Marketing Management

Marketing Channels

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Success story of Raymond's due to effective distribution channel

Raymonds The Complete Man 350 outlets at prime locations in India and abroad Wardrobe solution to man through popular brands like Park Avenue, Parx, Color Plus etc. Outlet covering 1 million square feet space, offers over 3000 shades and designs. Park Avenue toiletries and tailoring facilities. Well designed and well maintained interiors, attractive displays, superb assortment, spacious movement and well trained sales persons.
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Meaning
Marketing channels / Distribution channels are sets of interdependent organizations involved in the process of making a product or service available for use or consumption. They are the set of pathways a product or service follows after production, resulting in purchase and use by the final end users. It connect the manufacturer with the consumer and help in the distribution of goods.

Manufacturer

Intermediaries

Consumer

Distribution http://www.facebook.com/mr.fortyseven Channel

Purpose

Buying Purchasing a broad assortment of goods from the producer or other channel members. Carrying Inventory Assuming the risks associated with purchasing and holding an inventory. Successive storage and movement of goods. Selling Performing activities required for selling goods to consumers or other channel members. Transporting Arranging for the shipment of goods to the desired destination. Financing Providing funds required to cover the cost of channel activities.
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Contd.
Promoting Contributing to national and local advertising and engaging in personal selling efforts. Negotiating Attempting to determine the final price of goods and the terms of payment and delivery. Marketing Research (Information) Providing information regarding the needs of customers. Servicing Providing a variety of services, such as credit, delivery and returns.

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Levels of Channels
By channel level we mean how many intermediaries are there between the producer and consumer. Distribution channels are usually of two types, namely zero level channel or direct marketing channel and indirect marketing channel. Direct Marketing Channel or Zero Level Channel This type of channel has no intermediaries In this distribution system, the goods go from the producer direct to the consumer. Companies use their own sales force to reach consumers. Eg. Eureka Forbes which markets water purifiers in Indian market. Producer
Zero Level Channel
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Consumer

Contd.
Indirect Marketing Channel These are typical channels in which a third party is involved in the distribution of products and services of a firm. It can be classified into following categories : 1. One-Level Channel- In this type of channel there is only one intermediary between producer and consumer. This intermediary may be a retailer or a distributor. It is used for specialty products like washing machines, refrigerators etc.
Producer Distributor / Retailer Consumer

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Two-Level Channel This type of channel has two intermediaries, namely, wholesaler/distributor and retailer between producer and consumer. It can be seen in medicines.
Producer Wholesaler/ Distributor Retailer Consumer

Three-Level channel This type of channel has three intermediaries namely distributor, wholesaler and retailer. This pattern is used for convenience products like soaps, toothpaste etc.
Distributor Wholesale r Retailer Consume r
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Producer

Fourth-Level Channel This type of channel has four intermediaries, namely Agent, Distributor, Wholesaler and Retailer. It is used for consumer durable products.
Agent Distributor Wholesaler Retailer

Producer

Consumer

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Channel Alternatives
Following is a list of common types of intermediaries Company Sales Force Company uses its own sales force for direct marketing. The manager can assign sales quota for each territory and sells products directly to consumers. Middlemen Anybody acting as an intermediary between the producer and the consumer.

Agent or Broker Intermediaries with legal authority to market goods and services and to perform other functions on behalf of the producer are called agents or brokers. Agents generally work for producers continuously, whereas brokers may be employed for just any deal. Wholesaler Organizations that buy from producers and sell to retailers and organizational customers. Primarily deal in bulk. Retailer They purchase goods from wholesalers or from the producer and sell directly to final customers. Distributor These individuals and firms perform several functions, including inventory management, personal selling and financing . The basic difference between an agent and distributor is that while agents work on commission basis, distributors deal on their own account.

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Dealer It is the same intermediary as distributor. Dealers are those intermediaries who sell only to final customers not to other intermediaries. Value-Added Resellers They are intermediaries that buy the basic product from producers and add value to it or modify it and then then resell it to final customers. Merchants They are intermediaries that assume ownership of the goods they sell to customers or other intermediaries. Carrying and Forwarding Agents They are people and organizations that assist the flow of products and information to marketing channels, including transportation, storage, banking and insurance functions.

