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marketing channel

The group of organizations involved in selling and promoting goods from the time they are produced until they reach end users.

channel members

The firms a company partners with to actively promote and sell a product as it travels through its marketing channel to users.

C H A P T E R 8 Using Marketing Channels to Create Value for Customers Sometimes when you buy a good or service, it passes straight from the producer to you. But suppose every time

you purchased something, you had to contact its maker? For some offerings, such as a haircut, this would work. But

what about the products you purchase at the grocery store? You couldn’t begin to contact and buy from all the

makers of those products. It would be an incredibly inefficient way to do business.

Fortunately, companies partner with one another, alleviating you of this burden. So, for example, instead of

Procter & Gamble selling individual toothbrushes to consumers, it sells many of them to a drugstore close to you,

which then sells them to you and other people.

The specific avenue a seller uses to make a finished good or service available to you for purchase—for

example, whether you are able to buy it directly from the seller, at a store, online, from a salesperson, and so on—is

referred to as the product’s marketing channel (or distribution channel). All of the people and organizations that

buy, resell, and promote the product “downstream” as it makes its way to you are part of the marketing channel.

This chapter focuses on downstream channels. In the next chapter, we look not only “downstream” but also

“upstream” at the people and organizations that supply the materials and services and that allow products to be

made in the first place.

1. MARKETING CHANNELS AND CHANNEL PARTNERS

L E A R N I N G O B J E C T I V E S

1. Explain why marketing channel decisions can result in the success or failure of products. 2. Understand how supply chains differ from marketing channels. 3. Describe the different types of organizations that work together as channel partners and what

each does.

Today, marketing channel decisions are as important as the decisions companies make about the fea- tures and prices of products.[1] Consumers have become more demanding. They are used to getting what they want. If you can’t get your product to them when, where, and how they want it, they will simply buy a competing product. In other words, how companies sell has become as important as what they sell.[2]

The firms a company partners with to actively promote and sell a product as it travels through its marketing channel to users are referred to by the firm as its channel members (or partners). Com- panies strive to choose not only the best marketing channels but also the best channel partners. A strong channel partner like Walmart can promote and sell the heck out of a product that might not otherwise turn a profit for its producer. In turn, Walmart wants to work with strong channel partners it can depend on to continuously provide it with great products that fly off the shelves. By contrast, a weak channel partner can be a liability.

intermediaries

Third parties that facilitate the supply and sale of products from manufacturers to users.

F I G U R E 8 . 2

Neither Encyclopedia Britannica nor Microsoft saw Wikipedia on the horizon.

Source: Thinkstock 92841070.

The simplest marketing channel consists of just two parties—a producer and a consumer. Your haircut is a good example. When you get a haircut, it travels straight from your hairdresser to you. No one else owns, handles, or remarkets the haircut to you before you get it. However, many other products and services pass through multiple sales organizations before they get to you. These organiza- tions are called intermediaries (or middlemen or resellers).

Companies partner with intermediaries not because they necessarily want to (ideally they could sell their products straight to users) but because the intermediaries can help them sell the products bet- ter than they could working alone. In other words, they have some sort of capabilities the producer needs: contact with many customers or the right customers, marketing expertise, shipping and hand- ling capabilities, and the ability to lend the producer credit are among the types of help a firm can get by utilizing a channel partner.

Intermediaries also create efficiencies by streamlining the number of transactions an organization must make, each of which takes time and costs money to conduct. As Figure 8.1 shows, by selling the tractors it makes through local farm machinery dealers, the farm machinery manufacturer John Deere can streamline the number of transactions it makes from eight to just two.

F I G U R E 8 . 1 Using Intermediaries to Streamline the Number of Sales Transactions

The marketing environment is always changing, so what was a great channel or channel partner yester- day might not be a great channel partner today. Changes in technology, production techniques, and your customer’s needs mean you have to continually reevaluate your marketing channels and the chan- nel partners you ally yourself with. Moreover, when you create a new product, you can’t assume the channels that were used in the past for similar products are the best ones.[3] A different channel or channel partner might be better.

A classic example is Microsoft’s digital encyclopedia, Encarta, which was first sold on CD and via online subscription in the early 1990s. Encarta nearly destroyed Encyc- lopedia Britannica, a firm that had dominated the print encyclopedia business for liter- ally centuries. Ironically, Microsoft had actually tried to partner with Encyclopedia Britannica to use its encyclopedia information to make Encarta, but was turned down.

Today, Encarta no longer exists. It’s been put out of business by the free online en- cyclopedia, Wikipedia. The point is that products and their marketing channels are constantly evolving. Consequently, you and your company have to be ready to evolve, too.

158 PRINCIPLES OF MARKETING VERSION 3.0

supply chain

All the organizations that participate in the production, promotion, and delivery of a product or service from the producer to the end consumer.

supply chain management

The process of managing and refining supply chains so as to make them as efficient as possible.

Wholesalers

Businesses that purchase products in large quantities, can store the products, can break the pallets down into cases or units, and can deliver the desired quantity of a product to distributors, retailers, and/or consumers.

1.1 Marketing Channels versus Supply Chains In the past few decades, organizations have begun taking a more holistic look at their marketing chan- nels. Instead of looking at only the firms that sell and promote their products, they have begun looking at all the organizations that figure into any part of the process of producing, promoting, and delivering an offering to its user. All these organizations are considered part of the offering’s supply chain.

The supply chain includes producers of the raw materials that go into a product. If it’s a food product, the supply chain extends back through the distributors all the way to the farmers who grew the ingredients and the companies from which the farmers purchased the seeds, fertilizer, or animals. A product’s supply chain also includes transportation companies such as railroads that help physically move the product and companies that build websites for other companies. If a software maker hires a company in India to help it write a computer program, the Indian company is part of the partner’s sup- ply chain. These types of firms aren’t considered channel partners because it’s not their job to actively sell the products being produced. Nonetheless, they all contribute to a product’s success or failure.

Firms are constantly monitoring their supply chains and tinkering with them so they’re as efficient as possible. This process is called supply chain management, and we will discuss it in detail in Chapter 9. Supply chain management is challenging. If done well, it’s practically an art.

1.2 Types of Channel Partners Let’s now look at the basic types of channel partners. To help you understand the various types of channel partners, we will go over the most common types of intermediaries. The two types you hear about most frequently are wholesalers and retailers. Keep in mind, however, that the categories we dis- cuss in this section are just that—categories. In recent years, the lines between wholesalers, retailers, and producers have begun to blur considerably. Microsoft started out as a producer of goods, but has since began opening up its own retail stores to sell products to consumers, much like Apple has done.[4] As you will learn later in the chapter, Walmart and other large retailers now produce their own store brands and sell them to other retailers. Similarly, many producers have outsourced their manu- facturing, and although they still call themselves manufacturers, they act more like wholesalers.

Wherever organizations see an opportunity, they are beginning to take it, regardless of their posi- tions in marketing channels. The ride-sharing service Uber is another example of how a company’s channel partners can become its competitors. A few years ago Uber began partnering with a company called Breeze, which leases cars by the week to people who want to become Uber drivers. Later Uber decided to take on this task directly. The company was signing up 500,000 drivers a month and prob- ably figured leasing the cars itself would be a good a source of revenue.

Wholesalers

Wholesalers obtain large quantities of products from producers, store them, and break them down into cases and other smaller units more convenient for retailers to buy, a process called “breaking bulk.” Wholesalers get their name from the fact that they resell goods “whole” to other companies without transforming the goods. So, for example, if you are trying to stock a small electronics store, you probably don’t want to purchase a truckload of iPhones. Instead, you probably want to buy a smaller assortment of iPhones as well as other merchandise. Via wholesalers, you can get the assortment of products you want in the quantities you want. Some wholesalers carry a wide range of different products. Other carry narrow ranges of products.

Most wholesalers “take title” to goods—that is, they buy and own them—until they are purchased by other sellers. Wholesalers such as these assume a great deal of risk on the part of companies further down the marketing channel as a result. For example, if the iPhones you plan to purchase are stolen or damaged during shipment, or become outdated because a new model has been released, the wholesaler suffers the loss—not you. Electronic products, in particular, become obsolete very quickly. Think about the cell phone you owned just a few years ago. Would you want to have to use it today?

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Merchant wholesalers

Wholesalers that take title to the goods.

distributors

Businesses that purchase large quantities of products, can store products, can sell products, can deliver desired quantities of products, and can offer services. Distributors generally take title to products and employ a sales force to actively market their products.

Video Clip

Good thing you don’t have to use the cell phone shown in this YouTube video. You could forget about putting it in your purse or pocket. But in 1973, phones such as these were the latest and greatest of gadgets. Martin Cooper, who championed the development of the device, was a lead engineer at Motorola. To whom do you think Cooper made his first phone call on the device? To his rivals at AT&T, which at the time manufactured only “landline” phones. He wanted to let them know he and Motorola had changed the phone game.

There are many types of wholesalers. The three basic types of wholesalers are merchant wholesalers, brokers, and manufacturers’ agents, each of which we discuss next.

