Marketing -6D2

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Marketing Management

Fifteenth Edition

Chapter 17

Designing and Managing Integrated Marketing Channels

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Learning Objectives (1 of 2)

17.1 What is a marketing channel system and value network?

17.2 What work do marketing channels perform?

17.3 How should channels be designed?

17.4 What decisions do companies face in managing their channels?

17.5 How should companies integrate channels?

Learning Objectives (2 of 2)

17.6 What are the key channel issues in e-commerce?

17.7 What are the key channel issues in m-commerce?

17.8 How should companies manage channel conflict?

Marketing Channels and Value Networks (1 of 3)

Marketing channels

Sets of interdependent organizations participating in the process of making a product or service available for use or consumption

Intermediaries: merchants, agents, and facilitators

Most producers do not sell their goods directly to the final users; between them stands a set of intermediaries performing a variety of functions. These intermediaries constitute a marketing channel (also called a trade channel or distribution channel). Some intermediaries—such as wholesalers and retailers—buy, take title to, and resell the merchandise; they are called merchants. Others—brokers, manufacturers’ representatives, sales agents—search for customers and may negotiate on the producer’s behalf but do not take title to the goods; they are called agents. Still others— transportation companies, independent warehouses, banks, advertising agencies—assist in the distribution process but neither take title to goods nor negotiate purchases or sales; they are called facilitators.

Marketing Channels and Value Networks (2 of 3)

A marketing channel system

The particular set of marketing channels a firm employs

Push vs. pull strategy

One of the chief roles of marketing channels is to convert potential buyers into profitable customers. Marketing channels must not just serve markets, they must also make them. In managing its intermediaries, the firm must decide how much effort to devote to push and to pull marketing. A push strategy uses the manufacturer’s sales force, trade promotion money, or other means to induce intermediaries to carry, promote, and sell the product to end users. In a pull strategy the manufacturer uses advertising, promotion, and other forms of communication to persuade consumers to demand the product from intermediaries, thus inducing the intermediaries to order it.

Marketing Channels and Value Networks (3 of 3)

Multichannel marketing

Using two or more marketing channels to reach customer segments in one market area

Omnichannel marketing

Integrated marketing channel system

Each channel can target a different segment of buyers, or different need states for one buyer, to deliver the right products in the right places in the right way at the least cost. When this doesn’t happen, channel conflict, excessive cost, or insufficient demand can result. Research has shown that multichannel customers can be more valuable to marketers. Most companies today have adopted multichannel marketing.

Companies are increasingly employing digital distribution strategies, selling directly online to customers or through e-merchants who have their own Web sites. In doing so, these companies are seeking to achieve omnichannel marketing, in which multiple channels work seamlessly together and match each target customer’s preferred ways of doing business, delivering the right product information and customer service regardless of whether customers are online, in the store, or on the phone. An integrated marketing channel system is one in which the strategies and tactics of selling through one channel reflect the strategies and tactics of selling through one or more other channels.

Figure 17.1 The Hybrid Grid

Figure 17.1 shows a simple grid to help make channel architecture decisions. It consists of major marketing channels (as rows) and the major channel tasks to be completed (as columns). This multichannel architecture optimizes coverage, customization, and control while minimizing cost and conflict.

Marketing Channels and Value Networks (1 of 2)

Value network

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

Demand chain planning

A value network includes a firm’s suppliers and its suppliers’ suppliers and its immediate customers and their end customers. It also incorporates valued relationships with others such as university researchers and government approval agencies.

A supply chain view of a firm sees markets as destination points and amounts to a linear view of the flow of ingredients and components through the production process to their ultimate sale to customers. The company should first think of the target market, however, and then design the supply chain backward from that point. This strategy has been called demand chain planning.

Marketing Channels and Value Networks (2 of 2)

The digital channels revolution

Customer support in store/online/phone

Check online for product availability at local stores

Order product online to pick up at store

Return a product purchased online to a nearby store

The digital revolution is profoundly transforming distribution strategies. With customers—both individuals and businesses—becoming more comfortable buying online and the use of smart phones exploding, traditional brick-and-mortar channel strategies are being modified or even replaced.

Customers want the advantages both of digital—vast product selection, abundant product information, helpful customer reviews and tips—and of physical stores—highly personalized service, detailed physical examination of products, an overall event and experience.

The Role of Marketing Channels (1 of 2)

Channel functions and flows

Table 17.1 Channel Member Functions

Gather information about potential and current customers, competitors, and other actors and forces in the marketing environment.

