MARKETING CHANNELS/ DISTRIBUTION
MBA / BBA MARKETING MANAGEMENT
QUESTION PAPER 2019 APRIL
PUNE UNIVERSITY
DEFINITIONS OF MARKETING CHANNELS
According to American Marketing Association,
“A channel of
distribution, or marketing channel, is the structure of intra-company
organization units and extra company agents and dealers, wholesale and retail
through which a commodity, product or service is marketed.”
According to Philip
kotler, “Every producer seeks to links together the set of Marketing
intermediaries that best fulfill the firm’s objectives.
This set of marketing
intermediaries is called the Marketing Channels. (Also called Trades channel or
Channel of Distribution.)”
According To William J Stanton,“ A Channel of
distribution for product is the rout taken by the title to the goods as they
move from the producer to the ultimate consumer or industrial user.”
According to Cundiff,
Still and Govani, “Marketing channel are the distribution network through which
producers produce flow to the market.”
– Physical flow –
Title flow –
Payment flow –
Information flow –
Promotion flow
Tasks of Intermediaries -
Wholesalers
• Break down ‘bulk’
• Buys from producers and
sell small quantities to retailers
• Provides storage facilities
• Reduces contact cost
between producer and consumer
• Wholesaler takes some of
the marketing responsibility
e.g. sales force, promotions
Tasks of Intermediaries -
Retailer
• Much stronger personal
relationship with the consumer
• Hold a variety of
products
• Offer consumers credit
• Promote and merchandise
products
• Price the final product
• Build retailer ‘brand’ in the high street
It is only through distribution that public
and private goods and services can be made available for the use of
consumptions.
The emergence and
arrangement of wide variety of distribution oriented institution and agencies,
typically called Intermediaries because they
stand between production on other hand and consumption on other,
can be explained in
following terms;
iii.Intermediaries can
improve the efficiency of the process.
iv.They help in the proper
arrangement of the rout of transactions.
v. They help in the
searching process.vi.They help in sorting process.
To build the channel
members loyalty.
To stimulate channel
members to put greater selling efforts.
To develop managerial
efficiency in the channel organization.
To identify your
organization at buyer level.
To have an effective and
efficient distribution system, to make your product and services available.
– Physical distribution and insuring product
availability.
– Market Information.
– Promotional Support.
– Bearing the risk and
reducing the cost.
– Storing – Providing help
, support and services to the customers.
– Negotiation with customers.
– Prospecting (finding,
communicating, and tracking prospective buyers)
– Financing (acquiring and using funds to cover the costs or carrying out the channel work) Break down ‘bulk’
Importance of Marketing Channels
Time and Place utility.
Convenience to
Consumers.
Relive from Marketing
Problems.
Information to the
producer.
Stability in Prices.
Promotional Activities.
Storage of finished
goods.
Finance the producer.
Functions of Marketing Channels
Information Provider.
Price Stability.
Promotion.
Financing.
Title.
Help in Production
Function.
Matching Demand and
Supply.
Matching Buyer And
Seller.
Information (gathering and distributing information and intelligence)
• Promotion (development
and spreading marketing communications)
• Contacts (Finding and
communicating with prospective buyers)
• Negotiation with
customers (reaching an agreement on price and other terms)
• Physical distribution
(transporting and storing goods) 40
Prospecting (finding,
communicating, and tracking prospective buyers)
• Financing (acquiring and
using funds to cover the costs or carrying out the channel work)
• Risk taking (assuming
the risks of carrying out the channel work) • Break down ‘bulk’
• Provides storage facilities
Channels Strategies/ Policies.
Intensive Distribution.
Selective Distribution.
Exclusive Distribution.
Intensive Distribution
The intensive is a form
of distribution in which the manufacturer distributes his products through as
many outlets as possible.
This type of is used for
those products that are characterized by low involvement of the customer and
where customers look for location convenience.
Products like chocolate,
biscuits, shaving blades, soaps and detergents are distributed in this manner,
so they are easily
available to the customer at their nearest location.
Manufacturer are
constantly tempted to move from exclusive or selective distribution to more
intensive distribution to increase the coverage and the sales.
This strategy help long
term but hurt long term performance.
Titan watches - Titan
sells its through seven different channels; world of titan, Time zone,
ValueMart, Sonata stores, Titan Signet Club, Tanishq boutiques, and private
multi brand outlets.