Merchant Wholesalers

Merchant wholesalers are wholesalers that take title to the goods. They are also sometimes referred to as distributors, dealers, or jobbers. Merchant wholesalers include both full-service wholesalers and limited-service wholesalers. Full-service wholesalers perform a broad range of services, such as stocking inventories, operating warehouses, supplying credit to buyers, employing salespeople to assist the com- panies that buy their products, and delivering goods to them. Maurice Sporting Goods is a large North American full-service wholesaler of hunting and fishing equipment. The firm’s services include helping customers figure out which products to stock, how to price them, and how to display them.[5]

Limited-service wholesalers offer fewer services to their customers but lower prices. They might not offer delivery services, extend their customers’ credit, or have sales forces that actively call sellers. Cash- and-carry wholesalers are an example. Small retailers often buy from cash-and-carry wholesalers to keep their prices as low as big retailers that get large discounts because of the huge volumes of goods they buy.

Drop shippers are another type of limited-service wholesaler. Although drop shippers take title to goods, they don’t actually take possession of them or handle them, sometimes because they deal with goods that are large or bulky. Instead, drop shippers earn a commission by finding sellers and passing their orders along to producers, who then ship them directly to the sellers. E-commerce has greatly fa- cilitated drop shipping. You have probably purchased an item on eBay or Amazon.com that involved a drop shipper. The seller relayed the order to a drop shipper, who passed it along to the manufacturer, who then shipped the item straight to you.

Mail-order wholesalers sell their products using catalogs instead of sales forces and then ship the products to buyers. Truck jobbers (or truck wholesalers) actually store products, which are often highly perishable (e.g., fresh fish), on their trucks. The trucks make the rounds to businesses, which inspect and select the products they want straight off the trucks.

Rack jobbers sell specialty products, such as books, hosiery, and magazines that they display on their own racks in stores. Rack jobbers retain the title to the goods while the merchandise is in the stores for sale. Periodically, they count what’s been sold off their racks and then bill the stores for those items.

View the video online at: http://www.youtube.com/embed/8iE0OH5FmiU?rel=0

160 PRINCIPLES OF MARKETING VERSION 3.0

Brokers

Representatives of one or more manufacturers who sell products on their behalf to consumers, wholesalers, and distributors but do not take title to them.

F I G U R E 8 . 3

Good brokers with excellent contacts are able to quickly match up buyers and sellers.

Source: Thinkstock 83299172.

affiliate

A person or organization that uses its Web site to market and sell another company’s product for a commission.

Manufacturers’ sales offices or branches

Selling units that work directly for manufacturers. A type of factory outlet store.

Retailers

Businesses that purchase products from manufacturers, wholesalers, agents, or distributors and then sell them to consumers.

supermarkets

Self-service retailers that provide a full range of food products to consumers as well as some household products.

drugstores

Stores that specialize in selling over-the-counter medication, prescriptions, and health and beauty products and offer services such as photo developing.

Brokers and Affiliates

Brokers, or agents, don’t purchase or take title to the products they sell. Their role is limited to negoti- ating sales contracts for producers. Clothing, furniture, food, and commodities such as lumber and steel are often sold by brokers. They are generally paid a commission for what they sell and are as- signed to different geographical territories by the producers with whom they work. Because they have excellent industry contacts, brokers and agents are “go-to” resources for both consumers and compan- ies trying to buy and sell products.

The most common form of agents and brokers consumers encounter are in real estate. Real-estate agents work for brokers, who act as sort of a head agent and market the company’s services while mak- ing sure that all of the legal requirements are met.

An affiliate is a person or organization that uses its website to market a different company’s products, usually via online ads, and is paid a commission for each product sold. In other words, affiliates drive online traffic to other websites so as to sell products and then get paid for doing so. For example, when you book an airline flight on Expe- dia, you may be offered a deal from Avis, Hertz, or another rental-car company. If you go ahead and rent a car, the rental-car company pays Expedia a commission. If you don’t, Expedia gets no commission. Like brokers and agents, affiliates don’t take title to goods. They simply connect sellers with buyers who are likely to be interested in their products.

An affiliate marketing channel can be set up anywhere people congregate on- line—on blogs, search-engine, news, social media websites, and YouTube. Discount sites such as Groupon and comparison shopping sites such as NexTag and Com- pare.com also serve as affiliates to other sellers. Sellers like to sign up affiliates that at- tract a lot of online visitors who fit their target markets because it extends their market- ing reach instantly. Recall in Chapter 3 that we discussed how companies look to part- ner with online social media “stars” to access potential new customers quickly.

Manufacturers’ Sales Offices or Branches

Manufacturers’ sales offices or branches are selling units that work directly for manufacturers and are found in business-to-business settings. For example, Konica-Minolta Business Systems (KMBS) has a system of sales branches that sells commercial scanners, printers, and copiers directly to companies that need them. As a consumer, it would be rare for you to interact directly with a manufacturers’ sales office.

Retailers

Retailers buy products from wholesalers, agents, or distributors and then sell them to consumers. Re- tailers vary by the types of products they sell, their sizes, the prices they charge, the level of service they provide consumers, and the convenience or speed they offer.

Supermarkets, or grocery stores, are self-service retailers that provide a full range of food products to consumers, as well as some household products. Supermarkets can be high, medium, or low range in terms of the prices they charge and the service and variety of products they offer. Whole Foods and Central Market are grocers that offer a wide variety of products, generally at higher prices. Midrange supermarkets include stores like Albertsons and Kroger. Aldi and Sack ’n Save are examples of supermarkets with a limited selection of products and service but low prices. Drugstores specialize in selling over-the-counter medications, prescriptions, and health and beauty products and offer ser- vices such as photo developing.

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 161

convenience stores

Miniature supermarkets that stock a limited assortment of products. Many of them sell gasoline and are open twenty-four hours a day.

Specialty stores

Stores that sell a certain type of product.

category killer

A firm that sells a high volume of a product in a particular category.

Department stores

Stores that carry a wide variety of household and personal types of merchandise such as clothing and jewelry.

superstores

Large department stores that carry a broad array of general merchandise as well as groceries. Superstores are also referred to as hypermarkets and supercenters.

Warehouse clubs

Supercenters that sell products at a discount to people who pay an annual membership fee to join them.

Off-price retailers

Stores that sell a variety of discount merchandise that consists of seconds, overruns, and the previous season’s stock other stores have liquidated.

Outlet stores

Stores that sell a variety of merchandise that may consist of seconds, overruns, and the previous season’s stock, as well as first-run merchandise all from one manufacturer.

Online retailers

Companies that sell products directly to consumers via the Web.

Used retailers

Stores that sell products that have already been used.

Convenience stores are miniature supermarkets. Many of them sell gasoline and are open twenty-four hours a day. Often they are located on corners, making it easy and fast for consumers to get in and out. Some of these stores contain fast-food franchises like Church’s Chicken and Jack in the Box. Consumers pay for the convenience in the form of higher markups on products. In Europe, as well as in rural parts of the United States, you’ll find convenience stores that offer fresh meat and produce.

Specialty stores sell a certain type of product, but they usually carry a deep line of it. Zales, which sells jewelry, and Williams-Sonoma, which sells an array of kitchen and cooking-related products, are examples of specialty stores. The personnel who work in specialty stores are usually knowledgeable and often provide customers with high levels of service. Specialty stores vary by size. Many are small. Oth- ers are giant specialty stores called category killers. A category killer sells a high volume of a particu- lar type of product and, in doing so, dominates the competition, or “category.” Petco and PetSmart are category killers in the retail pet-products market. Best Buy is a category killer in the electronics-product market. But markets continue to evolve. Increasingly, many category killers are struggling as shoppers look for lower priced products on the Internet.

Department stores, by contrast, carry a wide variety of household and personal merchandise such as clothing and jewelry. Many are chain stores. The prices department stores charge range widely, as does the level of service shoppers receive. Neiman Marcus, Saks Fifth Avenue, and Nordstrom sell expensive products and offer extensive personal service to customers. The prices department stores such as JCPenney, Sears, and Macy’s charge are midrange, as is the level of service shoppers receive. Walmart, Kmart, and Target are discount department stores with cheaper goods and limited amounts of customer service.

Superstores are oversized department stores that carry a broad array of general merchandise as well as groceries. Banks, hair and nail salons, and restaurants such as Starbucks are often located within these stores for the convenience of shoppers. You have probably shopped at a SuperTarget or a huge Walmart with offerings such as these. Superstores are also referred to as hypermarkets and supercenters.

Warehouse clubs are supercenters that sell products at a discount. They require people who shop with them to become members by paying an annual fee. Costco and Sam’s Club are warehouse clubs. Off-price retailers are stores that sell a variety of discount merchandise that consists of seconds, over- runs, and the previous season’s stock other stores have liquidated. Big Lots, Ross Dress for Less, and dollar stores are off-price retailers.

Outlet stores are discount retailers that operate under the brand name of a single manufacturer. They sell a variety of merchandise that may consist of seconds, overruns, and the previous season’s stock, as well as first-run merchandise. Often located in rural areas but along interstate highways, these stores have lower overhead than similar stores in big cities due to their lower rents.