Develop and disseminate persuasive communications to stimulate purchasing.

Negotiate and reach agreements on price and other terms so that transfer of ownership or possession can be affected.

Place orders with manufacturers.

Acquire the funds to finance inventories at different levels in the marketing channel.

Assume risks connected with carrying out channel work.

Provide for the successive storage and movement of physical products.

Provide for buyers’ payment of their bills through banks and other financial institutions.

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

A marketing channel performs the work of moving goods from producers to consumers. It overcomes the time, place, and possession gaps that separate goods and services from those who need or want them. Members of the marketing channel perform a number of key functions (see Table 17.1).

Figure 17.2 Marketing Flows for Forklift Trucks

Members of the marketing channel perform a number of key functions. Some of these functions (storage and movement, title, and communications) constitute a forward flow of activity from the company to the customer; others (ordering and payment) constitute a backward flow from customers to the company. Still others (information, negotiation, finance, and risk taking) occur in both directions. Five flows are illustrated in Figure 17.2 for the marketing of forklift trucks. If these flows were superimposed in one diagram, we would see the tremendous complexity of even simple marketing channels.

The Role of Marketing Channels (2 of 2)

Channel levels

Zero-level channel (direct)

One/two/three-level channels (intermediaries)

Reverse-flow channels

Service sector channels

The producer and the final customer are part of every channel. We will use the number of intermediary levels to designate the length of a channel.

A zero-level channel, also called a direct marketing channel, consists of a manufacturer selling directly to the final customer. The major examples are mail order, online selling, TV selling, telemarketing, door-to-door sales, home parties, and manufacturer-owned stores. A one-level channel contains one selling intermediary, such as a retailer. A two-level channel contains two intermediaries, typically a wholesaler and a retailer, and a three-level channel contains three.

Channels normally describe a forward movement of products from source to user, but reverse-flow channels are also important (1) to reuse products or containers (such as refillable chemical-carrying drums), (2) to refurbish products for resale (such as circuit boards or computers), (3) to recycle products, and (4) to dispose of products and packaging. Reverse-flow intermediaries include manufacturers’ redemption centers, community groups, trash-collection specialists, recycling centers, trash-recycling brokers, and central processing warehousing.

Many of the most successful new banks, insurance and travel companies, and stock brokerages have emerged with strictly or largely online operations, such as Ally banking, Esurance insurance, Expedia travel, and E*TRADE investments. Marketing channels also keep changing for “person marketing.” Nonprofit service organizations such as schools develop education-dissemination systems and hospitals develop health-delivery systems. These institutions must figure out agencies and locations for reaching a far-flung population.

Figure 17.3 Consumer/Industrial Marketing Channels

Figure 17.3(a) illustrates several consumer-goods marketing channels of different lengths. Figure 17.3(b) shows channels commonly used in B-to-B marketing. An industrial-goods manufacturer can use its sales force to sell directly to industrial customers, or it can sell to industrial distributors who sell to industrial customers, or it can sell through manufacturer’s representatives or its own sales branches directly to industrial customers or indirectly to industrial customers through industrial distributors. Zero-, one-, and two-level marketing channels are quite common.

Channel-Design Decisions (1 of 4)

Analyzing customer needs and wants

Desired lot size

Waiting and delivery time

Spatial convenience

Product variety

Service backup

Consumers may choose the channels they prefer based on price, product assortment, and convenience as well as their own shopping goals (economic, social, or experiential). Channel segmentation exists, and marketers must be aware that different consumers have different needs during the purchase process.

Channels produce five service outputs:

Desired lot size—The number of units the channel permits a typical customer to purchase on one occasion.

2. Waiting and delivery time—The average time customers wait for receipt of goods. Customers increasingly prefer faster delivery channels.

3. Spatial convenience—The degree to which the marketing channel makes it easy for customers to purchase the product.

4. Product variety—The assortment provided by the marketing channel. Normally, customers prefer a greater assortment because more choices increase the chance of finding what they need, though too many choices can sometimes create a negative effect.

5. Service backup—Add-on services (credit, delivery, installation, repairs) provided by the channel. The more service backup, the greater the benefit provided by the channel.

Channel-Design Decisions (2 of 4)

Establishing objectives and constraints

Marketers should state their channel objectives in terms of the service output levels they want to provide and the associated cost and support levels. Channel objectives vary with product characteristics. Marketers must adapt their channel objectives to the larger environment. When economic conditions are depressed, producers want to move goods to market using shorter channels and without services that add to the final price. Legal regulations and restrictions also affect channel design.

