Channels of Distribution

Some Basics

• What is a marketing channel?

• Why is a marketing channel needed?

• Inadequate finances for selling function

• Customers’ desire for product assortment

• Better rate of return on core business

• Contact “efficiency”

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Distributor’s Economic Role

Manufacturer Distributor Customer

TransferredBusiness Costs

TransferredBusiness Costs

InventoryOrder HandlingSellingCredit

InventoryFreightStorageShrinkageOrder Handling

Generic Channel Functions

• Product Information• Promotion & Demand Generation• Product Customization• Quality Assurance• Lot Size• Assortment• Availability• After Sales Service• Logistics• Financing• Waiting Time• Spatial Convenience

Channel Members

• Direct Sales Force

• Distributors: Purchase goods from suppliers, take title and assume risks of ownership and sell goods to end-users or other resellers (Wholesalers). Economies of Scope

• Captive Distributors

• Agents: Similar to distributors but do not take title and work on commissions (Manufacturer Rep). Carry fewer product lines.

• Brokers: Similar to agents but carry a large number of suppliers for shorter periods (Agricultural commodities and used equipment).

• Retailers

• Decision Variable for Supplier: Number of Levels in Channel

Steps in Channel Design

1. Find out what yourcustomers want

2. Identify AlternativesDetermine Costs

3. Bound the “ideal”Impose Constraints

4. Evaluate and Compare Alternatives

What are the desired service outputsWhat tradeoffs do they make: betweenoutputs and with priceUse tradeoff information to generate segments

Explore real & hypothetical alternativesTypes, Number (Exclusive-Selective-Intensive), Terms Are options feasible? What kind of supportneeded? Costs and their implications in terms ofrequired market share increase, etc.

Get top mgt. reactions to effects on efficiency, effectiveness,and flexibilityDevelop list of objectives for distribution from top mgt.Legal restriction, prejudices and biasesOther managerially relevant constraints

Benchmark existing channel capabilities and competitors’channels w.r.t. customers’ channel function requirementsCompare “ideal” system from Step 2. with Step 3. constraintsUse Economic Criteria (breakeven analysis: when are variousstructures suitable); Control Criteria; Flexibility Criteria

Determining Channel Function Priorities - Example of Operational Detail

Most Important Functions• Product Information: Customers would like complete technical knowledge of

product construction. Prefer availability of expert to supervise installation and initial use. After this, customers would be satisfied to exchange performance results via computer, seeking assistance only when necessary

• Product Warranty: Customers would prefer a 3-year warranty and are not willing topay more than a 5% premium to receive the same. In case of a product breakdown, they would like it to be repaired within 4 hours, and in any case not beyond 24 hours. Customers are willing to pay lobar charges if repaired within 4.

Somewhat Important (but not critical)• Application Engineering: Customers would like application engineers to visit

installations every month to assist in optimizing the system in operation

• Availability of Complementary Products: Customers would like to source complementary products simultaneously from the same channel source, if possible.

• Credit Terms: Customers would like 90-day credit term, if possible, but they can live with 30-day credit terms.

Lead UserInput

Channel Benchmarking

Large Customer Segment

1. Product Information2. Product Warranty3. Application Engineering4. Assortment5. Credit Terms

1. Assortment2. Credit Terms3. Product Warranty4. Product Information5. Application Engineering

Customer’s DesiredLevel of

Customer’s DesiredLevel of

Small Customer Segment

Competitor Seller

Seller Competitor

Implications of Benchmarking

• Large customers’ needs could potentially be served by direct sales force, and small customers by a distribution channel

• But, can also serve large customers with a combination of a direct sales force and distributord with the former handling product information, warranty and application engineering functions and the distributors dealing with credit terms and product assortment

• A channel task force needs to identify creative channel alternatives with the potential of getting vloser to customers’ ideal requirements

Generating Alternatives

Seller

AgentsSales Force

Distributors

Large Customers

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Option 1: Current MethodOption 2: Sales Force and Distributors sharing channel functionsOption 3: Agents and Distributors sharing channel functionsOption 4: Sales Force performing all channel functions