Online retailers can fit into any of the previous categories; indeed, most traditional stores also have an online version. You can buy from JCPenney.com, Walmart.com, BigLots.com, and so forth. Other online stores, like Overstock.com and Amazon.com operate only on the Web.

Used retailers are retailers that sell used products. Online versions, like eBay and Craigslist, sell everything from used airplanes to clothing. Traditional stores with a physical presence that sell used products include Half-Priced Books and clothing consignment or furniture stores like Amelia’s Attic. Consignment stores do not take title to the products but only retail them for the seller.

162 PRINCIPLES OF MARKETING VERSION 3.0

Pop-up stores

Small temporary stores designed to generate “buzz” for a retailer and drive customers to its regular stores.

Nonstore retailing

Retailing not conducted in stores.

direct marketing

Delivering personalized promotional materials directly to individual consumers. Materials may be delivered via mail, catalogs, Internet, e-mail, or telephone, or in person.

Pop-up stores are small temporary stores. They can be kiosks or temporarily occupy unused re- tail space. Sometimes the stores are used to create excitement and “buzz” for a retailer that then drives customers to their regular stores. More commonly, though, pop-up stores are used for seasonal sales, such as a costume store before Halloween or the Hillshire Farms sausage and cheese shops you see at the mall just before Christmas.

Not all retailing goes on in stores. Nonstore retailing—retailing not conducted in stores—has al- ways existed and continues to take new forms. Online sales, selling on social media, party selling, tele- marketing, and selling to consumers via television, catalogs, and vending machines are examples of nonstore retailing. These are forms of direct marketing. Companies that engage in direct marketing communicate with customers directly rather than through retail stores. Chloe & Isabel, a direct mar- keter of jewelry, is capitalizing on social media selling. The New York-based company has no stores. Instead, its 5,000-plus independent sales associates start out by purchasing a small assortment of the firm’s products. The sales associates then resell the products to their friends on social media using Chloe & Isabel’s marketing materials, which include digital images of the products and other promo- tional materials.[6]

K E Y T A K E A W A Y S

How a product moves from raw material to finished good to the consumer is a marketing channel, also called a supply chain. Marketing channel decisions are as important as the decisions companies make about the fea- tures and prices of products. Channel partners are firms that actively promote and sell a product as it travels through its channel to its user. Companies try to choose the best channels and channel partners to help them sell products because doing so can give them a competitive advantage.

R E V I E W Q U E S T I O N S

1. Why are marketing channel decisions as important as pricing and product feature decisions?

2. What are the benefits of looking at all of the organizations that contribute to the production of a product versus just the organizations that sell them?

3. Why do channel partners rely on each other to sell their products and services?

4. How do companies add value to products via their marketing channels?

5. Explain how marketing channels have evolved and are continuing to evolve.

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 163

direct channel

A marketing channel that consists of a producer and a consumer.

indirect channel

A marketing channel that consists of a producer, a consumer, and one or more intermediaries.

2. TYPICAL MARKETING CHANNELS

L E A R N I N G O B J E C T I V E S

1. Describe the basic types of channels in business-to-consumer (B2C) and business-to-business (B2B) markets.

2. Explain the advantages and challenges companies face when using multiple channels and al- ternate channels.

3. Explain the pros and cons of disintermediation. 4. List the channels firms can use to enter foreign markets.

F I G U R E 8 . 4 Typical Channels in Business-to-Consumer (B2C) Markets

Figure 8.4 shows the typical channels in business-to-consumer (B2C) markets. As we explained, the shortest marketing channel consists of just two parties—a producer and a consumer. A channel such as this is a direct channel. By contrast, a channel that includes one or more intermediaries—say, a wholesaler, distributor, or broker or agent—is an indirect channel. In an indirect channel, the product passes through one or more intermediaries. That doesn’t mean the producer will do no mar- keting directly to consumers. Levi’s runs ads on TV designed to appeal directly to consumers. The makers of food products run coupon ads. However, the seller also has to focus its selling efforts on these intermediaries because the intermediary can help with the selling effort. Not everyone wants to buy Levi’s online.

164 PRINCIPLES OF MARKETING VERSION 3.0

F I G U R E 8 . 6

Name the product your company needs, and you can probably buy it from Grainger Industrial Supply.

Source: © Jupiterimages Corporation

industrial distributors

Intermediary firms that sell products that businesses or government departments and agencies use but don’t resell.

F I G U R E 8 . 5 Typical Channels in Business-to-Business (B2B) Markets

Figure 8.5 shows the marketing channels common in business-to-business (B2B) mar- kets. Notice how the channels resemble those in B2C markets, except that the products are sold to businesses and governments instead of consumers like you. The industrial distributors shown in Figure 8.5 are firms that supply products that businesses or government departments and agencies use but don’t resell. Grainger Industrial Supply, which sells tens of thousands of products, is one of the world’s largest industrial distrib- utors. Nearly two million businesses and institutions in 150 countries buy products from the company, ranging from padlocks to painkillers.

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disintermediation

A situation that occurs when intermediaries are cut out of marketing channels.

2.1 Disintermediation You might be tempted to think middlemen, or intermediaries, are bad. If you can cut them out of the deal—a process marketing professionals call disintermediation—products can be sold more cheaply, can’t they? Large retailers, including Target and Walmart, sometimes bypass middlemen. Instead, they buy their products directly from manufacturers and then store and distribute them to their own retail outlets. Walmart is increasingly doing so and even purchasing produce directly from farmers around the word.[7]

However, sometimes cutting out the middleman is desirable, but not always. A wholesaler with buying power and excellent warehousing capabilities might be able to purchase, store, and deliver a product to a seller more cheaply than its producer could acting alone. Walmart doesn’t need a whole- saler’s buying power but your local In ‘n Out convenience store does. Likewise, hiring a distributor will cost a producer money. But if the distributor can help the producer sell greater quantities of a product, it can increase the producer’s profits. Moreover, when you cut out the middlemen you work with, you have to perform the functions they once did. Maybe it’s storing the product or dealing with hundreds of retailers. More than one producer has ditched its intermediaries only to rehire them later because of the hassles involved.

Nonetheless, disintermediation isn’t likely to stop. The Internet facilitates a certain amount of dis- intermediation by making it easier for consumers and businesses to contact one another without going through any middlemen. Today, most people book trips online without going through travel agents. People also shop for homes online rather than using real estate agents. To remain in business, interme- diaries need to find new ways to add value to products—which is exactly what they are doing. For ex- ample, although there are fewer travel agents than there were in the past, there are many more travel- related Internet sites—Expedia, Tripadvisor, and Priceline, to name just a few—that book people’s trips by serving as affiliates to airlines, hotels, and other providers of travel and leisure services.

F I G U R E 8 . 7

Be glad you’re not the owner of this parking lot because it’s going to need a lot of cleanup. This Nationwide Insurance ad drives home the point that close personal contact with your insurance agent might be a good idea.

Source: Courtesy of Nationwide, used with permission.

166 PRINCIPLES OF MARKETING VERSION 3.0

F I G U R E 8 . 8

Michael Dell, founder of the worldwide corporation Dell, Inc., initially made and sold computers to buyers by telephone out of his college dorm room.

Source: Courtesy of Dell, Inc., used with permission.

However, for some products, disintermediation via the Internet doesn’t work so well. Insurance is an example. You can buy it online directly from companies, but many people want to buy through an agent they can talk to for advice.

Sometimes it’s simply impossible to cut out middlemen. Do sales representatives for Coca-Cola want to take the time and trouble to personally sell people individual cans of Coke? No. They are no more capable of selling individual Cokes to people than Santa is capable of delivering toys to children around the globe. Even Dell, which ini- tially made its mark by selling computers straight to users, now sells its products through retailers such as Best Buy as well. Dell found that to compete effectively, its products needed to be placed in stores alongside Hewlett-Packard, Toshiba, and other computer brands.[8]

2.2 Multiple Channels and Alternate Channels Marketing channels can get a lot more complex than the channels shown in Figure 8.4 and Figure 8.5 though. Look at the channels in Figure 8.9. Notice how in some situ- ations, a wholesaler will sell to brokers, who then sell to retailers and consumers. In other situations, a wholesaler will sell straight to retailers or straight to consumers. Manufacturers also sell straight to consumers, and, as we explained, sell straight to large retailers like Target.

F I G U R E 8 . 9 Alternate Channel Arrangements

The point is that firms can and do utilize multiple channels. Take Levi’s, for example. You can buy a pair of Levi’s from a retailer such as Kohl’s, or directly from Levi’s on its website or at one of the outlet stores it owns around the country. You can also buy a pair of Levi’s from a seller who scours retail stores for bargains and then resells the products on eBay and Amazon.com for a profit. DWNY LLC, based in Ocean Side, New Jersey, makes millions of dollars annually by dispatching teams of profes- sionals shoppers to find the bargains and then reselling them on Amazon.com.