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Factors affecting Channel choice

Distribution factors
The marketing manager should decide how many intermediaries he should use for distributing his products.

Intensive Distribution A channel strategy that seeks to make products available in as many appropriate places as possible. This strategy is used for fast moving consumer goods and products, which are of high and frequent demand, like food items and daily use personal care product categories. For eg. Titan Watches are available through different outlets and products of HUL Selective Distribution A channel strategy that limits availability of products to a few carefully selected outlets in a given market area. Gain adequate market coverage with more control and less cost. Eg. Nokia phones.

Exclusive Distribution Only one outlet in a market territory is allowed to carry a product or a product line. Eg. Avon Cosmetic products are distributed only through direct distribution channel outlets of herley davidson bike

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Market Factors Analyzing and understanding the target market is the first step in selecting marketing channels. Customer preferences The channel, which is more preferred by customers. Organizational customers Frequently have buying habits that are different from those of other customers. Ex. Kuk buy stationery in bulk amount in each year Geography Customer location is another important factor, determining the type of channel to be used. Competitors A good channel choice is a channel that has been overlooked or avoided by competitors.
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Product Factors

Life cycle A product categorys stage in the life cycle can be an important factor in selecting a channel, and channels may have to be adjusted over time. Customers require less support once the product has established itself.

Product complexity Some products are so complicated and require so much support that producers need to stay closely involved. This indicates either a direct sales force or a limited number of highly qualified intermediaries. For eg. Scientific equipments, jet aircraft, nuclear reactors, pharmaceuticals and computers.
Product Value Items with low cost and high volume are usually distributed through large, well established distribution networks, such as grocery wholesalers. Product size and weight A product with significant size and weight can face restricted distribution channel options. Consumer Perception- The perceptions customers have of products and producers also play a role in channel decision.

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Producer/ Manufacturer Factor Company objective The overall objective of a company influences its marketing channel choice. Company resources Various distribution options require different levels of resources and investment. Desire for control The need to control various aspects of the marketing process like pricing, positioning, brand image, customer support and competitive presence influence a producers selection of the channel system. Breadth of Product Life Producer with several products in a related area faces a channel situation that is different from those with one or two products.

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Channel Design Decisions

Analysis of Customers Desired Service output levels

Establishing Channel objectives and constraints

Identifying major Channel alternatives

Evaluating major channel alternatives

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1.

2.

3.

4.

5.

Analysis of Customers desired Service output levels Marketer must understand the service output levels its target customers want. Channels produce five service outputs. Lot size The number of units the channel permits a typical customer to purchase on one occasion. A household wants a channel that permits buying a lot size of one. Wholesalers buy in bulk. Waiting and Delivery time Average time customers of that channel wait for receipt of the goods. Customers prefer faster delivery channels. Spatial Convenience Expresses the degree to which the marketing channel makes it easy for the customers to purchase the product. Product Variety Assortment breadth provided by marketing channel. Customers prefer a greater assortment because more choices increase the chance of finding what they need. Service backup Add on services (credit, delivery, installation, repairs) provided by the channel.
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II. Establishing objectives and constraints Channel members should be evaluated on the basis of the cost structure of maintaining the channel. A channel with low cost is always preferred. Broad objectives include : Availability of product in the target market. Smooth movement of the product from the producer to the consumer. Cost effective and economic distribution. Information communication from the producer to the consumer. Channel objectives vary with product characteristics. Perishable products require more direct marketing. Bulky products such as building materials require channels that minimize the shipping distance and the amount of handling. Complex machinery are sold directly by company sales representative.

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III. Identifying major channel alternatives Each channel has its own strengths and weaknesses. Sales force is expensive but can handle complex products. 1. Types of Intermediaries For eg. Car perfume manufacturer identifies the following channel alternatives : Sell its car perfumes to automobile manufacturers. Auto dealers Retail automotive equipment dealers Mass merchandisers such as Best Buy or eZone. Authorised service centers. 2. Innovative Channel Alternatives HULs Operation Shakti involves Self Help Group women to distribute the product in rural areas. Avo ns Chain Marketing.
3.

Number of Intermediaries Exclusive Distribution Gucci Selective Distribution Nokia, Intensive distribution FMCG Products. Terms and responsibilities of Channel members Price Policy Producer to establish a price list and schedule of discounts and allowances. Conditions of sale Payment terms Distributors territorial rights Mutual services and responsibilities.

