Marketing Channels

Moving the Product from Moving the Product from Manufacturer to Manufacturer to

ConsumerConsumer

What is a Distribution Channel?

• organized system of organized system of marketing institutions marketing institutions and their and their interrelationships that interrelationships that promotes the physical promotes the physical and title flow of goods and title flow of goods and services from and services from producer to consumer producer to consumer or business useror business user

Distribution Channels and Utility

• Time UtilityTime Utility– available “when” want to purchaseavailable “when” want to purchase

• Place UtilityPlace Utility– available at convenient locationsavailable at convenient locations

• Ownership UtilityOwnership Utility– title passes from producer to intermediary to title passes from producer to intermediary to

consumerconsumer

When is a New Channel Formed?

• the channel begins with the channel begins with the producer and ends the producer and ends with the last person or with the last person or organization buying it organization buying it without making any without making any significant changes in significant changes in its formits form

• New form - new New form - new channel emerges (ex: channel emerges (ex: bolts of cloth)bolts of cloth)

Members of the Channel• Producers/ManufacturersProducers/Manufacturers• IntermediariesIntermediaries

– firm or individual that operates between the firm or individual that operates between the producer and the final consumerproducer and the final consumer

• Facilitating IntermediariesFacilitating Intermediaries– not officially apart of the channelnot officially apart of the channel– aid in the distribution processaid in the distribution process– examples: banks, transportation firms, insurance examples: banks, transportation firms, insurance

companiescompanies

Does Removing the Middleman Cut Prices?

• Not Necessarily! They provide functions Not Necessarily! They provide functions that must be performed that must be performed

• Their removal would only shift this Their removal would only shift this responsibility to another channel memberresponsibility to another channel member

• Functions include:Functions include:– arranging for a good’s sale and transfer of titlearranging for a good’s sale and transfer of title– promoting the productpromoting the product– storing the productstoring the product

Designing Distribution Channels

• Delineating the Role of Delineating the Role of DistributionDistribution– offensive or defensive offensive or defensive

strategystrategy

• Selecting the Type of Selecting the Type of ChannelChannel

• Determining Intensity Determining Intensity of Distributionof Distribution

• Choosing Specific Choosing Specific Channel MembersChannel Members

Selecting the Type of Channel

• Direct DistributionDirect Distribution– producer and the final customer; no producer and the final customer; no

middlemenmiddlemen

• Indirect DistributionIndirect Distribution– at least one level of middlemenat least one level of middlemen

– selection may be impacted by whether selection may be impacted by whether another channel member is effectedanother channel member is effected

Four Channel Types Widely Used

• Producer --> ConsumerProducer --> Consumer– door-to-door, telephone, mail, tvdoor-to-door, telephone, mail, tv

• Producer --> Retailer --> ConsumerProducer --> Retailer --> Consumer– cars, appliances, clothingcars, appliances, clothing

• Producer-->Wholesaler-->Retailer-->ConsumerProducer-->Wholesaler-->Retailer-->Consumer– convenience productsconvenience products

• Producer-->Agent-->Wholesaler-->Retailer--Producer-->Agent-->Wholesaler-->Retailer-->Consumer>Consumer

Business Goods Channels • Producer-->User - greater dollar volumeProducer-->User - greater dollar volume

• Producer-->Industrial Distributor (Merchant Producer-->Industrial Distributor (Merchant Wholesaler)Wholesaler)– operating supplies, small business accessoriesoperating supplies, small business accessories

• Producer-->Agent-->UserProducer-->Agent-->User– firms without their own sales departmentfirms without their own sales department– new products or entering a new marketnew products or entering a new market

• Producer-->Agent-->Industrial Distributor-->User Producer-->Agent-->Industrial Distributor-->User used when not feasible to sell through agents to userused when not feasible to sell through agents to user

Additional Notes of Interest

• Distribution Channels for Not-for-Distribution Channels for Not-for-Profits tend to be short, simple and Profits tend to be short, simple and direct. direct. – Intermediaries tend to be agentsIntermediaries tend to be agents