The key is understanding the different target markets for your product and designing the best channel to meet the needs of customers in each. Is there a group of buyers who would purchase your product if they could shop online rather than at a store? For example, it used to be that if you wanted to buy hot-off-the-runway designer clothing, you almost always went to a store like Neiman Marcus. But that is changing. Moda Operandi is one of a number of startup companies that is attempting to make luxury shopping more convenient for younger, tech-savvy customers. The company conducts its fash- ion and trunk shows online. Customers put down a 50-percent deposit on the designer clothing they want to buy online, and receive it as soon as the new fashions are actually manufactured.[9]

Or, perhaps there is a group of customers interested in your product but they do not want to pay full price. For these people, Wish might be more their speed. Wish is an app that enables people to buy super-inexpensive, unbranded clothing and other products, often from China. The goods are then shipped directly to the customer from China via the least-expensive, and very slowest, method possible. And what about the people who buy cheap products that were plucked from the shelves of retail stores and resold on Amazon.com and eBay? How do they benefit? They benefit because they don’t have to

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F I G U R E 8 . 1 0

In addition to selling products on TV and on the Web, QVC also sells them via its mobile message service. Customers can sign up to get alerts about products for sale and buy them on their cell phones.

Source: © Jupiterimages Corporation

strategic channel alliances

An agreement formed by two or more firms to deliver their products via a channel. The products and organizations can be similar or different.

personally look for the bargains in stores. Instead, they can conveniently buy the products online at more competitive prices than they could if the resellers hadn’t made them available there.

Many people regularly interact with companies via numerous channels before making buying de- cisions. Using multiple channels can be effective. At least one study has shown that the more marketing channels your customers utilize, the more loyal they are likely to be to your products.[10] Companies work hard to try to integrate their selling channels so users get a consistent experience. For example, QVC’s TV channel, website, and mobile service—which sends alerts to customers and allows them to buy products via their cell phones—all have the same look and feel.

A company can also use a marketing channel to set itself apart from the crowd. Jones Soda Co. ini- tially placed its own funky-looking soda coolers in skate and surf shops, tattoo and piercing parlors, in- dividual fashion stores, and national retail clothing and music stores. The company then began an up- and-down-the-street “attack,” placing its products in convenience and food stores. Finally, the com- pany was able to sell its drinks to bigger companies like Starbucks, Barnes & Noble, Safeway, Target, and 7-Eleven stores.[11] Would you like to purchase gold from a vending machine? You can—in Ger- many. Germans like to purchase gold because it’s considered a safe alternative to paper money, which can become devalued during a period of hyperinflation. So, in addition to selling gold the usual way, TG-Gold-Super-Markt has install “gold to go” machines in five hundred locations in German-speaking countries. The gold is dispensed in metal boxes, and cameras on the machine monitor the transactions to prevent money laundering.[12]

Video Clip

Check out this YouTube clip to get a look at how a gold vending machine works.

Some companies find ways to increase their sales by forming strategic channel alliances with one another. Harley-Davidson has a strategic channel alliance with Best Western. Click on Harley-David- son’s “Ride Planner” tab on its website, and you can sign up to receive points and other discounts by staying at Best Western hotels and motels.[13] Starbucks now dispenses its beverages in some of Safe- way’s grocery stores. Starbucks wants grocery shoppers at Safeway craving a cup of coffee to grab one; Safeway hopes customers dropping in for a Starbucks cup of coffee will buy some grocery products.

2.3 International Marketing Channels Consumer and business markets in the United States are well developed and growing slowly. However, the opportunities for growth abound in other countries. Coca-Cola, in fact, earns most of its income abroad, not in the United States. The company continues to push into other countries, such as China, where the per-person consumption of ready-to-drink beverages is only about a third of the global aver- age.[14]

The question is, how do companies enter these markets? Via what marketing channels? Some third-world countries lack good intermediary systems. In these countries, firms are on their own in terms of selling and distributing products downstream to users. Other countries have elaborate mar- keting channels that must be navigated. Consider Japan, for example. Japan has an extensive, complic- ated system of intermediaries, each of which demands a cut of a company’s profits. Carrefour, a global chain of hypermarkets, tried to expand there but eventually left the country because its marketing channel system was so complicated. Walmart managed to develop a presence in Japan, but only after acquiring the Japanese supermarket operator Seiyu.[15]

View the video online at: http://www.youtube.com/embed/eRa0Mnd93wE?rel=0

168 PRINCIPLES OF MARKETING VERSION 3.0

F I G U R E 8 . 1 1

McDonald’s opened a franchise in the Louvre. How about a little art viewing with your Big Mac?

Source: © Jupiterimages Corporation

As you learned in Chapter 2 and Chapter 5, acquiring part or all of a foreign company is a com- mon strategy for companies. It is referred to as making a direct foreign investment. However, you also have learned that some nations don’t allow foreign companies to do business within their borders or buy local companies. The Chinese government blocked Coca-Cola from buying Huiyuan Juice, that country’s largest beverage maker. Corruption and unstable governments also make it difficult to do business in some countries. The banana company Chiquita found itself in the bad position of having to pay off rebels in Colombia to prevent them from seizing the banana plantations of one of its subsidiaries.

One of the easier ways of utilizing intermediaries to expand abroad is by creating a joint venture. You first learned about joint ventures in Chapter 2. A joint venture is an entity created when two parties agree to share their profits, losses, and control with one another in an economic activity they jointly undertake. The German automaker Volkswagen struggled to penetrate Asian markets, so it signed an agreement with Suzuki, the Japanese company, in an effort to challenge Toyota’s dominance in Asia.

Do joint ventures work? Some do, but many fail, particularly when they involve companies from different countries. Daimler-Chrysler, the union between the German car company and US automaker Chrysler, is one of many joint ventures that fell by the wayside.[16] However, in some countries, such as India, it is the only way foreign companies are allowed to do business there.

An even easier way to enter markets is to simply export your products. Microsoft didn’t do well with its Zune MP3 player in the United States, so the company sub- sequently redesigned the product and launched it in other countries.[17] Companies can sell their products directly to other firms abroad, or they can hire intermediaries such as brokers and agents that specialize in international exporting to help them find po- tential buyers for their products.

Recall that many companies, particularly those in the United States, have expanded their operations via franchising. Franchising grants an independent operator the right to use a company’s business model, name, techniques, and trademarks for a fee. McDonald’s is the classic example of a franchise. Unlike Walmart, McDonald’s has had no trouble making headway in Japan. It has done so by selling thousands of franchises there. In fact, Japan is McDonald’s second-largest market next to the United States. The company also has thousands of franchises in Europe and other countries. There is even a McDonald’s franchise in the Louvre, the prestigious museum in Paris that houses the Mona Lisa. Licensing is similar to franchising. For a fee, a firm can buy the right to use another firm’s manufacturing processes, trade secrets, patents, and trademarks for a certain period of time.

K E Y T A K E A W A Y S

A direct marketing channel consists of just two parties—a producer and a consumer. By contrast, a channel that includes one or more intermediaries (wholesaler, distributor, or broker or agent) is an indirect channel. Firms often utilize multiple channels to reach more customers and increase their effectiveness. Some compan- ies find ways to increase their sales by forming strategic channel alliances with one another. Other companies look for ways to cut out the middlemen from channels, a process known as disintermediation. Direct foreign investment, joint ventures, exporting, franchising, and licensing are some of the channels by which firms at- tempt to enter foreign markets.

R E V I E W Q U E S T I O N S

1. Why are direct marketing channels possible for some products and not others?

2. Explain the value middlemen can add to products.

3. Name some companies that have multiple marketing channels for their products. What are those channels?

4. How do marketing channels differ around the world? Why is it sometimes hard for firms to penetrate foreign markets?

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 169

push strategy

A strategy in which businesses are the target of promotions so products get “pushed” through their marketing channels and sold to consumers.

3. FUNCTIONS PERFORMED BY CHANNEL PARTNERS

L E A R N I N G O B J E C T I V E S

1. Describe the activities performed in channels. 2. Explain which organizations perform which functions.

Different organizations in a marketing channel are responsible for different value-adding activities. The following are some of the most common functions channel members perform. However, keep in mind that “who does what” can vary, depending on what the channel members actually agree to in their con- tracts with one another.

3.1 Disseminating Marketing Communications and Promoting Brands Somehow wholesalers, distributors, retailers, and consumers need to be informed—via marketing com- munications—that an offering exists and that there’s a good reason to buy it. Sometimes, a push strategy is used to help marketing channels accomplish this. A push strategy is one in which a manu- facturer convinces wholesalers, distributors, or retailers to sell its products. Consumers are informed via advertising and other promotions that the product is available for sale, but the main focus is to sell to intermediaries.

F I G U R E 8 . 1 2 A Push versus a Pull Strategy

The problem with a push strategy is that it doesn’t focus on the needs of the actual users of the products. Coca-Cola used a push strategy for years before realizing that instead of focusing on moving beverages through a retailer’s back door and into their warehouse, it needed to help them sell to shop- pers through the retailer’s front door.[18] College textbook publishers are in a similar position today. Traditionally, they have concentrated their selling efforts on professors and bookstore managers. (Has a textbook company ever asked you what you want out of a textbook?) It’s no secret that the price of textbooks is climbing and students are purchasing fewer of them. Like Coca-Cola, textbook publishers are probably going to have to rethink their sales and marketing channel strategies. That’s what entre- preneurs Jeff Shelstad and Eric Frank did when they launched Flat World Knowledge, the publisher of this textbook. One of Flat World Knowledge’s strategies is to deliver its products via marketing chan- nels that are more cost-effective than those used to sell traditional textbooks.[19]

170 PRINCIPLES OF MARKETING VERSION 3.0

pull strategy

A strategy in which consumers are targeted with sales promotions such as coupons, contests, games, rebates, mail-in offers.