Channel-Design Decisions (3 of 4)

Identifying major channel alternatives

Types of intermediaries

Number of intermediaries

Terms/responsibilities of channel members

Each channel—from sales forces to agents, distributors, dealers, direct mail, telemarketing, and the Internet—has unique strengths and weaknesses. Channel alternatives differ in three ways: the types of intermediaries, the number needed, and the terms and responsibilities of each.

Identifying Major Channel Alternatives (1 of 2)

Number of intermediaries

Exclusive distribution

Selective distribution

Intensive distribution

Three strategies based on the number of intermediaries are exclusive, selective, and intensive distribution. Exclusive distribution severely limits the number of intermediaries. Selective distribution relies on only some of the intermediaries willing to carry a particular product. Whether established or new, the company does not need to worry about having too many outlets; it can gain adequate market coverage with more control and less cost than intensive distribution. Intensive distribution places the goods or services in as many outlets as possible.

Identifying Major Channel Alternatives (2 of 2)

Terms and responsibilities of channel members

Price policy

Conditions of sale

Distributors’ territorial rights

Mutual services and responsibilities

The main elements in the “trade relations mix” are price policies, conditions of sale, territorial rights, and specific services to be performed by each party.

• Price policy calls for the producer to establish a price list and schedule of discounts and allowances that intermediaries see as equitable and sufficient.

• Conditions of sale refers to payment terms and producer guarantees. Most producers grant cash discounts to distributors for early payment. They might also offer a guarantee against defective merchandise or price declines, creating an incentive to buy larger quantities.

• Distributors’ territorial rights define the distributors’ territories and the terms under which the producer will enfranchise other distributors. Distributors normally expect to receive full credit for all sales in their territory, whether or not they did the selling.

• Mutual services and responsibilities must be carefully spelled out, especially in franchised and exclusive agency channels.

Channel-Design Decisions (4 of 4)

Evaluating major channel alternatives

Economic criteria

Control and adaptive criteria

Figure 17.4 The Value-Adds versus Costs of Different Channels

Source: Oxford Associates, adapted from Dr. Rowland T. Moriarty. Cubex Corp.

Economic Criteria. Each channel alternative needs to be evaluated against economic, control, and adaptive criteria. Every channel member will produce a different level of sales and costs. Figure 17.4 shows how six different sales channels stack up in terms of the value added per sale and the cost per transaction.

Control and Adaptive Criteria Using a sales agency can pose a control problem. Agents may concentrate on the customers who buy the most, not necessarily those who buy the manufacturer’s goods. They might not master the technical details of the company’s product or handle its promotion materials effectively. To develop a channel, members must commit to each other for a specified period of time. Yet these commitments invariably reduce the producer’s ability to respond to change and uncertainty. The producer needs channel structures and policies that provide high adaptability.

Figure 17.5 Break-Even For Sales Force vs. Sales Agency

The next step is to estimate the costs of selling different volumes through each channel. The cost schedules are shown in Figure 17.5. Engaging a sales agency is less expensive, but costs rise faster because sales agents get larger commissions. The final step is comparing sales and costs. As Figure 17.5 shows, there is one sales level (SB) at which selling costs for the two channels are the same. The sales agency is thus the better channel for any sales volume below SB, and the company sales branch is better at any volume above SB. Given this information, it is not surprising that sales agents tend to be used by smaller firms or by large firms in smaller territories where the volume is low.

Channel-Management Decisions

Selecting channel members

Training channel members

Global channel considerations

Evaluating channel members

Channel modification decisions

Modifying channel design

After a company has chosen a channel system, it must select, train, motivate, and evaluate intermediaries for each channel. It must also modify channel design and arrangements over time, including the possibility of expansion into international markets.

To customers, the channels are the company. To facilitate channel member selection, producers should determine what characteristics distinguish the better intermediaries—number of years in business, other lines carried, growth and profit record, financial strength, cooperativeness, and service reputation.

Carefully implemented training, market research, and other capability-building programs can motivate and improve intermediaries’ performance. The company must constantly communicate that intermediaries are crucial partners in a joint effort to satisfy end users of the product.

Producers must periodically evaluate intermediaries’ performance against such standards as sales-quota attainment, average inventory levels, customer delivery time, treatment of damaged and lost goods, and cooperation in promotional and training programs.