4.

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IV. Evaluating the major alternatives 1. Economic Criteria Estimate how many sales are likely to be generated by a company sales force. Cost of selling different volume through each channel Comparing sales and cost. 2. Control and adaptive criteria Sales agency poses a control problem. Seeking to maximize the profit. Agents concentrate on the customer who buy the most, not necessarily who buy the manufacturers goods. Manufacturers seek to choose such distribution channel which will provide them the flexibility to adapt to any changing marketing environment.
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Channel Management Decisions

Selecting Channel Members

Training and motivating Channel members

Evaluating Channel Members

Modifying Channel Design and Arrangements

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I.

Selecting Channel Members Company should select channel partners based on number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness and service reputation. If the intermediaries are department stores, the producer should evaluate locations, future growth potential and type of clientele.
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II. Training and motivating Channel Members A company has to determine and understand the needs and wants of intermediaries. Plan and implement careful training program, Marketing Research program and Capability building program to improve intermediaries performance. For eg. Microsoft takes Certification exam and provide Microsoft Certified Professionals certificates to those who pass the exam. Producers draw on the following types of power : Coercive Power Manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate. Reward Power Offers an extra benefit for performing specific acts or functions. Legitimate Power Requests the behavior that is warranted under the contract. Expert Power Manufacturer has special knowledge the intermediaries value. Referent Power Manufacturer is so highly respected that intermediaries are proud to be associated with it. Eg. IBM, HP, Caterpillar etc.
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3. Evaluating Channel Members Producers must periodically evaluate intermediaries performance against such standards as sales quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs. Producers pay specified amounts for the trade channels performance of each agreed upon service. Underperformers need to be counseled, retrained, motivated or terminated.
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4. Modifying Channel design and arrangements Manufacturers periodically review and modify channel design and arrangements when the distribution channel is not working as planned, consumer buying patterns change, the market expands, new competition arises, innovative distribution channels emerge and the product moves into the later stages in the PLC.

Apple was distributing Laptops initially through Retail Stores but got disappointed by poor retail presentation by others. Now they are selling the product exclusively through company stores where there is a full line of Apple products, software and accessories and Apple specialists providing technical support. They conduct instore presentations and workshops for tech savvy customers.

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Vertical Marketing System (VMS)

It refers to a distribution channel structure in which the producer, wholesalers and retailers act as a unified system. The major or dominant player called channel captain owns the others and has so much power that all others cooperate in sales, delivery and service. He tries to control the behavior of other channel members and resolve conflicts arising due to independent behavior of channel members to pursue their own goals of profit maximization.

Producer

Wholesaler
Retailer

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Horizontal marketing System (HMS)

In HMS two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the capital, know how, production or marketing resources to venture alone or it is afraid of the risk. The companies might work with each other on a temporary or permanent basis or create a joint venture company. For eg. Post offices selling insurance and mutual funds. Companies like HUL entering a strategic tie-up with Pepsico India for bottling and distribution of Liptons Ready to Drink and other beverages.

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Multichannel Marketing System

It occurs when a single firm uses two or more marketing channels to reach one or more customer segments. Eg. Disney sells its DVDs through five main channels movie rental stores, Disney stores, Retail stores such as Target, online retailers such as Amazon.com and Disneys own online Disney Stores. Benefits Increased market coverage More customers are able to shop for the companys products in more places.

Lower Channel cost Selling by phone is cheaper than selling via personal visits to small customers. More customized selling Adding a technical sales force to sell more complex equipment.

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Difficulties in multichannel marketing Adding new channels incur costs. Introduce conflict and problems with control. Two or more channels may end up competing for the same customers. New channels may be more independent and make cooperation more difficult.
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Channel conflict
Channel conflict is generated when one channel members actions prevent another channel from achieving its goal. Eg. General Motors came into conflict with its dealers in trying to enforce policies on service, pricing and advertising. Types of Conflict Vertical channel conflict Conflict between two members at different levels within the same channel. A manufacturer having a conflict with a distributor is an example of vertical conflict. For eg. HUL came into conflict with its distributors in Kerala on the issue of commissions.