By contrast, a pull strategy focuses on creating demand for a product among consumers so that businesses agree to sell the product. A good example of an industry that utilizes both pull and push strategies is the pharmaceutical industry. Pharmaceutical companies promote their drugs to pharma- cies and doctors, but they now also run ads designed to persuade individual consumers to ask their physicians about drugs that might benefit them.

In many cases, two or more organizations in a channel jointly promote a product to retailers, pur- chasing agents, and consumers and work out which organization is responsible for what type of com- munication to whom. For example, the ads from Target, Walmart, and other retailers you see in the pa- per on Sunday are often a joint effort between the manufacturers and the retailers that sell the products. The actual forms and styles of communication will be discussed more in the promotions and sales section of the book.

3.2 Sorting and Regrouping Products As we explained, many businesses don’t want to receive huge quantities of a product. One of the func- tions of wholesalers and distributors is to break down large quantities of products into smaller units and provide an assortment of different products to businesses.

For example, cranberry farmers have large crops to sell. You don’t want to buy large amounts of cranberries, make your own juice or cranberry sauce, or dry them into craisins for salads. So the farm- ers sell their produce to a co-op, which sorts the berries by size; large ones become craisins while others are destined to become either juice or sauce, depending on their liquid content. Those are then sold to the juice and sauce producers.

3.3 Storing and Managing Inventory If a channel member has run out of a product when a customer wants to buy it, the result is often a lost sale. That’s why most channel members stock, or “carry,” reserve inventory. However, storing products is not free. Warehouses cost money to build or rent and heat and cool; employees have to be paid to stock shelves, pick products, ship them, and so forth. Some companies, including Walmart, put their suppliers in charge of their inventory. The suppliers have access to Walmart’s inventory levels and ship products when and where the retailer’s stores need them.

Storing and managing inventory is not just a function provided for retailers, though. Storage also involves storing commodities like grain prior to processing. Gigantic grain elevators store corn, wheat, and other grains until processors, like Oroweat, need them. You can buy fresh bread in your grocer every day because the wheat was stored first at a grain elevator until it was needed.

Video Clip

Not all warehouses utilize humans to pluck products from shelves. Increasingly they use robots as well, as this video shows. Robots cost money, too, though.

View the video online at: http://www.youtube.com/embed/UtBa9yVZBJM?rel=0

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 171

F I G U R E 8 . 1 3

Walmart doesn’t just own its own warehouses. It also owns its own fleet of semi-trucks.

Source: © Jupiterimages Corporation

free on board (FOB)

A contract term that designates which party is responsible for a product’s shipping costs and owns the title to the goods and when.

nondisclosure agreement

A contract that specifies information that is proprietary, or owned by a channel partner, and how, if at all, the other partners can use that information.

3.4 Distributing Products Physical goods that travel within a channel need to be moved from one member to an- other and sometimes back again. Some large wholesalers, distributors, and retailers own their own fleets of trucks for this purpose. In other cases, they hire third-party transportation providers—trucking companies, railroads, and so forth—to move their products.

Being able to track merchandise like you can track a FedEx package is extremely important to channel partners. They want to know where their products are at all times and what shape they are in. Losing inventory or having it damaged or spoiled can wreak havoc on a company’s profits. So can not getting products on time or being able to get them at all when your competitors can.

3.5 Assuming Ownership Risk and Extend Credit If products are damaged during transit, one of the first questions asked is who owned the product at the time. In other words, who suffers the loss? Generally, no one channel member assumes all of the ownership risk in a channel. Instead, it is distributed among channel members depending on the contracts they have with one another and their free

on board provisions. A free on board (FOB) provision designates who is responsible for what ship- ping costs and who owns the title to the goods and when. However, the type of product, the demand for it, marketing conditions, and the clout of the various organizations in its marketing channel can affect the contract terms channel members are willing to agree to. Some companies try to wait as long as possible to take ownership of products so they don’t have to store them. During an economic down- turn, channel members often try to hold as little inventory as possible in case it becomes obsolete.[20]

3.6 Sharing Marketing and Other Information Each of the channel members has information about the demand for products, trends, inventory levels, and what the competition is doing. The information is valuable and can be doubly valuable if channel partners trust one another and share it. More information can help each firm in the marketing channel perform its functions better and overcome competitive obstacles.[21]

That said, confidentiality is a huge issue among supply chain partners because they share so much information with one another, such as sales and inventory data. For example, a salesperson who sells Tide laundry detergent for Procter & Gamble will have a good idea of how many units of Tide Walmart and Target are selling. However, it would be unethical for the salesperson to share Walmart’s numbers with Target or Target’s numbers with Walmart. Many business buyers require their channel partners to sign nondisclosure agreements or make the agreements part of purchasing contracts. A nondisclosure agreement (NDA) is a contract that specifies what information is proprietary, or owned by the partner, and how, if at all, the partner can use that information.

K E Y T A K E A W A Y S

Different organizations in a marketing channel are responsible for different value-adding activities. These activ- ities include disseminating marketing communications and promoting brands, sorting and regrouping products, storing and managing inventory, distributing products, assuming the risks of products, and sharing information.

R E V I E W Q U E S T I O N S

1. Explain the difference between a pull and a push strategy when it comes to marketing communications.

2. Why is taking ownership of products an important marketing channel function?

3. Which firms manage inventory in marketing channels?

172 PRINCIPLES OF MARKETING VERSION 3.0

4. MARKETING CHANNEL STRATEGIES

L E A R N I N G O B J E C T I V E S

1. Describe the factors that affect a firm’s channel decisions. 2. Explain how intensive, exclusive, and selective distribution differ from one another. 3. Explain why some products are better suited to some distribution strategies than others.

4.1 Channel Selection Factors Selecting the best marketing channel is critical because it can mean the success or failure of your product. One of the reasons the Internet has been so successful as a marketing channel is because cus- tomers get to make some of the channel decisions themselves. They can shop virtually for any product in the world when and where they want to, as long as they can connect to the Web. They can also choose how the product is shipped.

Type of Customer

The Internet isn’t necessarily the best channel for every product, though. For example, do you want to closely examine the fruits and vegetables you buy to make sure they are ripe enough or not overripe? Then online grocery shopping might not be for you. Clearly, how your customers want to buy products will have an impact on the channel you select. In fact, it should be your prime consideration.

First of all, are you selling to a consumer or a business customer? Generally, these two groups want to be sold to differently. Most consumers are willing to go to a grocery or convenience store to pur- chase toilet paper. The manager of a hospital trying to replenish its supplies would not. The hospital manager would also be buying a lot more toilet paper than an individual consumer and would expect to be called upon by a distributor, but perhaps only semiregularly. Thereafter, the manager might want the toilet paper delivered on a regular basis and billed to the hospital via automatic systems. Likewise, when businesses buy expensive products such as machinery and computers or products that have to be customized, they generally expect to be sold to personally via salespeople. And often they expect special payment terms.

Type of Product

The type of product you’re selling will also affect your marketing channel choices. Perishable products often have to be sold through shorter marketing channels than products with longer shelf lives. For ex- ample, a yellowfin tuna bound for the sushi market will likely be flown overnight to its destination and handled by few intermediaries. By contrast, canned tuna can be shipped by “slow boat” and handled by more intermediaries. Valuable and fragile products also tend to have shorter marketing channels. Automakers generally sell their cars straight to car dealers (retailers) rather than through wholesalers. The makers of corporate jets often sell them straight to corporations, which demand they be custom- ized to certain specifications.

Channel Partner Capabilities

Your ability versus the ability of other types of organizations that operate in marketing channels can affect your channel choices. If you are a massage therapist, you are quite capable of delivering your product straight to your client. If you produce downloadable products like digital books or recordings, you can sell your products straight to customers on the Internet. Hypnotic World, a UK producer of self-hypnosis recordings, is such a company. If you want to stop smoking or lose weight, you can pay for and download a recording to help you do this at http://www.hypnoticworld.com.

But suppose you’ve created a great new personal gadget—something that’s tangible, or physical. You’ve managed to sell it via two channels—say, on TV (via the Home Shopping Network, perhaps) and on the Web. Now you want to get the product into retail stores like Target, Walgreens, and Bed Bath & Beyond. If you can get the product into these stores, you can increase your sales exponentially. In this case, you might want to contract with an intermediary—perhaps an agent or a distributor who will convince the corporate buyers of those stores to carry your product.

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 173

http://www.hypnoticworld.com

intensive distribution

A strategy of selling a product in as many outlets as possible.

The Business Environment and Technology

The general business environment, such as the economy, can also affect the marketing channels chosen for products. For example, think about what happens when the value of the dollar declines relative to the currencies of other countries. When the dollar falls, products imported from other countries cost more to buy relative to products produced and sold in the United States. Products “made in China” be- come less attractive because they have gotten more expensive. As a result, some companies then look closer to home for their products and channel partners.

