firm needs to identify the types of intermediaries available to carry on its channel work.
Companies should search for innovative marketing channels.
Sometimes a company chooses an unconventional channel because of the difficulty, cost, or ineffectiveness of working with the dominant channel. The advantage is that the company will encounter less competition during the initial move into this channel.
Number of Intermediaries
Companies have to decide on the number of intermediaries to use at each channel level. Three strategies are available: exclusive distribution, selective distribution, and intensive distribution.
Exclusive distribution means severely limiting the number of intermediaries.
It is used when the producer wants to maintain control over the service level and outputs offered by the resellers.
Often it involves exclusive dealing arrangements.
Exclusive deals between suppliers and retailers are becoming a mainstay for specialists looking for an edge in a business world.
Selective distribution involves the use of more than a few, but less than all, of the intermediaries who are willing to carry a particular product
Intensive distribution consists of the manufacturer placing goods or services in as many outlets as possible.
Manufacturers are constantly tempted to move from exclusive or selective distribution to intensive distribution to increase coverage and sales.
Terms and Responsibilities of Channel Members
The producer must determine the rights and responsibilities of participating channel members.
A) The main elements in the “trade-relations mix” are:
Conditions of sale
Distributors’ territorial rights
Mutual services and responsibilities
2) Evaluating the Major Alternatives
4) Each channel alternative needs to be evaluated against economic, control, and adaptive
)A Each channel will produce a different level of sales and costs.
B) Firms will try to align customers and channels to maximize demand at the lowest overall cost.
C) Sellers try to replace high-cost channels with low-cost channels as long as the value added per sale is sufficient.
Control and Adaptive Criteria
Using a sales agency poses a control problem. To develop a channel, members must make some degree of commitment to each other for a specified period of time
1) Yet these commitments invariably lead to a decrease in the producer’s ability to respond to a changing marketplace.
2) In rapidly, changing, volatile, or uncertain product markets, the producer needs channel structures and policies that provide high adaptability.
After a company has chosen a channel alternative, individual intermediaries must be selected, trained, motivated, and evaluated. Channel arrangements must be modified over time.
Selecting Channel Members
To customers, the channels are they company. Companies need to select their channel members carefully.
1) To facilitate channel member selection, producers should determine what characteristics distinguish better intermediaries.
2) They should evaluate the:
1) Number of years in business
2) Other lines carried
3) Growth and profit records
4) Financial strength
6) Service reputation
C) If the intermediaries are sales agents, producers should evaluate the:
A) Number and character of other lines carried.
B) Size and quality of the sales force.
D) If the intermediaries are department stores that want exclusive distribution, the producer should evaluate:
2) Future growth potential
3) Type of clientele
Training and Motivating Channel Members
A company needs to determine intermediaries’ needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries.
A) Stimulating channel members to top performance starts with understanding their needs and wants.
B) The company should provide training programs and market research programs to improve intermediaries’ performance.
C) The company must constantly communicate its view that the intermediaries are partners in a joint effort to satisfy end users of the product.
D) Producers vary greatly in skill in managing distributors.
E) Channel power can be defined as the ability to alter channel member’s behavior.
F) Manufacturers can draw on the following types of power to elicit cooperation:
1) Coercive power
2) Reward power
3) Legitimate power
4) Expert power
5) Referent power
G) Coercive and reward power are objectively observable.
H) Legitimate, expert, and referent power are more subjective and dependent on the ability and willingness of parties to recognize them.
I) Most producers see gaining intermediaries cooperation as a huge challenge.
J) Companies that are more sophisticated try to forge a long-term partnership with distributors.
Evaluating Channel Members
Producers must periodically evaluate intermediaries’ performance against such standards as sales quota attainment, average inventory levels, customer delivery times, treatment of damaged and lost goods, and cooperation in promotional and training programs.
a. Under performers need to be counseled, retrained, motivated, or terminated
Modifying Channel Arrangements
A producer must periodically review and modify its channel design and arrangements.
Modification becomes necessary when the distribution channel is not working as planned.
When consumer-buying patterns change
When the market expands
When new competition arises
When innovative distribution channels emerge
And when the product moves into the later stages in the product life cycle
No marketing channel will remain effective over the whole product life cycle
In competitive markets with low entry barriers, the optimal channel structure will inevitably change over time.
1) The change could involve adding or dropping individual channel members.
