Distribution and Value Networks

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Marketing Channels

Marketing channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption. These interdependent organizations, intermediaries. These are of two types: also called as

Merchants, such as wholesalers and retailers who buy, take title to and resell the goods. Brokers, such as sales agents who represent the manufacturers and search for the customers, negotiate on the producers behalf but do not take title of the goods.

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Marketing Channels
The Importance of Channels

Convert potential buyers into profitable orders Marketing Channels serve companys markets Marketing Channels create markets

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Value Networks

Value Networks
A system of partnerships and alliances that a firm creates to source, augment, and deliver its offerings.

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The Role of Marketing Channels

Producers often delegate the job of selling and distribution to intermediaries even at the risk of loosing some control over how and to whom the products are sold. The following are the reasons for doing so:

Lack of Financial Resources to set up own distribution channels More return on investment from the core competency business. Not feasible to set up retail channels for just one product line. Intermediaries achieve superior efficiency in making goods widely available and accessible to target markets through their contacts, experience, specialization and scale of operation.

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The Role of Marketing Channels

Channel Levels
A zero level channel consist of a manufacturer selling directly to the final customer. Major examples are door to door sale, mail order. A one-level channel contains one selling intermediary, a twolevel channel contains two selling intermediaries. These intermediates could be retailers, distributors. As the no. of levels increase the level of difficulty of information sharing and coordination also increase. Channels normally describe a forward movement of products from source to user.

Service Sector Channels

Marketing channels are not limited to distribution of physical goods. Producers of services and ideas also need intermediaries to make their services available to target populations. Travel agents, internet, telecalling setups provide 6 such distribution of services and ideas.

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The Role of Marketing Channels

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Channel Design Decisions

Designing a marketing channel will be influenced by the following factors: Analyzing Customer Needs Establishing Objectives and Constraints Identifying Major Channel Alternatives Evaluating Major Channel Alternatives

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Channel Design Decisions

Analyzing Customers Desired Service Output Levels
Channels produce five service outputs, which are as follows: Lot size The number of units that a customer can purchase from a channel on one occasion. Waiting and Delivery time The average time that the customers wait for the receipt of goods. Customers prefer faster and faster delivery channels. Special convenience The degree to which the marketing channel makes it easier for the customer to buy that product. Product variety The assortment breadth provided by the marketing channel. Service backup The add on services such as credit, delivery, installation, repairs etc provided by the channel.

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Channel Design Decisions

Establishing Objectives and Constraints
Channel objectives should be stated in terms of targeted service output level. Channel objectives vary with product characteristics.

Bulky products such as building material require channels that minimize the shipping distance and the amount of handling. Perishable products require more direct marketing. Non standard products such as custom-built machinery are sold by the company representatives directly.

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Channel Design Decisions

Identifying Major Channel Alternatives
Companies can choose from a wide variety of channels for reaching customers from sales forces to agents, distributors, dealers and direct mail. A Channel alternative is described by 3 elements:

Types of Intermediaries
Companies need to look at the intermediaries abilities to use them for distributing their products which could range from simple products to highly complicated technical products.

Number of Intermediaries

Companies have to decide on the number of intermediaries to use at depending upon the distribution strategy. There are three stages are available: Exclusive distribution means severely limiting the number of intermediaries to exercise control over the service level and outputs. Selective distribution involves the use of more than a few but less than all of the intermediaries who are willing to carry a particular of product. This is done to gain market coverage with more control and lesser cost. Intensive distribution consists of the manufacturer placing the goods or services in as many outlets as possible. Generally done for tobacco products, confectionary and calling cards.

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Channel Design Decisions

Terms and Responsibilities of Channel Members
The producer must determine the rights and responsibilities of participating channel members. The main elements in the trade relations mix are as follows:

Price policy calls for the producer to establish a price list and schedule of discounts and allowances that intermediaries see as a equitable and sufficient. Condition of sale refers to payment terms and producer guarantees. Distributors territorial rights define the distributors territory and the terms under which the producer will grant franchise to other distributors. Mutual service and responsibilities must be carefully spelled out, especially in franchise and exclusive agency channels.