Technological changes affect marketing channels, too, of course. The Internet vastly changed how products are bought and sold. Many companies like selling products on the Internet as much as con- sumers like buying them. For one, an Internet sales channel gives companies more control over how their products are sold and at what prices than if they leave the job to another channel partner such as a retailer. Plus, a company selling on the Internet has a digital footprint, or record, of what shoppers look at, or click on, at its site. As a result, it can recommend products they appear to be interested in and tar- get them with special offers and prices.[22]

Some sites let customers tailor products to their liking. On the Domino’s website, you can pick your pizza ingredients and then watch them as they fall onto your virtual pizza. The site then lets you know who is baking your pizza, how long it’s taking to cook, and who’s delivering it. Even though in- teraction is digital, it somehow feels a lot more personal than a basic phone order. Developing custom- er relationships is what today’s marketing is about. The Internet is helping companies do this.

Competing Products’ Marketing Channels

How your competitors sell their products can also affect your marketing channels. As we explained, Dell now sells computers to firms like Best Buy so the computers can compete with other brands on store shelves, but that’s not how it initially sold its computers.

You don’t always have to choose the channels your competitors rely on, though. Maybelline and L’Oréal products are sold primarily in retail stores. However, Mary Kay and Avon use salespeople to personally sell their products to consumers.

Netflix is another example. Netflix turned the video rental business on its head by coming up with a new marketing channel that better meets the needs of consumers. Beginning with direct mail and then moving to Internet delivery, Netflix has changed the way television is watched. To stay competit- ive and allow people to watch the shows they want to see when they want to watch them, broadcast and cable channels such as HBO, CBS, NBC, and others have begun streaming their shows on demand for a monthly fee on Netflix and other streaming services.

4.2 Factors That Affect a Product’s Intensity of Distribution Firms that choose an intensive distribution strategy try to sell their products in as many outlets as possible. Intensive distribution strategies are often used for convenience offerings—products customers purchase on the spot without much shopping around. Soft drinks and newspapers are an example. You see them sold in many different places. Redbox, which rents DVDs out of vending machines, has made headway using a distribution strategy that’s more intensive than Blockbuster’s: the machines are loc- ated in fast-food restaurants, grocery stores, and other places people go frequently. The strategy was so successful, Blockbuster attempted to retaliate with its own line of vending machines, although it was too little, too late.

174 PRINCIPLES OF MARKETING VERSION 3.0

F I G U R E 8 . 1 4

Because installing a vending machine is less expensive than opening a retail outlet, Redbox was able to locate its DVD vending machines in more places than Blockbuster could its stores. Blockbuster responded with its own vending machines.

selective distribution

A strategy of selling products at specific outlets and/or locations.

exclusive distribution

A strategy of selling products through one or a few retailers in a specific location.

gray market

A market in which a producer hasn’t authorized its products to be sold.

By contrast, selective distribution involves selling products at select outlets in specific locations. For instance, Sony TVs can be purchased at a number of outlets such as Best Buy, Target, or Walmart, but the same models are generally not sold at all the outlets. The lowest-priced Sony TVs are at Walmart, the better Sony models are more expensive and found in stores like Best Buy or specialty electronics stores. By selling different models with different features and price points at different outlets, a manufac- turer can appeal to different target markets. You don’t expect, for example, to find the highest-priced products in Walmart; when you shop there, you are looking for the lower-priced goods.

Exclusive distribution involves selling products through one or very few outlets. Most students often think exclusive means high priced, but that’s not always the case. Exclusive simply means limiting distribution to only one outlet in any area, and can be a strategic decision based on applying the scarcity principle to creating demand. For in- stance, supermodel Cindy Crawford’s line of furniture is sold exclusively at the fur- niture company Rooms To Go. Designer Michael Graves has a line of products sold ex- clusively at Target. To purchase those items you need to go to one of those retailers. In these instances, retailers are teaming up with these brands in order to create a sense of quality based on scarcity, a sense of quality that will not only apply to the brand but to the store.

TV series are distributed exclusively. In this instance, the choice isn’t so much about applying the scarcity principle as it is about controlling risk. A company that produces a TV series will sign an exclusive deal with a network like ABC, CBS, or Showtime, and the series will initially appear only on that network. Later, reruns of the shows are often distributed selectively to other networks. That initial exclusive run, however, is intended to protect the network’s investment by giving the network sole rights to broadcast the show. The Muppets are an ex- ample. After appearing on PBS for decades, the network recently sold the Muppets series to HBO. (And darned if Miss Piggy and Kermit the Frog didn’t break up about the same time, too.) New epis- odes of the Muppets now initially appear on HBO and then on PBS later.

To control the image of their products and the prices at which they are sold, the makers of upscale products often prefer to distribute their products more exclusively. Expensive perfumes and designer purses are an example. Distributing a product exclusively to a limited number of organizations under strict terms can help prevent a company’s brand from deteriorating or losing value. It can also prevent products from being sold cheaply in gray markets. A gray market is a market in which a producer hasn’t authorized its products to be sold. The choice to distribute intensively, selectively, or exclusively is a strategic decision based on many factors such as the nature of the brand, the types and number of competitors, and the availability of retail choices.

K E Y T A K E A W A Y S

Selecting the best marketing channel is critical because it can mean the success or failure of your product. The type of customer you’re selling to will have an impact on the channel you select. In fact, this should be your prime consideration. The type of product, your organization’s capabilities versus those of other channel mem- bers, the way competing products are marketed, and changes in the business environment and technology can also affect your marketing channel decisions. Various factors affect a company’s decisions about the in- tensity of a product’s distribution. An intensive distribution strategy involves selling a product in as many out- lets as possible. Selective distribution involves selling a product at select outlets in specific locations. Exclusive distribution involves selling a product through one or very few outlets.

R E V I E W Q U E S T I O N S

1. Why are good channel decisions critical to a product’s success?

2. Name the factors that affect channel-selection decisions.

3. Which kinds of products are more likely to be distributed using exclusive marketing strategies?

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 175

channel power

The ability to influence a channel partner’s goals and efforts.

channel leaders

A strong channel member that wields channel power.

channel conflict

A dispute among channel members.

5. CHANNEL DYNAMICS

L E A R N I N G O B J E C T I V E S

1. Explain what channel power is and the types of firms that wield it. 2. Describe the types of conflicts that can occur in marketing channels. 3. Describe the ways in which channel members achieve cooperation with one another.

5.1 Channel Power Strong channel partners often wield what’s called channel power and are referred to as channel leaders, or channel captains. In the past, big manufacturers like Procter & Gamble and Dell were often channel captains. But that is changing. More often today, big retailers like Amazon.com, Walmart, and Target are commanding more channel power. They have millions of customers and are bombarded with products wholesalers and manufacturers want them to sell. As a result, these retailers increasingly are able to call the shots. Category killers like Home Depot and Petco are in a similar position.

Consumers like you are gaining marketing channel power, too. Regardless of what one manufac- turer produces or what a local retailer has available, you can use the Internet to find whatever product you want at the best price available and have it delivered when, where, and how you want.

5.2 Channel Conflict A dispute among channel members is called a channel conflict. Channel conflicts are common. Part of the reason for this is that each channel member has its own goals, which are unlike those of any oth- er channel member. The relationship among them is not unlike the relationship between you and your boss (assuming you have a job). Both of you want to serve your organization’s customers well. However, your goals are different. Your boss might want you to work on the weekend, but you might not want to because you need to study for a Monday test.

All channel members want to have low inventory levels but immediate access to more products. Who should bear the cost of holding the inventory? What if consumers don’t purchase the products? Can they be returned to other channel members, or is the organization in possession of the products responsible for disposing of them? Channel members try to spell out details such as these in their con- tracts with one another.

But no matter how “airtight” their contracts are, there will still be points of contention among channel members. Channel members are constantly asking their partners, “What have you done (or not done) for me lately?” Wholesalers and retailers frequently lament that the manufacturers they work with aren’t doing more to promote their products—for example, distributing coupons for them, run- ning Facebook and TV ads, and so forth—so they will move off store shelves more quickly. Meanwhile, manufacturers want to know why wholesalers aren’t selling their products faster and why retailers are placing them at the bottom of shelves where they are hard to see. Apple opened its own retail stores around the country, in part because it didn’t like how its products were being displayed and sold in other companies’ stores.

176 PRINCIPLES OF MARKETING VERSION 3.0

F I G U R E 8 . 1 5

Dr. Thunder is Walmart’s store-brand equivalent of Dr. Pepper. Store brands create competition for “regular” manufacturers.

Store brands

Products retailers produce themselves or pay manufacturers to produce for them.

vertical conflict

Conflict that occurs between two different types of members of the channel.

horizontal conflict

Conflict that occurs between organizations of the same type.

Dumping

Selling a large quantity of goods in another country at artificially low prices to drive your competitors out of business.