Horizontal channel Conflict Involves conflict between members at the same level within the channel. For eg. Bangalore Ford Dealers complained about other Ford Dealers advertising and pricing too aggressively. Multichannel conflict When the manufacturer has established two or more channels that sell to the same market. For eg. Companies getting into direct online sales through Web marketing have also received boycott threats from the established distributors.

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Causes of Channel conflict

Goal Incompatibility Manufacturers may want to achieve rapid market penetration through a low price policy. Dealers, in contrast, may prefer to work with high margins and pursue short run profitability. Unclear roles and rights Geographical territory boundaries , credit for sales and commission issues always create conflict. For eg. HP sells personal computers to large accounts through its own sales force but its licensed dealers may also be trying to sell to large accounts. Differences in perception Manufacturer may be optimistic about the short term economic slowdown and want dealers to carry higher inventory. Dealers may be pessimistic and assume that slowdown will last long and are not ready to carry high inventory. Intermediaries dependence on the manufacturer Fortunes of exclusive dealers such as auto dealers are profoundly affected by the manufacturers product and pricing decisions.
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Managing Channel Conflict

Effective conflict management can be done by Adoption of superordinate goals Channel members come to an agreement on the fundamental goal they are jointly seeking, whether it is survival, market share, high quality or customer satisfaction.

Exchange of employees GM executives might agree to work for a short time in some dealerships and some dealership owners might work in GMs dealer policy department. Participant will grow to appreciate each others point of view. Joint membership in trade associations For eg. There is good cooperation between the grocery manufacturers and the Food Marketing Institute, which represent most of the food chains, this cooperation led to the development of Universal Product Code (UPC).
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Co-optation An effort by one organization to win the support of the leaders of another organization by including them in advisory councils, boards of directors and the like. Diplomacy, Meditation and Arbitration Diplomacy when each side sends a person or group to meet with its counterparts to resolve the conflict. Meditation means resorting to a neutral third party skilled in maintaining the two parties interests. Arbitration occurs when the two parties agree to present their arguments to one or more arbitrators and accept the arbitration decisions. Legal recourse File a lawsuit if nothing works.
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Pure click companies Selling only through online channel. Eg. Amazon.com, eBay etc. Brick and Click companies Companies initially selling through retail stores and now starting online channel. Eg. Pantaloons has both offline and online selling channel. Selling through stores and www.futurebazaar.com
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Four categories of Non-store Retailing

Direct selling (multilevel selling and network marketing) Selling door to door or at home sales parties. In direct selling , a salesperson goes to the home of a host who has invited friends; the salesperson demonstrates the product and takes orders. Multilevel (network) marketing, consists of recruiting independent businesspeople who act as distributors. The distributors compensation includes a percentage of sales of those the distributor recruits as well as earnings on direct sales to customers. Eg. Amway, tupperware etc.
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Direct marketing Telemarketing and Internet selling. Eg. Amazon.com Automatic Vending used for a variety of merchandise like milk, coffee, beverage and money. Buying service Storeless retailer serving a specific clientele usually employees of large organizations who are entitled to buy from a list of retailers.
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Wholesaling
Includes all the activities in selling goods or services to those who buy for resale or business use. Buy from manufacturer and sell to retailers. Functions Selling and promoting Wholesalers sales force helps manufacturers reach many small business customers at a relatively low cost. Wholesalers have more contacts, and often buyers trust wholesalers more than they trust a distant manufacturer.

Buying and assortment building Wholesalers are able to select items and build the assortments their customers need, saving the customers considerable work.

Bulk breaking Wholesalers achieve savings for their customers through buying in large carload lots and breaking the bulk into smaller units.

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Warehousing Wholesalers hold inventories, thereby reducing inventory costs and risks to suppliers and customers.

Transportation Wholesalers can often provide quicker delivery to buyers because they are closer to the buyers.
Financing Wholesalers finance customers by granting credit, and finance suppliers by ordering early and paying bills on time.

Risk bearing Wholesalers absorb some risk by taking title and bearing the cost of theft, damage, spoilage and obsolescence.
Market Information Wholesalers supply information to suppliers and customers regarding competitors activities, new products, price developments and so on.

Management services and counseling Wholesalers often help retailers improve their operations by training sales clerks, helping with store layouts and displays and setting up accounting and inventory control systems.

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