2) Adding or dropping particular market channels.
3) Developing a totally new way to sell goods.
I) The most difficult decision involves revising the overall channel strategy. Distribution channels clearly become outmoded, and a gap arises between the existing distribution system and the ideal system that would satisfy target customers’ needs and desires.
CHANNEL INTEGRATION AND SYSTEM
Distribution channels don’t stand still. New wholesaling and retailing institutions emerge, and new channel systems evolve.
Vertical Marketing Systems
One of the most significant recent channel developments is the rise of vertical marketing systems.
A) A conventional marketing system comprises an independent producer, wholesaler(s), and retailer(s).
B) A vertical marketing system (VMS), by contrast, comprises the producer, wholesaler(s), and retailer(s) acting as a unified system.
1) One channel member, the channel captain, owns the others, franchises them, or has so much power that they all cooperate.
C) VMSs arose as a result of strong channel members’ attempts to control channel behavior and eliminate the conflict that results when independent members pursue their own objectives.
D) VMSs achieve economies through:
2) Bargaining power
3) The elimination of duplicated services
E) There are three types of VMS:
A) A corporate VMS combines successive stages of production and distribution under single ownership.
A) An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members.
B) Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers.
C) The most advanced supply-distributor arrangement for administered VMS involves distribution programming that can be defined as building a planned, professionally managed, vertical marketing system that meets the needs of both manufacturer and distributors.
D) The manufacturer establishes a department within the company called distributor-relations planning.
1) Its job is to identify distributor needs and build up merchandising programs to help each distributor operate as efficiently as possible.
A) A contractual VMS consists of independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone.
B) Contractual VMSs now constitute one of the most significant developments in the economy.
C) They are of three types:
1) Wholesaler-sponsored voluntary chains
2) Retailer cooperatives
3) Franchise organizations
D) The traditional system is the manufacturer-sponsored retailer franchise.
E) Another is the manufacturer-sponsored wholesaler franchise.
F) A new system is the service-firm-sponsored retailer franchise
The New Competition in Retailing
The new competition in retailing is no longer between independent business units but between whole systems of centrally programmed networks (corporate, administered, and contractual) competing against one another to achieve the best cost economies and customer response.
Horizontal Marketing Systems
Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity.
Integrating Multi-Channel Marketing Systems
Most companies have adopted multichannel marketing.
Multi-channel marketing occurs when a single firm uses two or more marketing channels to reach one or more customer segments.
An integrated marketing channel system is one in which the strategies and tactics of selling through one channel reflect the strategies and tactics of selling through other channels.
By adding more channels, companies can gain three important benefits:
1) Increased market coverage
2) Lower channel cost
3) More customized selling
D) The gains from adding new channels come at a price:
New channels typically introduce conflict and control problems.
Two or more channels may end up competing for the same customers.
The new channel may be more independent and make cooperation more difficult.
E) Companies need to think through their channel architecture. They must determine which channels should perform which functions.
G) Moriarty and Moran propose using the hybrid grid to plan the channel architecture.
A) The grid shows several marketing channels (rows).
B) Several demand-generation tasks (columns)
C) The grid illustrates why using only one channel is not efficient.
G) Channels should be designed to work together effectively
CONFLICT, COOPERATION, AND COMPETITION
Channel conflict is generated when one channel member’s actions prevents the channel from achieving its goal. Channel coordination occurs when channel members are brought together to advance the goals of the channel, as opposed to their own potentially incompatible goals.
Types of Conflict and Competition
1) Vertical channel conflict means conflict between different levels within the same channel.
2) Horizontal channel conflict involves conflict between members at the same level within the channel.
3) Multi-channel conflict exists when the manufacturer has established two or more channels that sell to the same market.
1) Multi-channel conflict is likely to be especially intense when the members of one channel get a lower price (based on larger volume purchases) or work with a lower margin.
Causes of Channel Conflict
1. One major cause is goal incompatibility.
2. Some conflict arises from unclear roles and rights.
3. Conflicts can also stem from differences in perception.
4. Conflict might additionally arise because of the intermediary’s dependence on the manufacturer.
Managing Channel Conflict
As companies add channels to grow sales, they run the risk of creating channel conflict. Some channel conflict can be constructive and lead to better adaptation to a changing environment, but too much is dysfunctional. The challenge is not to eliminate conflict but to manage it better.