Channel conflicts can also occur when manufacturers sell their own products online. When they do, wholesalers and retailers often feel like they are competing for the same customers when they shouldn’t have to. Likewise, manufacturers often feel slighted when retailers dedicate more shelf space to their own store brands. Store brands are products retailers produce themselves or pay manufactur- ers to produce for them. Dr. Thunder is Walmart’s store-brand equivalent of Dr. Pepper. Because a re- tailer doesn’t have to promote its store brands to get them on its own shelves like a “regular” manufac- turer would, store brands are often priced more cheaply. And some retailers sell their store brands to other retailers, creating competition for manufacturers.

Vertical versus Horizontal Conflict

The conflicts we’ve described so far are examples of vertical conflict. A vertical conflict is conflict that occurs between two different types of members in a channel—say, a manufacturer, an agent, a whole- saler, or a retailer. By contrast, a horizontal conflict is conflict that occurs between organizations of the same type—say, two manufacturers that each want a powerful wholesaler to carry only its products.

Horizontal conflict can be healthy because it’s competition driven. But it can create problems, too. A few years ago, Walmart experienced a horizontal conflict among its landline telephone suppliers. The suppliers were in the middle of a price war and cutting the prices to all the retail stores they sold to. Walmart wasn’t selling any additional phones due to the price cuts. It was just selling them for less and making less of a profit on them.[23]

Dumping can lead to horizontal conflict. Dumping is the practice of selling for a period of time a large quantity of goods in another country at a price too low to be economically justifiable. The goal of dumping is to drive your competitors out of a market and then raise your price. Typically, dumping is made possible by government subsidies that allow a company to lower its prices relative to internation- al competitors that have to operate without government support. While there are global economic agreements that prohibit dumping and specify penalties when it occurs, the process can take so long to right the situation that one’s competitors have already been driven out of business.

Channel leaders like Walmart usually have a great deal of say when it comes to how channel con- flicts are handled, which is to say that they usually get what they want. But even the most powerful channel leaders strive for cooperation. A manufacturer with channel power still needs good retailers to sell its products; a retailer with channel power still needs good suppliers from which to buy products. One member of a channel can’t squeeze all the profits out of the other channel members and still hope to function well. Moreover, because each of the channel partners is responsible for promoting a product through its channel, to some extent they are all in the same boat. Each one of them has a vested interest in promoting the product, and the success or failure of any one of them can affect that of the others.

Flash back to Walmart and how it managed to solve the conflict among its telephone suppliers: Be- cause the different brands of landline telephones were so similar, Walmart decided it could consolidate and use fewer suppliers. It then divided its phone products into market segments—inexpensive phones with basic functions, midpriced phones with more features, and high-priced phones with many fea- tures. The suppliers chosen were asked to provide products for one of the three segments. This gave Walmart’s customers the variety they sought. And because the suppliers selected were able to sell more phones and compete for different types of customers, they stopped undercutting each other’s prices.[24]

5.3 Achieving Channel Cooperation Ethically What if you’re not Amazon.com, Walmart, or a channel member with a great deal of power? How do you build relationships with channel partners and get them to cooperate with you? One way is by em- phasizing the benefits of working with your firm. For example, if you are a seller whose product and brand name are in demand, you want to point out how being one of a retailer’s “authorized sellers” can boost store traffic and revenues.

Oftentimes companies produce informational materials and case studies showing their partners how they can help boost their sales volumes and profits. Channel partners also want to feel assured that the products coming through the pipeline are genuine and not knockoffs and that there will be a steady supply of them. Your goal is to show your channel partners that you understand issues such as these and help them generate business.

Sometimes the shoe is on the other foot—retailers have to convince the makers of products to do business with them instead of the other way around. Beauty.com, an online retailer, is an example. Selling perfumes and cosmetics online can be difficult because people want to be able to smell and feel the products like they can at a department store. But Beauty.com has been able to convince the makers of more than two hundred upscale cosmetic brands that selling their products on its website is a great deal and can increase their revenues. To reassure sellers that shoppers can get personalized service,

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 177

F I G U R E 8 . 1 6

Boar’s Head creates in-store displays like the banner shown here to help its channel partners sell its products.

resale price maintenance agreement

An agreement whereby a producer of a product restricts the price a retailer can charge for it.

Beauty.com offers the site’s visitors free samples of products and the ability to chat live online with skin and hair care consultants.[25]

In some instances, Walmart has had trouble attracting manufacturers because it demanded to buy their products at ultra-low prices. All of the people and organizations in a marketing channel wants to make a profit. But if you squeeze too much profit out of your channel partners, they will want to do business with someone else rather than you.

Producing marketing and promotional materials their channel partners can use for sales purposes can also facilitate cooperation among companies. In-store displays, bro- chures, banners, photos for websites, and advertisements the partners can customize with their own logos and company information are examples. Look at the banner in Figure 8.16. Although it looks like it was made by the grocery store displaying it, it wasn’t. It was produced by Boar’s Head, a meat supplier, for the grocer and others like it.

Educating your channel members’ sales representatives is an extremely important part of facilitating cooperation, especially when you’re launching a new product. The reps need to be provided with training and marketing materials in advance of the launch so their activities are coordinated with yours. Microsoft is a company that does a good job of training its partners. Before launching new operating systems, Microsoft provides thousands of its partners with sales and technical training.[26]

In addition, companies run sales contests to encourage their channel partners’ sales forces to sell what they have to offer. Offering your channel partners certain mon- etary incentives, such as discounts for selling your product, can help, too.

What shouldn’t you do when it comes to your channel partners? Take them for granted, says John Addison, the author of the book Revenue Rocket: New Strategies for Selling with Partners. Addison suggests creating a dialogue with them via one-on-one

discussions and surveys and developing “partner advisory councils” to better understand their needs. You also don’t want to “stuff the channel,” says Addison. Stuffing the channel occurs when, in or-

der to meet its sales numbers, a company offers its channel partners deep discounts and unlimited re- turns to buy a lot of a product. The problem is that such a strategy can lead to a buildup of inventory that gets steeply discounted and dumped on the market and sometimes on gray markets. This can affect people’s perceptions of the product and its brand name. And what happens to any unsold invent- ory? It gets returned back up in the channel in the next accounting period, taking a toll on the “stuffers’” sales numbers.

Lastly, you don’t want to risk breaking the law or engage in unfair business practices when dealing with your channel partners.[27] We have already discussed confidentiality issues and dumping. Another issue channel partners sometimes encounter relates to resale price maintenance agreements. A resale price maintenance agreement is an agreement whereby a producer of a product restricts the price a retailer can charge for it.

The producers of upscale products often want retailers to sign resale price maintenance agree- ments because they don’t want the retailers to deeply discount their products. Doing so would “cheapen” their brands, producers believe. Producers also contend that resale price maintenance agree- ments prevent price wars from breaking out among their retailers, which can lead to the deterioration of prices for all of a channel’s members.

Both large companies and small retail outlets have found themselves in court as a result of price maintenance agreements. Although the US Supreme Court hasn’t ruled that all price maintenance agreements are illegal, some states have outlawed them on the grounds that they stifle competition. In some countries, such as the United Kingdom, they are banned altogether. The safest bet for a manufac- turer is to provide a “suggested retail price” to its channel partners.

178 PRINCIPLES OF MARKETING VERSION 3.0

vertical marketing system

A system in which channel members located at different levels within a channel formally agree to cooperate with one another.

vertical integration

A strategy of disintermediation, or growth through acquisition or development of operations, or that eliminates middlemen in the channel.

forward integration

A form of vertical integration where the company adds downstream operations, either by acquisition or by growth; the opposite of backward integration.

backward integration

A form of vertical integration where the company integrating channel operations moves upstream, toward manufacturing.

conventional marketing system

A marketing system in which the channel members have no affiliation with one another.

horizontal marketing system

A system in which two companies at the same channel level agree to cooperate with one another to sell their products.

horizontal integration

Adding to operations at the same level in the distribution channel, usually through acquisition of competitors.

5.4 Channel Integration: Vertical and Horizontal Marketing Systems Another way to foster cooperation in a channel is to establish a vertical marketing system. In a vertical marketing system, channel members formally agree to closely cooperate with one another. (You have probably heard the saying, “If you can’t beat ’em, join ’em.”) A vertical marketing system can also be created by one channel member taking over the functions of another member; this is a form of disin- termediation known as vertical integration.

Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a re- tailer of them. But the company’s long-term strategy is to compete in every personal-care channel, in- cluding salons, where the men’s business is underdeveloped. In 2009, P&G purchased The Art of Shav- ing, a seller of pricey men’s shaving products located in upscale shopping malls. P&G also runs retail boutiques around the globe that sell its prestigious SK-II skin-care line.[28]

Vertical integration can be forward, or downstream, as in the case of P&G just described. Backward integration occurs when a company moves upstream in the supply chain—that is, toward the beginning. An example occurred when Walmart bought McLane, a grocery warehousing and distri- bution company. As much as physical facilities, Walmart also wanted McLane’s operating knowledge in order to improve its own logistics.

Franchises are another type of vertical marketing system. They are used not only to lessen channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group the right to mar- ket a company’s goods or services within a certain territory or location.[29] McDonald’s sells meat, bread, ice cream, and other products to its franchises, along with the right to own and operate the stores. And each of the owners of the stores signs a contract with McDonald’s agreeing to do business in a certain way.

