session 1 - marketing channels, structure and functions
TRANSCRIPT
Marketing Channels:
Structure and Functions
14th February 2008
Middlemen are responsible for the increase in prices!!!
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Comment!!!
Marketing Channel
is a set of
interdependent organizations
involved in the process of making
a product or service
available
for use or consumption
The purpose of a marketing channel is to satisfy the end – users in the market.
Many entities
are involved
Not an event
The purpose of
the process
Concepts underlyingthe Distribution System
A middleman is an independent business concern standing between the producer and the ultimate userEither he - Takes title to the merchandise as it flows from producer to consumer
- or he actively negotiates the transfer of title
Classifying Middlemen
Basis : Whether they take title to the products involved
Type : Merchant MiddlemenWholesalers and retailers who take title
Agent MiddlemenBrokers and manufacturer’s agents who do not take title but actively assist in the transfer of title
Exchange without Intermediaries
Cloth
Shovels
Vege-tables Baskets
Meat
Number of Exchanges
= n(n -1) 2 = 10
Where n = number of consuming units
Number of TransactionsWithout Marketing Intermediaries
In the real world the number of producing and consuming units would be far greater.
Number of Number of Units Transactions
25 300 100 4950 500 124750 1000 499500
Exchange with Intermediaries
Cloth
Shovels
Vege-tables Baskets
Meat
Number of Exchanges
= 5
Trading Post
Contact Cost to Reach the Market with and without Intermediaries
Manufacturers
Retailers
40 Contact Lines
Selling Directly
Contact Cost to Reach the Market with and without Intermediaries
Selling Through One Wholesaler
Manufacturers
Wholesaler
Retailers
14 Contact Lines
Contact Cost to Reach the Market with and without Intermediaries
Selling Through Two Wholesalers
Manufacturers
Wholesalers
Retailers
28 Contact Lines
Number of Transactions and Marketing Costs
Activities involved in sale to a retailer
Costs involved for each activity
Contact with the retailer by salesman
Travel costs and selling time to canvass biz
If it’s a new account, credit investigation
Unchanged with number of products sold
If an order is received, processing of the order
Marginal increase with increase in size of order
Delivery of the goods Unchanged or relatively higher for smaller orders
Billing Unchanged
Collection of payments Unchanged
Why are there Marketing Channels???
• Facilitation of search
• Adjustment of assortment discrepancy
• Routinization• Reduction in number of contacts
Demand side factors :
Supply side factors :
End-users’ point of view
Sellers’ point of view
What is the work of the Marketing Channels???
Performance of the
Marketing Flows
The term “FLOWS” is used (instead of functions or activities)
to emphasize that these processes flow through the channel.
Marketing Flows in Channels
Physical PossessionOwnership
Promotion
Negotiation
Financing
Risking
Ordering
Payment
Physical PossessionOwnership
Promotion
Negotiation
Financing
Risking
Ordering
Payment
Physical PossessionOwnership
Promotion
Negotiation
Financing
Risking
Ordering
Payment
Pro
du
cers
Wh
oles
aler
s
Ret
aile
rs
Con
sum
ers
Ind
ust
rial
a
nd
Hou
seh
old
Commercial Channel Subsystem
Note :Each flow carries a cost
Examples of Costs of various Flows
Marketing flow
Cost represented
1. Physical possession Storage and delivery costs
2. Ownership Inventory carrying costs
3. Promotion Personal selling, advertising, sales promotion, public relations, publicity
4. Negotiation Time and legal costs
5. Financing Credit terms, terms and conditions of sale
6. Risking Warranties, repair, after sales service costs
7. Ordering Order-processing costs
8. Payment Collections, bad debts costs
Who Belongs to a Marketing Channel???
The key members are :
Manufacturers – producer or originator of the product
Intermediaries – (wholesalers, agents, brokers,
retailers) that assist producers and manufacturers (and final
users) in the performance of negotiatory functions
End-users – either individual or business customers
Intermediaries
Refers to any channel member other than the manufacturer or the end-user.
Three types of intermediaries :
• Wholesalers
• Retailers
• Specialized – such as insurance companies, banks, shipping firms, advertising agencies
Our focus during this course is on
Market coverage
Sales contact
Inventory holding
Order processing
Market information
Customer support
Product availability
Customer service
Credit
Assortment convenience
Breaking bulk
Advice and technical support
Tasks performed
by Wholesalers
Result?
Effective and efficient marketing channelsFo
r Man
ufa
cture
rs For
Con
sum
ers
Distribution Tasks performed by Retailers
The role of a retailer in the distribution channel,
regardless of his size or type, is to :
• Interpret the demands of his customers
• Find and stock the goods these customers
want
• When they want them,
• And in the way the want them.
Facilitating Agencies
1. Transportation agencies
2. Storage agencies
3. Order processing agencies
4. Advertising agencies
5. Financial agencies
6. Insurance companies
7. Marketing research firms
What is the best channel
for a particular product???