• Reverse ChannelsReverse Channels– backward movement of goodsbackward movement of goods

• recycling, recalls, repairsrecycling, recalls, repairs

Multiple Channels of Distribution• Dual DistributionDual Distribution

• Use this approach when want to reach different Use this approach when want to reach different types of markets when they are selling:types of markets when they are selling:– the same product to both the consumer and the same product to both the consumer and

business marketsbusiness markets– unrelated products (margarine and paint)unrelated products (margarine and paint)– size of the buyer varies greatlysize of the buyer varies greatly– density differs across parts of the marketdensity differs across parts of the market

• Competing ChannelsCompeting Channels

Vertical Marketing Systems

• Tightly coordinated distribution channels Tightly coordinated distribution channels designed to achieve efficiencies and marketing designed to achieve efficiencies and marketing effectiveness. Three ways to achieve:effectiveness. Three ways to achieve:– Corporate VMSCorporate VMS– Contractual VMSContractual VMS

• wholesaler sponsored (True Value)wholesaler sponsored (True Value)• Retailer Co-ops (IGA Grocery)Retailer Co-ops (IGA Grocery)• Franchises (McDonald’s)Franchises (McDonald’s)

– Administered VMS - depend on channel leaderAdministered VMS - depend on channel leader

Factors Impacting Choice of Channels• Market Considerations - type of market, # of potential Market Considerations - type of market, # of potential

customers, geographic concentration, order sizecustomers, geographic concentration, order size• Product Considerations - unit value, perishability, Product Considerations - unit value, perishability,

technical naturetechnical nature• Middlemen Considerations - availability of desired Middlemen Considerations - availability of desired

middlemen, attitude of middlemen towards policies of middlemen, attitude of middlemen towards policies of producerproducer

• Company Considerations - desire for channel control, Company Considerations - desire for channel control, services provided by the seller, ability of management, services provided by the seller, ability of management, financial resourcesfinancial resources

Determining Intensity of Distribution

• Intensive DistributionIntensive Distribution– sell to every outlet consumer might reasonably sell to every outlet consumer might reasonably

looklook– convenience goodsconvenience goods

• Selective DistributionSelective Distribution– multiple retailersmultiple retailers– shopping goods, accessory equipmentshopping goods, accessory equipment

• Exclusive DistributionExclusive Distribution– specialty goodsspecialty goods

Conflict and Control in Channels

• Channel ConflictChannel Conflict– one channel perceives another to be acting in a way to one channel perceives another to be acting in a way to

prevent the first from achieving its distribution prevent the first from achieving its distribution objectivesobjectives

– two types of conflict - horizontal and verticaltwo types of conflict - horizontal and vertical

• Horizontal ConflictHorizontal Conflict– among firms at the same level: competitionamong firms at the same level: competition

– can occur between middlemen of the same type can occur between middlemen of the same type (Kroger and Food Lion) or different types (Walmart (Kroger and Food Lion) or different types (Walmart and Kroger)and Kroger)

Scrambled Merchandising

• middlemen add products they don’t middlemen add products they don’t traditionally carrytraditionally carry

• often causes conflictoften causes conflict

• middlemen are aware that middlemen are aware that consumers prefer one-stop shopping, consumers prefer one-stop shopping, so broaden their assortment and add so broaden their assortment and add higher margin itemshigher margin items

Vertical Conflict

• Different levels in the same channelDifferent levels in the same channel

• producer has a different point of view than producer has a different point of view than the wholesaler/retailerthe wholesaler/retailer

• market conditions often precipitate these market conditions often precipitate these problems when producer tries to bypass the problems when producer tries to bypass the wholesaler and sell directly to the consumerwholesaler and sell directly to the consumer

• example: Pillsbury and Haagen Dazexample: Pillsbury and Haagen Daz

Channel Control

• ability to influence ability to influence other channel other channel membersmembers

• manufacturers manufacturers traditionally held traditionally held this positionthis position

• retailers emerging retailers emerging as very powerfulas very powerful