These channels – some of which are only
present in selected cities –
provide Titan with wide range coverage, cover
different price points, and target different segments of customers.
It helps Titan generate sales volume while
protecting its brand image at the same time.
Selective Distribution.
Here, the firm selects
some outlets to distribute its products.
This alternative help to
focus the selling efforts of the manufacturing firm on the few outlets rather
than disappointing it over countless marginal ones.
It also enables the firm
to establish a good working relationship with channel members.
Selective distribution can
help the manufacturer gain optimum market coverage and more control but at
lesser cost than intensive distribution.
Selective distribution
is appropriate for consumers shopping goods,
such as various types of
clothing and appliances and business accessory equipments,
such as office equipments
and Hand held tools.
In contrast, company may
choose to be a more selective after some experience with intensive
distribution.
The decision to change usually hinges on the
high cost of intensive distribution or the unsatisfactory performance of
middlemen.
A firm may move towards
more selective distribution to enhance the image of its products, strengthen
customer services,
improve quality control, and or maintain some
influence over its prices.
Exclusive Distribution
When the firm
distributes its brand through just one or two major outlets in the market, who
exclusively deal in it and not all competing brands, we say that the firm is
using an exclusive distribution strategy. This is a common from products and
brands that seeks high prestigious image.
Typical example are
designer ware, major domestic appliances and even automobiles.
By granting exclusive
distribution rights , the manufacturer hopes to have control over the
intermediaries price, promotion, credit inventory and service policies.
As the manufacturer uses
a relative fewer number of distribution channel , he can maintain good relation
with the channel members and as a result, expect an increased marketing effort
from them.
Exclusive Distribution
Branded menswear like
color plus, Arrow, Zodiac, Lee and so on are available at exclusive showroom as
well as other distribution channel.
Channel Design
Steps involved in
Designing a Channel System.
2.Formulating Channel
Objectives.
3.Identifying Channel
functions.
4.Linking design to
Product Characteristics.
5.Evaluation of the
distribution Environment.
6.Evaluation of
competitors Channels Design.
7.Matching Channel Design
to Company Resources.
8.Evaluating the
Alternatives and Selecting the Best.
Step I -
Formulating Channel Objectives.
Formulation of channel
objective is the first step in designing a channel systems.
The objective clarify what
is to be achieved by having the channels.
All firm seeks to realize
certain common objectives by having the channel. In addition, they may also
have some specific objectives depending on unique circumstances.
The common objectives
ared) The effective coverage of target market.
e) Efficient and cost
effective distribution.f) Ensuring that consumer incur minimum effort in
procuring product.
g) Helping the firm to
carry on manufacturing uninterrupted, confidence that the channels will take
care of sales.
h) Partnering the firm in
financing and sub distribution.
Id e n t if y in g c h a n n e l f u n c t io n s .
There are various
functions of channel like, Information Provider, Price Stability, Promotion,
Financing, Title, Help in Production Function, Matching Demand and Supply,
Matching Buyer And Seller.
Step III –
Linking Channel Design to Product Characteristics.
Different product
requires different channel systems. The firm should analyze the characteristics
of product and choose the channel system that matches the product best.
Consumer goods and the and
industrial goods, for example, need different channels.
And within the category
consumer goods, different sub-category such as convenience goods, shopping
goods, and specialty goods may need different channels
Evaluation of the Distribution Environment.
While selecting the
channel design, the firm should also take account the distribution environment
pertaining in the country/territory.
It should evaluate the
vital features of the distribution environment and ensure that the proposed
channel design is compatible with them.
Distribution environment
in the broader sense includes the trade related legal environment as well.
The legal implication of channel design must be carefully examined before taking a final decision.
Step V –
Evaluation of Competitors Channel Design.
The firm should also
study the competitors channel patterns before deciding its channel design.
While the firm may not
necessarily follow the competitors in channel design,
it should analyze the plus and minus of
channel pattern adopted by each of its competitors.
Step VI –
Matching the Channel Design to Company Resources.n Firm with the
Limited
Resource Settle for
conventional channels –
firm with limited resources and small volume
of business will normally find it difficult and uneconomical to opt for own
channels.
For such firms,
establishing branch showrooms/depots/retail outlets of their own will result in
high distribution cost , which they can not afford.
They are better of by depending on unconventional channels.