An Analytic Framework
for Channel Design
and Implementation
Designing the Right Channel
The steps in designing the Right Channel are :
• Segmenting the market by service outputs
desired
• Positioning
• Targeting
Segmentation for
Marketing Channel Design:
Service Outputs
The Marketing Channel
System Design and Management requires starting with the
END – USERseach of whom will have differential preference for service output levels that reduce their
Search, Waiting time, Storage and other Costs
Segmenting for Channel Design
Segmenting on the basis of the demands for the outputs of the marketing channel
Service outputs include :Bulk breaking
Assortment Variety
Waiting and delivery timeSpatial convenience
Service outputs : value added
services created by channel
members and consumed by
end-users along with the
product purchased
Role of Service Output Demand Analysis in
Marketing Channel Design
After segmenting the market on the basis of SODs,
the channel manager can easily
1. Assess segment attractiveness
2. Target a subset of the segments identified
3. Customize the marketing channel system
solution for each targeted segment
Service Output Demand Differences FAMILY OFFICE EMPLOYEE
SERVICE OUTPUT
DESCRIPTOR SERVICE OUTPUT DEMAND LEVEL
DESCRIPTOR SERVICE OUTPUT DEMAND
LEVEL
Bulk-breaking “I buy groceries weekly for my family, and all of us like soft drinks”
LOW
“I’m on my coffee break and I have only have time for one can of soft drink”
HIGH
Spatial convenience
“I drive to the supermarkets in my area to shop”
LOW
“I only have 15 minutes for my break, so I need to buy whatever is handy”
HIGH
Quick delivery “We usually have some extra cans of soft drinks in the house, so I’ll just come back the next time if I can’t find the drinks I want on this trip”
LOW
“If I don’t get my soft drink right at 3:00 when my break starts, I’ll never have a chance to go back later and get one”
HIGH
Assortment and variety
“My husband and I like Coke and Pepsi, but our kids aren’t permitted to drink caffeinated soft drinks. They like caffeine-free fruit-flavored soft drinks”
HIGH
“I can’t be too particular about which soft drink I pick. It’s important to me to get one, as long as it has caffeine”
MODERATE
Service Output Demand Templatefor Laptop Computers
SERVICE OUTPUT DEMAND:
SEGMENT NAME/ DESCRIPTOR
BULK BREAKING
SPATIAL CONVENIENCE
DELIVERY/ WAITING
TIME
ASSORTMENT/ VARIETY
OTHER SERVICE OUTPUT
DEMANDS
1. Business buyer
Low
2. Home buyer
3. Student
4.
5.
High
High
High
High
High
High
High
High
High
Low
Low
Targeting
The segments to be targeted would depend upon :
Internal environment – the constraints the company faces
External environment – such as legal constraints, trade practices, channel power.
Channel design : PositioningEach segment will have its own set of service output
demands
The channel designer must therefore decide :
1. The type - optimal channel structure to produce the channel
flows 2. The identity – exact identity of the channel partner to use at
each level of the channel
3. The intensity – how many of each type of channel members
of the channel members at each levelAt the minimum channel flow cost
Channels of Distribution - LevelsConsumer Goods
Manufacturer
Manufacturer Agent Wholesaler Retailer
CO
NS
UM
ER
Manufacturer
Manufacturer Wholesaler
Retailer
Retailer
Zero Level
One Level
Two Level
Channels of DistributionIndustrial Goods
Manufacturer
CO
NS
UM
ER
ManufacturerManufacturer’s
Agent
ManufacturerIndustrial
Supply House
Channel Design
Establish new channels – Zero based
channel design
Modify existing channels – after a
Gap Analysis (the differences between the zero
based and actual channels)
Demand and Supply Side Gaps
Demand Side Gaps – at least one of the service output demands is not being appropriately met by the channel.
Service Output
Undersupplied
Oversupplied
Dissatisfaction
High cost leading to dropin sales and market share
Supply Side Gaps – at least one flow in the channel is carried out at too high a cost
Channel Power
A channel member’s
power to control
the decision variables
in the marketing strategy of
another member
in a given channel at a
different level of distribution
Channel Conflict
When one channel member’s actions prevents the channel from achieving its goal, there is Channel Conflict.
Types of Channel Conflicts :
* Goal conflict
* Domain conflict
* Perceptual conflict
Channel Management Schematic1.
SEGMENTATION
Define SODs by segment
Identify environmental characteristics and constraints
2.POSITIONING
Define optimal channel flow
performance for each segment
Define optimal channel
structure for each segment
4A. ESTABLISH NEW CHANNELS
Channel flow performance
Channel structure
3.TARGETING
Choose segments to target, subject to:
Environmental bounds
Managerial bounds
Competitive Benchmarks
4B. REFINE EXISTING
CHANNELS
Channel flow performance
Channel structure
Gap Analysis
CHANNEL DESIGN PROCESS
THAT’S ALL FOR TODAY!!!