In-House Experts /LineManagers

Optimal Channels for 3 Segments

Do-ItYourself

Customers

Large, Medium & SmallIndustrial Customers

Seller

Sales Force Distributors

Dealers Dealers

IndustrialLarge

Customers

Industrial:Medium &

Small

Seller

Sales Force

Dealers1

2 3 4

Optimal 2ndBest

Channel Management Decisions

• Selecting Channel Members• P&G in Japan

• Motivating Channel Members• Micromerchandising by Kraft• Notion of Fairness: A dental supply company, instead of paying a straight

35% commission to distributors, pays 20% for carrying out the basic sales work, 5% for carrying a 60 day inventory, 5% for paying bills on time and 5% for reporting consumer purchase information

• Evaluating Channel Members• Sales quota attainment; average inventory levels; customer delivery time;

treatment of lost and damaged goods; co-operation in promotional & training programs

Channel Dynamics: Designer Apparel

Boutiques

MassMerchandisers

Off-PriceStores

Better DepartmentStore

Value added by channel

High Low

Low

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MarketGrowth

Rate

Vertical Marketing Systems (VMS)

• Conventional Channels

• Independent producer, wholesaler and retailer

• Double marginalization problems

• VMS

• Producer, wholesaler and retailer act as a unified system

– Corporate VMS: Vertical Integration

– Administered VMS: Co-ordination through power of one player (e.g., P&G)

– Contractual VMS: Franchising

Franchising

• Formal contract governing• Supply• Responsibilities• Division of profits

• Franchisors provide– Use of trademark– Access to product– Co-operative advertising– Training– Standardized operating procedures– Site selection– Plant design– Financing

Why Franchise?

• Versus Vertical Integration

• Decentralized decision making

• Responsiveness to local conditions

• Clearer management objectives

• Versus Verical Separation

• Risk sharing

• Legitimate authority

• Ownership of company owned outlets as role models and as trial grounds

Horizontal Marketing Systems

• Two or more non-related companies put together resources or programs to exploit an emerging market opportunity

• Each company individually lacks the capital, know-how, production or marketing resources to go it alone

• Airline companies: British & American; Lufthansa & United; KLM & Northwest

Multichannel Marketing Systems•When a single firm uses two or more marketing channels to reach one or more customer segments.•Gain increased market coverage; lower channel cost and more customized selling•Downside - conflict and control problems•Generate a hybrid grid to design channel architecture. Use marketing tasks as basis

Nat. A/C Mgt

Direct Sales

Telemarketing

Direct Mail

Retail Stores

Distributors

VARs

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hann

els

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ds

BIG CUSTOMERS

MIDSIZE CUSTOMERS

SMALL CUSTOMERS

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Demand Generation Tasks

Example of Multichannel Marketing: IBM

Cost of Using only DirectSalesforce

Cost of Using DifferentChannels

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DEALER

TELEMARKETING

SALESFORCE

NATIONALACCOUNTS

Small, Rural Small, Urban Medium Large Very LargeCUSTOMER SIZE

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COST($)

Conflict

Conflict

Channel Conflict

• Vertical

• Coca-Cola and bottlers wanting to bottle Dr. Pepper

• Horizontal

• Some Ford dealers coplaining about other dealers being too aggressive in their pricing

• Multichannel

• Anne Klein opening own stores while distributing through large department stores

Causes of Conflict

• Goal Incompatibility

• Manufacturer wants to achieve rapid market growth via lower prices; retailer interested in large margins

• Unclear roles and rights

• Territory boundaries, who gets credit for sale

• Differences in perception

• Optimistic manufacturer, pessimistic retailer

• Level of dependence

• Of retailer on manufacturer or vice-versa

Managing Channel Conflict

• Superordinate Goals

• Exchange of persons

• Co-optation

• Include members of other organization on advisory councils, boards, etc.

• Joint membership in trade associations