Firms with larger
resources have more options –
Firms with larger
resources and larger marketing operation can go in for varied distribution
channels.
In fact, in India firms which may are strong resources usually operates two parallel channels one reaching out to the customers through company depots and showrooms and other through conventional intermediaries.
Step VII -
Evaluating the alternative and selecting the best.
Economic evaluation;
Balancing cost; Efficiency and Risk.
Conceptual Evaluation; Flexibility and Capability.
Channel Management Decisions.
Selecting Channel
Members.
Training and Motivating
Channel Members.
Evaluating Channel
Members.
Modifying Channel design and Arrangement.
Selecting Channel Members.
Producer vary in their
ability to attract qualified intermediaries.
Whether producer find it
very easy or difficult to recruit intermediaries,
they should at least
determine what characteristics distinguish the better intermediaries.
They will want to evaluate
number of year in business, other lines carried, growth and profit record,
solvency, cooperativeness and reputation.
If the intermediaries
are sales agent, producer will want to evaluate number of character of other
line carried and the size and quality of sales force.
If the intermediaries are
department store and want exclusive distribution,
the producer will want to evaluate locations,
future growth potential and type of clientele.
Market consideration
b) Consumer or industrial
Market.
c) Number of potential
customers.
d) Size of order.e) Buying
habits of customers.
f) Geographical
concentration of Market.
Product Considerationsh)
Unit value.i) Product
Line.
j) Standardized Product.
k) Technical Nature.
l) Bulk and weight.
Selecting Channel Members.
Company Consideration
2. Volume of Production.
3. Financial Resources.
4. Experienced and
competent Management.
5. Services provided by
the channels.
6. Desire for control of
channels.
Middleman Consideration
8. Availability of desired
middlemen.
9. Financial ability.
10.Attitude of middlemen
11.Sales potential
12.Cost
13.Competition and legal constraints.
Training to Channel Members
Companies need to plan
and implement careful training programs for their distributors and dealers,
because the intermediaries
will be viewed as the company by end users.
Field Training
Orientation Programme.
Training for Paper work.
Training for Paper work.
Training for Care of
Company Products.
Technical Training.
Installation Training.
Servicing Training
Motivating Channel Members
A company needs to view
its intermediaries in the same way that it views end users.
The company needs to
determine intermediaries need and construct a channel positioning such that its
channel offering is tailored to provide superior value to these intermediaries.
The company provide
training programme, market research programme and other capability building
programme to improve intermediaries performance.
The company must constantly communicate its view that the intermediaries are partner in joint effort to satisfy end using consumers.
Coercive Power occurs
when manufacturer threatens to withdraw a resources or terminates a
relationship if intermediaries fail to cooperate.
This power can be quite
effective if intermediaries are highly dependent upon the manufacturer.
But the exercise of
coercive power produces resentment and can lead the intermediaries to organize
countervailing power.
It occurs when the
manufacturer offer intermediaries an extra benefits for performing specific
acts or functions.
Reward power typically produces better results
than coercive but it can be overrated.
Expert power can be
applied when the manufacturer has special knowledge that the intermediaries
value.
Once the intermediaries acquires this
expertise, however the expert weakens.
The manufacturer must
continue to develop new expertise so that intermediaries will want to continue
cooperating
Legitimate Power is
wielded when the manufacturer requires a behavior that is warranted under the
contract.
The manufacturer feels it has this right and
the intermediaries have this obligation. As long as the intermediaries view the
manufacturer as a legitimate leader, legitimate power works.
It occurs when the
manufacturer is so highly respected that intermediaries are proud to be
associated.
Companies such as IBM,
caterpillar and Hewlett-Packerd have high referent power.
Evaluation provides the information necessary
to decide which channel members to retain and which to drop.
Shortfalls in distributor
skills and competences may be identified through evaluation and appropriate
training programmes organized by producer.
Evaluation criteria includes sales volume and value, profitability, level of stocks, quality and position of display, new account opened, selling and marketing capabilities, quality of services provided to customers, market information feedbacks, ability and willingness to keep commitment, attitudes and personal capabilities.
Case study DELL
Dell
Customer could custom
design the exact pc they wanted, and rigorous cost cutting allowed for low
everyday price.
Sound like a winning
formula?
It was for almost two
decades.
But 2006 saw the company
encounter a number of problems that led to step stock price decline.
