chapter 7 marketing channel strategy and management

Chapter 7Chapter 7

Marketing Channel Strategy and Management

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In this chapter, you will In this chapter, you will learn about…learn about…

1. The Channel-Selection Decision

The Design of Marketing Channels

Channel Selection at the Retail Level

Channel Selection at Other Levels of

Distribution

2. Dual Distribution and Multi-Channel Marketing

Dual Distribution

Multi-Channel Marketing

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In this chapter, you will In this chapter, you will learn about…learn about…

3. Satisfying Intermediary Requirements and

Trade Relations

Intermediary Requirements

Trade Relations

4. Channel-Modification Decisions

Qualitative Factors in Modification

Decisions

Quantitative Factors in Modification

Decisions

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A marketing channel consists of

individuals and firms involved in

the process of making a product or

service available for consumption

or use by consumers and industrial

users.

What is a marketing What is a marketing channel?channel?

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Links a producer to buyers

Performs sales, advertising, and

promotion

Influences the firm’s pricing strategy

Affects product strategy through branding

policies, willingness to stock and

customize offerings, install, maintain,

offer credit, etc.

Role of the channel in Role of the channel in marketing strategymarketing strategy

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The Channel-Selection The Channel-Selection DecisionDecision

Fundamental QuestionsFundamental Questions

Who are potential customers?

Where do they buy?

When do they buy?

How do they buy?

What do they buy?

- Avon Cosmetics example

The marketing manager must answer the following questions:

Traditional Marketing Channel Traditional Marketing Channel DesignsDesigns

Producer

Ultimate Buyers

Retailers or Dealers

Distributors or Wholesalers

Brokers or Agents

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The Design of Marketing The Design of Marketing ChannelsChannels

Use intermediaries to reach target market

typelocationdensitynumber of channel levels

Contact ultimate buyers directly

using its own sales force or distribution outletsusing the Internet through a marketing Web site or electronic storefront

vs.INDIRECT DIST. DIRECT DIST.

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The Design of Marketing The Design of Marketing ChannelsChannels

Buyers are easily identifiable

Personal selling is a major component of the communication mix

Organization has a wide variety of offerings for the target market

Sufficient resources are available

Direct distribution is typically used when:

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Intermediaries are not available for reaching target markets

Intermediaries do not possess the capacity to service the requirements of target markets

Direct distribution must be considered when:

The Design of Marketing The Design of Marketing ChannelsChannels

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Intermediaries can perform distribution functions more efficiently and less expensively

Customers are hard to reach directly

Organization does not have resources to perform distribution function

Indirect distribution must be considered when:

The Design of Marketing The Design of Marketing ChannelsChannels

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The Design of Marketing The Design of Marketing ChannelsChannels

Electronic marketing channels employ

some form of electronic communication,

including the Internet, to make products

and services available for consumption

or use by consumers and industrial

users.

Ultimate Buyers

Amazon.com Dell.comTravelocity.com

Representative Electronic Marketing Representative Electronic Marketing ChannelsChannels

Autobytel.com

Book Publisher

Book Distributor

Amazon.com (Virtual Retailer)

Dell Computers

Airline

Travelocity (Virtual Agent)

Auto Manufacturer

Auto Dealer

Auto-By-Tel (Virtual Broker)

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The Design of Marketing The Design of Marketing ChannelsChannels

Disintermediation is the elimination of

traditional intermediaries and direct

distribution through electronic

marketing channels.

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Channel Selection at the Channel Selection at the Retail LevelRetail Level

Channel Selection DecisionsChannel Selection Decisions

1. Which channel and intermediaries will

provide the best coverage of the target

market?

2. Which channel and intermediaries will

best satisfy the buying requirements of

the target market?

3. Which channel and intermediaries will be

the most profitable?

Channel Selection at the Channel Selection at the Retail LevelRetail Level

Target Market CoverageTarget Market Coverage

Exclusive IntensiveSelective

Levi’sSony

RolexFaberge

Wrigley’sCoke

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Channel Selection at the Channel Selection at the Retail LevelRetail Level

Effective Distribution occurs when a limited number of retail outlets account for a significant fraction of the market potential.

Example: A marketer distributes the product through 40% of available outlets, but these outlets account for 80% of the market.

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Channel Selection at the Channel Selection at the Retail LevelRetail Level

Satisfying Buyer RequirementsSatisfying Buyer Requirements

Information

Convenience

Variety

Attendant services

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Channel Selection at the Channel Selection at the Retail LevelRetail Level

ProfitabilityProfitability

Margins = Revenues – Channel Costs

Channel costs are:

- Distribution costs

- Advertising costs

- Selling costs

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Specialty wholesaler– Limited line of items within a product

line

General-merchandise wholesaler– Wide assortment of products

General-line wholesaler– Complete assortment of items in a

single retailing field

Combination

Channel Selection at Other Channel Selection at Other Levels of DistributionLevels of Distribution

Types of WholesalerTypes of Wholesaler

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occurs when an organization distributes its offering through two or more different marketing channels that may or may not compete for similar buyers

the main consideration is whether it will provide incremental sales revenue or cannibalize existing sales

Dual DistributionDual Distribution

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own brand and private store brand

distribution to large and small retailers

multibrand strategy

geographic factors

Dual DistributionDual DistributionWhen is it usedWhen is it used

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Hallmark

Sells Hallmark brand cards through Hallmark stores and selected department stores

Sells Ambassador brand cards through discount drugstore chains

Dual DistributionDual DistributionExampleExample

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Multi-channel marketing involves the

blending of an electronic marketing

channel and a traditional channel in

ways that are mutually reinforcing in

attracting, retaining, and building

relationships with customers.