By contrast, in a conventional marketing system the channel members have no affiliation with one another. All the members operate independently. If the sale or the purchase of a product seems like a good deal at the time, an organization pursues it. But there is no expectation among the channel members that they have to work with one another in the future.

A horizontal marketing system is one in which two companies at the same channel level—say, two manufacturers, two wholesalers, or two retailers—agree to cooperate with another to sell their products or to make the most of their marketing opportunities, and is sometimes called horizontal integration. The Internet phone service Skype and the mobile-phone maker Nokia created a hori- zontal marketing system by teaming up to put Skype’s service on Nokia’s phones without consumers having to first download the the Skype app. Skype gained new market (mobile phone users) this way, and Nokia sold more phones to people who like to use Skype.[30]

Similarly, Via Technologies, a computer-chip maker that competes with Intel, teamed up with a number of Chinese companies with no PC-manufacturing experience to produce inexpensive tablet computers.[31] Of course, the more of them that are sold, the more computer chips Via Technologies sells.

K E Y T A K E A W A Y S

Channel partners that wield channel power are referred to as channel leaders. A dispute among channel members is called a channel conflict. A vertical conflict is one that occurs between two different types of members in a channel. By contrast, a horizontal conflict is one that occurs between organizations of the same type. Channel leaders are often in the best position to resolve channel conflicts. Vertical and horizontal market- ing systems can help foster channel cooperation, as can creating marketing programs to help a channel’s members all generate greater revenues and profits.

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 179

R E V I E W Q U E S T I O N S

1. What gives some organizations more channel power than others?

2. Why do channel conflicts occur?

3. Which organization(s) has the most power to resolve channel conflicts?

4. How can setting up vertical and horizontal marketing systems prevent channel conflicts?

6. DISCUSSION QUESTIONS AND ACTIVITIES

D I S C U S S I O N Q U E S T I O N S

1. What’s the ideal number of marketing channels a firm should have?

2. Is a pull strategy superior in all markets?

3. Is selling power the only source of channel power? From what other sources could an organization derive channel power?

4. The chapter listed a number of scenarios that can cause channel conflicts. What other factors can you think of that might cause channel conflicts?

5. Amazon.com has carved out a unique niche for itself as an intermediary. Amazon sells products on behalf of manufacturers such as Dell, Sony, and Calvin Klein, as well as retailers such as Macy’s and Toys“R”Us. How should Amazon be categorized? As a retailer, wholesaler, or broker?

6. What are some reasons for backward integration? For forward integration? Does such integration always benefit the consumer?

7. Direct to consumer advertising for pharmaceuticals is a pull strategy, designed to get consumers to ask their doctors to prescribe certain medications. What are the pros and cons of this practice? Are these always pros and cons to pull strategies? What might the pros and cons be for push strategies involving pharmaceuticals?

8. What are some brands that you think use selective or exclusive channels? How does channel choice, in those instances, influence consumer perceptions of value? In what situations might selective or exclusive channels add real value?

9. Of the channel functions described in the chapter, which is the most important and why? The least important? Why?

10. How does disintermediation benefit the consumer? How might it harm the consumer? Can you think of any revolutionary businesses created in the past few years due to disintermediation? Be sure to describe one not mentioned already in the chapter.

A C T I V I T I E S

1. Think of some products you currently use. Are there any you would like to buy via different marketing channels? Do you think the products could be successfully marketed this way?

2. Describe a time in which you did business with a company and received conflicting information from its different channels (for example, a store’s website versus a visit to the store). How did it affect your buying experience? Have you done business with the company since?

3. Break into groups and make a list of four to five different types of products. Decide which channels should be used to distribute each product. Present your findings to your class and see if they agree with you.

4. Make a list of products you believe failed because of poor marketing channel choices.

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180 PRINCIPLES OF MARKETING VERSION 3.0

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ENDNOTES

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“Developing a Channel Strategy,” CBSNews.com, Accessed April 13, 2012, http://www.cbsnews.com/8301-505125_162-51168339/ developing-a-channel-strategy/?tag=mncol;lst;1.

Geoff Lancaster and Frank Withey, Marketing Fundamentals (Burlington, MA: Butterworth-Heinemann, 2007), 173.

Daniel Lyons, “The Lost Decade,” Newsweek, November 9, 2009, 27.

“Developing a Channel Strategy,” CBSNews.com, Accessed April 13, 2012, http://www.cbsnews.com/8301-505125_162-51168339/ developing-a-channel-strategy/?tag=mncol;lst;1.

Agnus Loten, “Direct Seller Crafts Its Own Sales Model,” Wall Street Journal, July 17, 2014, B5.

Jonathan Birchall, “Walmart Aims to Cut Supply Chain Cost,” Financial Times, January 4, 2010, 4.

Kenneth L. Kraemeer and Jason Dedrick, “Dell Computer: Organization of a Global Production Network,” Center for Research on Information Technology and Organiza- tions, University of California, Irvine, 2008, http://escholarship.org/uc/item/ 89x7p4ws#page-2.

Lizette Chapman, “Moda Operandi Brings High End to Digital,” Wall Street Journal, February 18, 2015, B5B.

Michele Fitzpatrick, “The Seven Myths of Channel Integration,” Chief Marketer, Octo- ber 1, 2005, http://chiefmarketer.com/multi_channel/myths_integration_1001.

“About Jones Soda Co.,” JonesSoda.com, Accessed April 13, 2012, http://www.jonessoda.com/company/about-us.

James Wilson and Javier Blas, “Machines with Midas Touch Swap Chocolate for Gold Bars,” Financial Times, June 17, 2009, http://www.jonessoda.com/company/about-us.

Cristene Gonzalez-Wertz, “Ten Examples of Smarter Customer Focus” (blog), WordPress.com, February 11, 2009, http://museandmaven.wordpress.com/2009/02/ 11/10-examples-of-smarter-customer-focus.

Patt Waldmeir, “Coca-Cola in New China Push,” Financial Times, March 7, 2009, 10.

Matthew Boyle, “Walmart’s Painful Lessons,” BusinessWeek, October 13, 2009, http://www.businessweek.com/managing/content/oct2009/ ca20091013_227022.htm.

Daniel Shafer, “Asia Is Final Frontier for VW Empire,” Financial Times, December 10, 2009, 17.

Tim Bradshaw, “Zune to Launch Outside US,” Financial Times, November 16, 2009, http://www.ft.com/cms/s/0/76f98ae8-d205-11de-a0f0-00144feabdc0.html.

“Bottling Success,” Packaging-Gateway.com, September 1, 2006, http://www.packaging-gateway.com/features/feature738/.

Goldie Blumenstyk, “Kaplan U.’s Catchy Ad Provokes a Question: Do Colleges Serve Today’s Students?” Chronicle of Higher Education, June 29, 2009, http://chronicle.com/ article/Kaplan-Us-Question-Do/46956.

Barbara Jorgensen, “Distributors’ Services Help Keep Customers Afloat,” EDN 54, no. 8 (April 23, 2009): 60.

Gary L. Frazier, Elliot Maltz, Kersi D. Antia, and Aric Rindfleisch, “Distributor Sharing of Strategic Information with Suppliers,” Journal of Marketing, July 1, 2009, http://www.atypon-link.com/AMA/doi/abs/10.1509/ jmkg.73.4.31?cookieSet=1&journalCode=jmkg.

“Pizza Hut’s Online Ordering Called ‘Virtual Waiter,’” The Food Channel, Accessed December 12, 2009, http://www.foodchannel.com/stories/ 421-pizza-hut-s-online-ordering-called-virtual-waiter.

Michael Hitt, Stewart Black, and Lyman Porter, Management, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2009), ch. 5.

Matthew W. Evans, “Beauty.com Undergoes a Revamp,” Women’s Wear Daily 194, no. 66 (September 26, 2007): 17.

“Ten Mistakes to Avoid with Channel Partners,” irieAuctions.com, Accessed December 12, 2009, http://www.irieauctions.com/Alternate_Distribution_Channel.htm.

Jack Neff, “P&G Acquires the Upscale Art of Shaving Retail Chain,” Advertising Age 80, no. 2118 (June 8, 2009): 2.

Don Daszkowski, “What Is a Franchise,” About.com, Accessed December 12, 2009, http://franchises.about.com/od/franchisebasics/a/what-franchises.htm.

“Skype Expands Mobile Push,” Financial Times, March 31, 2009, 20.

Kathrin Hill, “Via to Help New PC Makers Enter the Netbook Market,” Financial Times, May 18, 2009, 16.

CHAPTER 8 USING MARKETING CHANNELS TO CREATE VALUE FOR CUSTOMERS 181

http://www.manufacturing.net/articles/2007/02/supply-chain-trends-whats-in-whats-out

http://www.cbsnews.com/8301-505125_162-51168339/developing-a-channel-strategy/?tag=mncol;lst;1

http://escholarship.org/uc/item/89x7p4ws#page-2

http://chiefmarketer.com/multi_channel/myths_integration_1001

http://www.jonessoda.com/company/about-us

http://museandmaven.wordpress.com/2009/02/11/10-examples-of-smarter-customer-focus

http://www.businessweek.com/managing/content/oct2009/ca20091013_227022.htm