Marketing - Lesson 10

Managing Marketing Channels

Producers delegate some of the selling job to intermediaries; means relinquish some control over how and to whom the products are sold, due to following reasons:

·         Many producers lack the resources to carry out direct marketing

·         In some cases direct marketing is not feasible.

·         Producers who do establish their own channels can often earn greater returns by increasing their investment in their main business.

Members of marketing channel perform a number of key functions:

·         Gather information about potential and current customers, competitors and other factors.

·         Develop and disseminate persuasive communications to stimulate purchasing.

·         Reach agreement on price and other terms so that ownership can be affected.

·         Place orders with manufacturers.

·         Acquire funds to finance inventories.

·          Assume risks connected with carrying out channel work.

·         Provide for the successive storage and movement of physical products.

·          Provide for buyer’s payment of their bills through banks and other financial institutions.

·         Oversees actual transfer of ownership from one organization or person to another.

Consumers marketing

·         Zero – level channel: door to door sales, home parties, mail order, tele marketing, TV selling, Internet selling, and manufacturer owned stores.

·         One – level channel: one intermediary, such as retailer.

·         Two – level channel: wholesalers and retailers.

·         Three – level channel: wholesalers, jobbers and retailers.

Analyzing customer needs

In designing the marketing channel, the marketer must understand the service output level desired by the target customer.

·         Lot size – The no of units the channel permits a typical customer to purchase on an occasion

·         Waiting time – The average time customers of that channel wait for receipt of goods

·         Spatial convenience – The degree to which the marketing channels makes it easy for customers to purchase the product

·         Product variety – The assortment breadth provided by the marketing channel

·         Service backup – The add-on services provided by the channel

Establishing channel objectives & constraints

·         Channel institutions should arrange their functional tasks to minimize total channel costs with respect to desired level of service outputs.

·         Channel objective vary with product characteristics. Perishable goods require more direct mktg.

·         Channel design must take into account the strengths and weaknesses of different types of intermediaries.

·         Competitor’s channels also influence channel design.

·         Channel design must adapt to the larger environment.

·         Legal restrictions and regulations also affect channel design.

Terms and responsibilities of channel members

The main elements in the “trade relation mix” are

-          Price policies

-          Conditions of sale

-          Territorial rights

-          And specific services to be performed by each party

Evaluating the major alternatives

Channel alternative should be evaluated against

·         Economic

·         Control

·         Adaptive criteria

The producers should select the channel members by determining the characteristics like number of years in business, other lines carried, growth and profits record, solvency, cooperativeness and reputation. If the intermediaries are sales agent, producers would look into the number and characteristics of other lines carried and the size and quantity of the sales force. If the intermediaries want exclusive dealership, the producer would like to consider its locations, future growth prospects and type of clientele.

Training Channel members

Companies should conduct training programs for their distributors and dealers because the end users would view them as company.

Motivating Channel Members

A company needs to view its channel members in the same way as its end users. The company needs to determine the intermediary needs and construct a channel positioning such that its channel offering is tailored to provide superior value to these intermediaries. The company should provide training programs, market research programs and other capability building program to improve intermediary’s performance. The company must constantly communicate its view that the intermediaries are the partners in the joint effort to satisfy end consumers. This should start with understanding their needs and wants. Producers vary greatly in managing intermediaries. They can draw on the following types of power to elicit cooperation:

1. Coercive Power: When the producer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate. This power is quite effective if the intermediaries are highly dependent upon the manufacturer but it can produce resentment can lead intermediaries to organize countervailing powers.

2. Reward Power: When the producer offers intermediaries an extra reward for performing specific acts or functions. Reward power typically produces better results than coercive power but can be overrated. The intermediaries may start expecting reward every time the manufacturer wants a certain behavior to occur.

3. Legitimate Power: When the manufacturer requests a behavior that is warranted under contract.

4. Expert Power: When the manufacturer has special knowledge that the intermediaries value. This is an effective form of power bcoz intermediaries would perform poorly without this. But it weakens once the expertise is passed on to the intermediaries. So, manufacturer must keep on developing new expertise to keep influencing the intermediaries.

5. Referent Power: When the manufacturer is so highly respected that the intermediaries are proud to be associated with him.

Manufacturers can gain cooperation best if they resort to referent power, expert power, legitimate power and reward power and avoid using coercive power.

Intermediaries can aim for relationship based on cooperation, partnership or distribution program. Manufacturers can gain intermediaries cooperation through higher margins, special deals, premiums, cooperative advertising allowances, display allowances and sales contests. At time they may apply negative sanctions such as threatening to reduce margins. Slow delivery or terminate the relationship. More companies try to forge a long term partnership with the intermediaries by defining what it wants from the intermediaries in terms of market coverage, inventory levels, marketing development, account solicitation, technical advice and services and marketing info. There may be a compensation plan for adhering to these policies.

Distribution Planning

 Building a planned, professionally managed, vertical marketing system that meets the need of both. The manufacturer establishes a department within the company called distribution relations planning. Its job is to identify distributor needs and build up merchandising programs to help each distributor work as efficiently as possible. Both of them work jointly. The aim is to make distributors feel for making money from the sale side rather than on the buying side.