No channel strategy remains effective over the whole product life cycle. In competitive markets with low entry barriers, the optimal channel structure will inevitably change over time. Channel Evolution A new firm typically starts as a local operation selling in a fairly circumscribed market, using a few existing intermediaries. Identifying the best channels might not be a problem; the problem is often to convince the available intermediaries to handle the firm’s line. In short, the channel system evolves as a function of local opportunities and conditions, emerging threats and opportunities, and company resources and capabilities.

A producer must periodically review and modify its channel design and arrangements.

International markets pose distinct challenges, including variations in customers’ shopping habits and the need to gain social acceptance or legitimacy among others, but opportunities do exist.

Training and Motivating Channel Members (1 of 2)

Channel power

Coercive

Reward

Legitimate

Expert

Referent

Producers vary greatly in their skill in managing distributors. Channel power is the ability to alter channel members’ behavior so they take actions they would not have taken otherwise. Manufacturers can draw on the following types of power to elicit cooperation:

• Coercive power. A manufacturer threatens to withdraw a resource or terminate a relationship if intermediaries fail to cooperate. This power can be effective, but its exercise produces resentment and can lead the intermediaries to organize countervailing power.

• Reward power. The manufacturer offers intermediaries an extra benefit for performing specific acts or functions. Reward power typically produces better results than coercive power, but intermediaries may come to expect a reward every time the manufacturer wants a certain behavior to occur.

• Legitimate power. The manufacturer requests a behavior that is warranted under the contract. As long as the intermediaries view the manufacturer as a legitimate leader, legitimate power works.

• Expert power. The manufacturer has special knowledge the intermediaries value. Once the intermediaries acquire this expertise, however, expert power weakens. The manufacturer must continue to develop new expertise so intermediaries will want to continue cooperating.

• Referent power. The manufacturer is so highly respected that intermediaries are proud to be associated with it. Companies such as IBM, Caterpillar, and Hewlett-Packard have high referent power.

Training and Motivating Channel Members (2 of 2)

Channel partnerships and ECR practices

Demand-side management

Supply-side management

Enablers and integrators

More sophisticated companies try to forge a long-term partnership with distributors. To streamline the supply chain and cut costs, many manufacturers and retailers have adopted efficient consumer response (ECR) practices to organize their relationships in three areas: (1) demand-side management, or collaborative practices to stimulate consumer demand by promoting joint marketing and sales activities, (2) supply-side management, or collaborative practices to optimize supply (with a focus on joint logistics and supply chain activities), and (3) enablers and integrators, or collaborative information technology and process improvement tools to support joint activities that reduce operational problems, allow greater standardization, and so on. Research has shown that although ECR has a positive impact on manufacturers’ economic performance and capability development, manufacturers may also feel they are inequitably sharing the burdens of adopting it and not getting as much as they deserve from retailers.

Channel Integration and Systems

Conventional marketing channel

Vertical marketing systems

Horizontal marketing systems

A conventional marketing channel consists of an independent producer, wholesaler(s), and retailer(s). Each is a separate business seeking to maximize its own profits, even if this goal reduces profit for the system as a whole. No channel member has complete or substantial control over other members.

A vertical marketing system (VMS), by contrast, includes the producer, wholesaler(s), and retailer(s) acting as a unified system. One channel member, the channel captain, sometimes called a channel steward, owns or franchises the others or has so much power that they all cooperate. Stewards accomplish channel coordination without issuing commands or directives by persuading channel partners to act in the best interest of all.

Another channel development is the horizontal marketing system, in which two or more unrelated companies put together resources or programs to exploit an emerging marketing opportunity. Each company lacks the capital, know-how, production, or marketing resources to venture alone, or it is afraid of the risk. The companies might work together on a temporary or permanent basis or create a joint venture company.

Vertical Marketing Systems

Corporate VMS

Administered VMS

Contractual VMS

Wholesaler-sponsored voluntary chains

Retailer cooperatives

Franchise organizations

New competition in retailing

A corporate VMS combines successive stages of production and distribution under single ownership.

An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members. Manufacturers of dominant brands can secure strong trade cooperation and support from resellers. The most advanced supply-distributor arrangement for administered VMSs relies on distribution programming, which builds a planned, professionally managed, vertical marketing system that meets the needs of both manufacturer and distributors.