First, reinvigorated
competitors such as HP narrowed the gap in productivity and price.
Always focused more on the
business market, dell struggled to sell effectively to the consumer market.
A shift in consumer preferences
to buy in retail stores as opposed to buying direct didn’t help,
but self- inflicted damage
from an ultra efficient supply chain model that squeezed cost- and quality- out
of customer service was perhaps the most painful.
Managers evaluate call
center employees primarily on how long they stayed on each call- a recipe for
disaster as scores of customer cell center employees
Primarily on how long they
stay on each call- a recipe for disaster as scores of customer felt there
problem where ignored or not properly handled .
A lack of R&D spending
that hindered new product development.
1.
‘Business-to-Consumer’(B2C)Distribution Channels/ Consumer Channels.
2. ‘Business-Business’
(B2B) Distribution Channels/Industrial Channels.
“Business-to-Customer (B2C) distribution
occurs between the producer and the final user.”
2. “Business-to-Business
(B2B) distribution occurs between a producer and industrial users of raw
materials needed for the manufacturer of finished products.”
1. Direct
2. Indirect
3. Hybrid
A distribution system is said to be direct
when the product or service leaves the producer and goes directly to the
customer, with no middlemen involved.
• For example, – Company
owned outlets –
Car wash – Barber utilize
direct distribution because the customer receives the service directly from the
producer.
– The jewelry manufacturer who sells its
products directly to consumer.
Indirect Distribution Channel:
An indirect distribution
channel relies on intermediaries to perform most or all distribution functions,
otherwise known as wholesale distribution.
– Ex: A company (suppose
Samsung mobiles) may sell the product through its exclusive company owned
outlet and website, as well as through independent retailers.
Distribution Channel for Consumer Products
Zero Level channel/Direct Marketing Channel:
It consists of a
manufacturer directly selling to the end consumer.
• Ex. – Door to Door
sales, – Direct mails or – Telemarketing.
It has an intermediary in between the producer
and the consumer.
Ex. – An insurance policy
in which there is an insurance agent between the insurance company and the
customer.
It consists of two intermediaries between
manufacturer and consumers, usually a wholesaler and a retailer.
• It is a widely used
marketing channel in the FMCG and the consumer durables industry.
It can combine the roles of a distributor on
top of a dealer and a retailer.
The distributor stocks the most and spreads it
to dealers who in turn give it to retailers.
• It as usually observed
in both the FMCG and the consumer durables industry.
Major Channel Alternatives/Types of Intermediaries are:
1. Merchants (Wholesalers
and Retailers).
2. Agents and Brokers/
Manufacturers’ Representatives/ Sales agents
3. Facilitators
(Transportation companies, Independent warehouses, Banks, and Advertising
agencies).
Merchants (Wholesalers and Retailers) are
intermediaries that buy and resell products.
– They take title to, and resell the products.
Agents and Brokers/
Manufacturers’ Representatives/ Sales Agents chase customers and may bargain on
the producer’s behalf .
– They but do not take
title to the products.
Facilitators
(transportation companies, independent warehouses, banks, and advertising
agencies), help in the distribution process .
– They neither take title
to goods nor negotiate purchases or sales.
Factors affecting Distribution Channel Choice
Factors related to
Market/Consumers. –
Number of buyers
– Expansion/spread of the
Consumers.
– Size of the Order/Sale.
– Objective of Purchase.
– Need of the Credit Facilities. 32
• Factors related to Product.
– Price of the product
– Standardised or
customised product
– Perishability of the product
– Technical nature of the
product
– Goods made to order.
– After-sales service.
Factors related to the
Intermediary/Middlemen
– Services offered by
middlemen.
– Scope or possibilities of quantity of sales.
– Attitude of agents towards the producers'
policies.
– Cost of channel of
distribution.
• Factors related to the
Producer /Company
– Level of production.
– Financial resources of
the company.
– Managerial competence and
experience.
• Other Factors
– Distribution channel of
competitors.
– Social viewpoint.
– Freedom of changing the
middleman.
Push Strategy:
“A push strategy uses the
manufacturer’s sales force, trade promotion money, and other means to induce
intermediaries to carry, promote, and sell the product to end users” • “Pushing
the product “down” through the distribution channel to the customer”.