Evaluating Channel members:

Producers must constantly evaluate the channels performance against such standards as sales quota attainment, avg inventory levels, customer delivery time, treatment of damaged and lost goods and cooperation in the promotional and training programs.

Modifying Channel Arrangements:

A producer must periodically review and modify its channel arrangements. It becomes necessary when the channel is working as per the plans, the consumers buying patterns changes, the market expands, new competition arises, innovative distribution channels emerge and the product moves into the later stages of the PLC.

Marketing Channels vis-à-vis PLC:

·         Introductory stage: Specialist channels

·         Rapid growth stage: Dedicated stores, department stores that offer services

·         Maturity stage: Mass merchandisers

·         Decline stage: Lower cost channels like mail order, off price discounters.

The most difficult decision is revising overall channel strategy. It may become outdated and a gap would be created.

Customer Driven Distribution System Design:

·         Research target customers value perceptions, needs, and desires regarding channel service outputs.

·         Examine the performance of the company’s and competitors existing distribution systems in relation to customer desires

·         Find service output gaps that need corrective actions

·         Identify major constraints that will limit possible corrective actions

·         Design a management bounded channel solution

·         Implement the reconfigured distribution system.

In a conventional marketing system, with producer wholesaler and retailer, there is no member with substantial control over the other one. Each seeks to maximize own profits.

In Vertical marketing systems(VMS) the 3 members act as a unified system. The channel captain, controls the other members of the channel. Anyone, the producer, wholesaler or retailer can be captain, depending upon the power and dominance wielded. They achieve economies through size, bargaining power and elimination of duplicate services. There is less chance of conflict as there is grp objective and no individual goals. The 3 types of VMS:

1) Corporate VMS –

Combines successive stages of production and distribution under single ownership.

2) Administered VMS

Coordinates successive stages of production and distribution through size and power of one of its members. Manufacturers of a dominant brand can get strong trade cooperation from resellers.

3) Contractual VMS

Individual firms at the 3 different stages integrating their programs on a contractual basis to achieve economies through size. “Value added partnerships”. 3 types:

- Wholesaler sponsored voluntary chains

Wholesalers organize chains for the or retailers to compete against the other large chain organizations ,through standardized selling practices

Retailer cooperatives

Retailers take initiative and organize new business entity to carry on wholesaling and possible some production. Members do joint advertisement and concentrate purchases through their retailer co-op. profits are shared in proportion to the purchase proportion.

Franchise organization

Traditional method is the manufacturer-sponsored retailer franchisee. E.g. Ford. Another method is manufacturer-sponsored wholesaler franchisee, e.g. Coca-Cola licenses its bottlers in various markets who buy its product concentrate. Service firm-sponsored retailer franchisee is when the service firm brings its service efficiently to its consumers. E.g. Hertz, Avis, McDonalds.

Horizontal marketing systems:

2 or more unrelated companies put their resources together to exploit emerging marketing opportunities. Individual companies lack money, or know how or the marketing resources. But together they supplement each other.

Multi channel marketing systems:

When single firm uses two or more marketing channels to reach one or more consumer segments. Companies gain through increased market coverage, can reach out to a new consumer segment by adding a new channel. They can lower the channel cost and can customize the selling as per target consumer requirements.

Types of channel conflict:

Vertical channel conflict – within different members/levels of the same channel. e.g. GM in conflict with dealers, Coke in conflict with bottlers.

Horizontal channel conflict – within different members at same levels of the same channel. e.g. Conflict between different Ford dealers

Multi channel conflict – within different members I different channels in the same market e.g. company selling through specialty showroom and through dealerships. This sets up different prices within the same market.

Causes off Channel Conflict

·         Goal Incompatibility

·         Unclear roles/Difference in Perception

·         Dependence – on manufacturers

1. Retailing

All activities involved in selling goods & services directly to final consumer for personal, non-business use.

2. Types of Retailers

Specialty Store: Narrow Product line with a deep assortment, such as apparel stores, furniture stores, bookstores etc.

Department Store: Several Product lines-typical clothing, home furnishings and household goods

Super market: Relatively large, low cost low margin, high volume, self service operation designed to serve total needs for food, laundry and household maintenance products

Convenience Store: Relatively small store located near residential area, open long hours seven days a week and carrying a limited line of high turnover convenience products at slightly higher prices

Discount store: Standard merchandise sold at lower prices with lower margins and higher volumes

Off-Price Retailer: Merchandise bought at less than regular wholesale price and sold at less than retail; often left over goods, overruns and irregulars obtained at lower prices.

3. Retailers can position themselves as offering one of four levels of service:

a. Self-service: It is corner stone of all discount operations.

b. Self selection: Customers find their own goods, although they can ask for assistance

c. Limited service: These retailers carry more shopping goods and customers need more information and assistance

d. Full Service: Sales people are ready to assist in every phase of the locate-compare- select process.