Multi-Channel MarketingMulti-Channel Marketing

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An electronic marketing channel can provide incremental revenue (Victoria’s Secret)

An electronic marketing channel can leverage the presence of a traditional channel (Ethan Allen)

Multi-channel marketing can satisfy buyer requirements (Clinique division of Estée Lauder)

Multi-Channel MarketingMulti-Channel MarketingJustificationsJustifications

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Multi-Channel MarketingMulti-Channel MarketingConsiderationsConsiderations

Actual incremental revenue or merely

cannibalization?

Incremental cost to launch and sustain

an electronic forefront

Disintermediation – a traditional

intermediary member is replaced by

electronic storefront

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Improvements in product assortments

Trade discounts

Fill-rate standards

Promotional support

Lead-time requirements

Product-service exclusivity agreements

Satisfying Intermediary Satisfying Intermediary Requirements and Trade Requirements and Trade

RelationsRelationsIntermediary RequirementsIntermediary Requirements

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Satisfying Intermediary Satisfying Intermediary Requirements and Trade Requirements and Trade

RelationsRelationsTrade RelationsTrade Relations

Channel Conflict arises when one

channel member believes another

channel member is engaged in

behavior that is preventing it from

achieving its goals.

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Channel member bypasses another member and sells or buys direct (Wal-Mart)

Uneven distribution of profit margins among channel members (Michelin)

Manufacturer believes channel member is not giving its products adequate attention (Heinz)

Manufacturer engages in dual distribution (Elizabeth Arden)

Satisfying Intermediary Satisfying Intermediary Requirements and Trade Requirements and Trade

RelationsRelationsSources of Channel ConflictSources of Channel Conflict

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Satisfying Intermediary Satisfying Intermediary Requirements and Trade Requirements and Trade

RelationsRelationsChannel PowerChannel Power

Channel Captain is a channel

member that takes on the role of

coordinating, directing, and

supporting other channel members.

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Ability to reward or coerce other

members (Microsoft and Wal-Mart)

Expertness (American Hospital Supply)

Identification with a particular channel

member (Ralph Lauren)

Legitimate right to dictate the behavior of

other members (franchising)

Satisfying Intermediary Satisfying Intermediary Requirements and Trade Requirements and Trade

RelationsRelationsForms of Channel Captain PowerForms of Channel Captain Power

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Channel-Modification Channel-Modification DecisionsDecisions

ReasonsReasons

Shifts in the geographical concentration of buyers

Inability of existing intermediaries to meet the needs of buyers

Costs of distribution

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Channel-Modification Channel-Modification DecisionsDecisions

Basic ObjectivesBasic Objectives

1. Provide the best coverage of the target market sought

2. Satisfy the buying requirements of the target market

3. Maximize revenue and minimize cost

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1. Will the change improve the effective coverage of the target markets sought? How?

2. Will the change improve the satisfaction of buyer needs? How?

3. Which marketing functions, if any, must be absorbed in order to make the change?

4. Does the organization have the resources to perform new functions?

5. What effect will the change have on other channel participants?

6. What will be the effect of the change on the achievement of long-range organizational objectives?

Channel-Modification Channel-Modification DecisionsDecisions

Qualitative FactorsQualitative Factors

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…considers the financial impact of

the change in channel members in

terms of revenues and expenses

Channel-Modification Channel-Modification DecisionsDecisions

Quantitative AssessmentQuantitative Assessment

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Margin to wholesalers $5,000,000

Service expense 500,000

Total cost $5,500,000

Suppose an organization is considering

replacing its wholesalers with its own

distribution centers. The cost of wholesalers

includes:

Channel-Modification Channel-Modification DecisionsDecisions

Quantitative Assessment ExampleQuantitative Assessment Example

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Sales to retailers $1,500,000

Sales administration 250,000

Inventory cost 935,000

Delivery and storage 1,877,000

Accounts receivable 438,000

Total cost $5,000,000

The cost of Distribution Centers:

Channel-Modification Channel-Modification DecisionsDecisions

Quantitative Assessment ExampleQuantitative Assessment Example

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Channel-Modification Channel-Modification DecisionsDecisions

Quantitative Assessment ExampleQuantitative Assessment Example

Since using wholesalers costs $3.5 million

and the cost of distribution centers would

be $5 million, a cost perspective suggests

selection of the latter option. However, the

effect on revenues must be considered by:

Determining the dollar value of:

– Market coverage– Satisfaction of buyer needs– Channel-participant response