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Channel Design Decisions

Evaluating the Major Alternatives
Each channel alternative must be evaluated against economic and control & adaptive criteria. Agency

Economic Criteria Each channel produces different level of sales

and costs. Generally agencies produce low cost sales at lower volumes and higher cost sales for higher volumes due to commissions linked to sales. On the other hand, sales force of a company has a high component of fixed costs and is only viable for higher volume selling.

Sales Force

Sales

Control and Adaptive Criteria A sales agency is an

independent firm seeking to maximize its profits. Agents may concentrate on the customers who buy the most, not necessarily those who buy the manufacturers product. Further agents might not master the technical details of the companys product or handle its promotion material effectively.

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Channel Management Decisions

Selecting Channel Members Training Channel Members Motivating Channel Members Evaluating Channel Members Modifying Channel Members

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Channel Management Decisions

Selecting Channel Members
Companies need to select their channel members carefully as they represent the company to the customer. To facilitate channel members selection, produces should determine what characteristics distinguish the better intermediaries, for e.g. the no. of years in business, the growth and profit record and financial strength

Training Channel Members

Companies need to plan and implement careful training programs for their intermediaries.

Motivating Channel Members

A company needs to view its intermediaries in the same way as it views its end users. To motivate its intermediaries, the company should provide training programs, market research programs, other capability building programs to improve the intermediarys performance. Channel Power may be defined as the ability of the manufacturer to alter the channel members behavior so that they take actions that they would not take otherwise. Manufacturers can use the following types of power to manage the channel partners.

Coercive Power Reward Power Legitimate Power Expert Power Referent Power

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Channel Management Decisions

Evaluating Channel Members

A manufacturer needs to evaluate whether the channel partners are actually delivering what the manufacturer is paying them for. Hence producers must periodically evaluate intermediaries performance against such standards as salesquota attainment, average inventory levels, customer delivery time, treatment of damaged or lost goods and cooperation in promotional and training programs.

Modifying Channel Members

A producer must periodically review and modify its channel arrangements. Modification becomes necessary 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 later stages in the PLC.

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Channel Conflict
Channel conflict is generated when one channel members actions prevent the channel as a whole in achieving its goal.

Types of Channel Conflict

Vertical Channel Conflict - Vertical channel conflict is a conflict between different levels within the same channel. This could be between different stakeholders up or down the distribution line trying to exercise greater control. Horizontal Channel Conflict - This involves a conflict between members at the same level within the channel. This would mean conflict between selling practices of various dealerships. Multi-channel conflict exists when the manufacturer has established two or more channel that sell to the same market. This would be predominantly seen when one of the channels may get lower price, such as internet banking for banking products rather than the financial intermediaries. 17

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Channel Conflict
Causes of Channel Conflict
Following are the most prevalent causes of channel conflict.

Goal incompatibility Differences in the goals of the manufacturer and the intermediary. Difference in perception - Manufacturer may be looking at the environment as optimistic and may want the dealers to carry higher inventory but the dealers may not want to do so, considering the economic scenario.

Dependence - The dependence of the intermediaries on the manufacturer and his policies such as in the case of automobiles may cause channel conflict.

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Channel Conflict
Managing Channel Conflict
There are several ways for effective channel conflict management. They are as follows:

Co-optation This is an effort by one organization to win the support of the leaders of another organisation by including them in the advisory councils, boards of directors etc. Diplomacy This takes place when each side sends a person or a group to meet with its counterpart to resolve the conflict. Mediation This means resorting to a neutral third party who is skilled in conciliating the two parties interests. Arbitration This occurs when the parties agree to present their arguments to one or more arbitrators and accept the arbitration decision.

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Channel Conflict
Legal and Ethical Issues in Channel Relations Many producers likes to develop exclusive channels for their products. Exclusive dealing often includes exclusive territory agreements. The producer may agree not to sell to other dealers in a given area. Producers are free to select their dealers, but their right to terminate dealers is somewhat restricted.

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E-Commerce Marketing Practices

E-business describes the use of electronic means and platforms to conduct a companys business. There are various possible situations such as:

E-commerce means that a company or site offers to transact or facilitate the selling of its products and services online. E-purchasing means companies decide to purchase goods, services and information from various online suppliers. E-marketing describes companys efforts to inform buyers communicate, promote and sell its product and services over the internet.

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