A) There are several mechanisms for effective conflict management.
One is the adoption of superordinate goals
a. Channel members come to an agreement on the fundamental goal they are jointly seeking.
2) A useful step is to exchange persons between two or more channel levels.
3) Co-optation is an effort by one organization to win the support of the leaders of another organization by including them in advisory councils, and the like.
4) Much can be accomplished by encouraging joint membership in and between trade associations.
5) When conflict is chronic or acute, the parties may have to resort to:
Dilution and Cannibalization: Marketers must also be careful not to dilute their brands through inappropriate channels.
Legal and Ethical Issues in Channel Relations
Companies are legally free to develop whatever channel arrangements suit them. In fact, the law seeks to prevent companies from using exclusionary tactic that might keep competitors from using a channel.
A) Many producers like to develop exclusive channels for their products.
1) When the seller requires that these dealers not handle competitors’ products, this is called exclusive dealing.
2) Exclusive dealing is legal as long as they do not substantially lessen competition or tend to create a monopoly, and as long as both parties enter into the agreement voluntarily.
3) Exclusive dealing often includes exclusive territorial agreements.
a. The producer may agree not to sell to other dealers in a given area.
b. The buyer may agree to sell only in its own territory.
(i) This second practice has become a major legal issue.
B) Producers of a strong brand sometimes sell it to dealers only if they will take some or all of the rest of the line.
1) This practice is called full-line forcing.
C) Such tying agreements are not necessarily illegal, but they do violate U.S. law if they tend to lessen competition substantially.
D) Producers are free to select their dealers, but their right to terminate dealers is somewhat restricted
1) Producers can drop dealers for “cause” but they cannot drop dealers if, the dealer refuses to cooperate in doubtful legal arrangements.
E-COMMERCE MARKETING PRACTICES
E-business describes the use of electronic means and platforms to conduct a company’s business.
(i) E-commerce means that the company or site offers to transact or facilitate the selling of products and services online.
(ii) E-purchasing means companies decide to purchase goods, services, and information from various online suppliers.
(iii) E-marketing describes company efforts to inform, communicate, promote, and sell its products and services over the Internet.
(iv) We can distinguish between pure-click companies and brick-and-click companies.
Pure-Click Companies: There are several kinds of pure-click companies.
A) Search engines
B) Internet Service Providers (ISPs)
C) Commerce sites
D) Transaction sites
E) Content sites
F) Enabler sites
1) Companies must set up and operate their e-commerce Web sites carefully. Customer service is critical.
2) Consumer surveys suggest that most significant inhibitors of online shopping are the absence of:
1) Pleasurable experiences
2) Social interaction
3) And personal consultation.
C) Some firms are employing avatars, graphical representations of virtual, animated characters that can act as company representatives.
D) Ensuring security and privacy online remain important.
F) More activity is being conducted on business-to-business (B2B) sites.
1) The impact of B2B sites is to make markets more efficient.
2) With the Internet, buyers have easy access to a great deal of information.
3) They can get information from:
a. Supplier Web sites
c. Market makers
d. Customer communities
G) The net impact is to make prices more transparent.
H) Suppliers of superior products will be able to offset price transparency with value transparency.
1) Suppliers of undifferentiated products will have to drive down their costs in order to compete.
Many companies have agonized over whether to add an online e-commerce channel. Many companies opened Web sites describing their business but resisted adding e-commerce to their sites. They felt that selling their products or services online would produce channel conflict.
A) Adding an e-commerce channel creates the treat of a backlash from retailers, brokers, agents, or other intermediaries.
B) The question is how to sell both through intermediaries and online.
C) There are at least three strategies for trying to gain acceptance from intermediaries:
1) Offer different brands or products on the Internet.
2) Offer the off-line partners higher commissions to cushion the negative impact on sales.
3) Take orders on the Web site but have retailers deliver and collect payment.
D) Some pure or predominately online companies have invested in brick-and-mortar sites.
E) Ultimately, companies may need to decide whether to drop some or all of their retailers and go direct.
Consumers and businesspeople no longer need to be near a computer to send and receive information.
1. A whole field called telematics places wireless Internet-connected computers in the dashboards of cars and trucks, and makes home appliances wireless so they can be used anywhere in or near the home.
2. Many see a big future in M-commerce (m for mobile).
3. The potential market opportunities for location-based services are enormous.