– Incentives to agents and
intermediaries
Pull Strategy:
“A pull strategy uses
advertising, promotion, and other forms of communication to persuade consumers
to demand the product from intermediaries”.
• Pulling the customer “up” through the
distribution to the channel – Traditional media/private sales/CRM.
Channel Management
“Channel Management is a process by which a
producer or supplier directs marketing activity by selecting, involving,
training and motivating the entities comprising its channel of distribution”.
• “Channel Management
refers to the administration of existing channels to secure the cooperation of
channel members in achieving the firm’s distribution objectives”.
Channel Management involves- 1. Selection of
channel members 2. Training of channel members 3. Motivating channel members 4.
Evaluation of channel members 5. Conflict management 44
Selection of Channel Members
Selecting a distribution
channel is an important aspect of building a competitive advantage for
businesses of every size. • The right distribution channel ensures that
customers in different locations around the country, or around the world, can
buy products and get the right level of service from the firm.
. Factors in Selection of Channel Members
• To select the right distribution channel for
business, company need to consider what a channel can offer to company,
including-
– Location
– Reach (The channel must
be easily accessible for customers and prospects)
– Skills (channel member
should have the skills and knowledge to sell products)
– Resources
– Management costs and
– Degree of control
. Motivating Channel Members
“Channel Motivation refers
to the actions taken by the manufacturer to foster strong channel member
cooperation in implementing the manufacturer’s distribution objectives”. •
Channel motivation can be done by two ways-
– Positive motivation
– Negative motivation
• Positive motivation:
To motivate intermediaries
the firm can use positive actions, such as-
– Offering higher margins
to the intermediary,
– Special deals,
– Premiums and Incentives
may be offered for reaching performance goals
– Allowances for
advertising or display.
Negative motivation:
On the other hand, negative actions may be
used, such as-
– Threatening to cut back
on margin, or
– Hold back delivery of product.
–Sanctions may be imposed
middlemen not performing well
Training of Channel
Members
An effective channel management requires
channel members to be equipped with the right skills to consistently execute on
the companies strategy.
• The channel members must
be trained in
– Technical specifications
of product
– Hospitality and courtesy
– Company’s policies and
strategies
– Ways to stay ahead to
competitors in local market – Etc.
Evaluation of Channel Members
The company should constantly evaluate the
channel members and monitor-
• What is working?
• What is not working?
• What can be improved?
The company must evaluate intermediaries
performance against various standards as:
• Sales quota attainment
• Average inventory levels
• Customer delivery time
• Treatment of damaged and
lost goods
• Cooperation in promotional and training
programs.
Channel Conflict/ Conflict in Distribution Channels
Channel conflict can arise when one
intermediary's actions prevent another intermediary from achieving their
objectives.
• Channel conflict is
“disagreements between channel members on goals and roles, who should do what,
and for what rewards”
• Channel conflict may be
– Vertical conflict is conflict between different levels of the same channel
(Ex: Manufacturer competes with retailer in selling product to target market.)
– Horizontal conflict is
conflict among members at the same channel level (Ex: Two retailers compete to
carry a supplier’s “exclusive” product.)
Vertical channel conflict:
Vertical conflict is conflict between
different levels of the same channel.
• It occurs between the
levels within a channel and
• Ex: Manufacturer
competes with retailer in selling product to target market.
Horizontal channel conflict:
Horizontal conflict is conflict among members
at the same channel level.
• It occurs between
intermediaries at the same level within a channel.
• Ex: Two retailers
compete to carry a supplier’s “exclusive” product.
Some conflict encourages healthy competition
which produces innovation and better performance.
• Too much conflict
becomes dysfunctional.
Reverse-Flow Channels Reverse-flow channels are important to:
(1)reuse products or containers (such as
refillable chemical-carrying drums);
(2)refurbish products for
resale (such as circuit boards or computers) (3) to recycle products (such as
paper)
Factors affecting
selection of marketing channels
1) Product Considerations
2) Market Considerations
3) Company Considerations
4) Middlemen
Considerations
Product Considerations •Nature of Product
•Perishability •Unit Value •Standardised/ Customised product
Market Considerations •Consumer or Industrial
market •Number of Customers •Geographical Distribution
Company Considerations •Financial Strength
•Past channel experience •Reputation of company •Product Mix
Middlemen Considerations •Availability of
middlemen •Attitude of Middlemen •Services Provided by middlemen •Financial
Ability
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