A contractual VMS consists of independent firms at different levels of production and distribution integrating their programs on a contractual basis to obtain more economies or sales impact than they could achieve alone. Sometimes thought of as “value-adding partnerships” (VAPs), contractual VMSs come in three types:

1. Wholesaler-sponsored voluntary chains—Wholesalers organize voluntary chains of independent retailers to help standardize their selling practices and achieve buying economies in competing with large chain organizations.

2. Retailer cooperatives—Retailers take the initiative and organize a new business entity to carry on wholesaling and possibly some production. Members concentrate their purchases through the retailer co-op and plan their advertising jointly, sharing in profits in proportion to their purchases. Nonmember retailers can also buy through the co-op but do not share in the profits.

3. Franchise organizations—A channel member called a franchisor might link several successive stages in the production-distribution process. Franchising has been the fastest-growing retailing development in recent years.

Many independent retailers that have not joined VMSs have developed specialty stores serving special market segments. The result is a polarization in retailing between large vertical marketing organizations and independent specialty stores, which creates a problem for manufacturers. The new competition in retailing is no longer between

independent business units but between whole systems of centrally programmed networks (corporate, administered,

and contractual), competing against one another to achieve the best cost economies and customer response.

E-Commerce Marketing Practices

E-commerce

Uses a Web site to transact or facilitate the sale of products and services online

Pure-click vs. brick-and-click companies

We can distinguish between pure-click companies, those that have launched a Web site without any previous existence as a firm, and brick-and-click companies, existing companies that have added an online site for information or e-commerce.

M-Commerce Marketing Practices

Mobile channels and media can keep consumers as connected and interacting with a brand as they choose

Advertising and promotion

Geofencing

Privacy issues

By mid-2013, more than half of all online U.S. buyers had made a purchase on a mobile device, and m-commerce accounted for more than 11 percent of all e-commerce. In the United States, mobile marketing is becoming more prevalent and taking all forms. Consumers are fundamentally changing the way they shop in stores, increasingly using a cell phone to text a friend or relative about a product while shopping in stores. Fifty percent of all Google searches are done on mobile phones. Companies are trying to give their customers more control over their shopping experiences by bringing Web technologies into the store, especially via mobile apps.

Marketers are using a number of new and traditional practices in m-marketing. Understanding how consumers want to use their smart phones is critical to understanding the role of advertising. Given the small screen and fleeting attention paid, fulfilling advertising’s traditional role of informing and persuading is more challenging for m-commerce marketers. Consumers often use their smart phones to find deals or capitalize on them: the redemption rate for mobile coupons (10 percent) far exceeds that of paper coupons (1 percent).

The idea of geofencing is to target customers with a mobile promotion when they are within a defined geographical space, typically near or in a store. The local-based service requires just an app and GPS coordinates, but consumers have to opt in.

The fact that a company can pinpoint a customer’s or employee’s location with GPS technology raises privacy issues. Like so many new technologies, such location-based services have potential for good and harm and will ultimately warrant public scrutiny and regulation.

Conflict, Cooperation, and Competition (1 of 5)

Channel conflict

Generated when one channel member’s actions prevent another channel member from achieving its goal

Channel coordination

Occurs when channel members are brought together to advance the goals of the channel instead of their own potentially incompatible goals

No matter how well channels are designed and managed, there will be some conflict, if only because the interests of independent business entities do not always coincide.

Conflict, Cooperation, and Competition (2 of 5)

Types of conflict and competition

Horizontal channel conflict

Vertical channel conflict

Multichannel conflict

Horizontal channel conflict occurs between channel members at the same level. Vertical channel conflict occurs between different levels of the channel. Multichannel conflict exists when the manufacturer has established two or more channels that sell to the same market. It’s likely to be especially intense when the members of one channel get a lower price (based on larger-volume purchases) or work with a lower margin.

Conflict, Cooperation, and Competition (3 of 5)

Causes of channel conflict

Goal incompatibility

Unclear roles and rights

Differences in perception

Intermediaries’ dependence on manufacturer

Goal incompatibility. The manufacturer may want to achieve rapid market penetration through a low-price policy. Dealers, in contrast, may prefer to work with high margins and pursue short-run profitability.

Unclear roles and rights. HP may sell laptops to large accounts through its own sales force, but its licensed dealers may also be trying to sell to large accounts. Territory boundaries and credit for sales often produce conflict.

Differences in perception. The manufacturer may be optimistic about the short-term economic outlook and want dealers to carry higher inventory, while the dealers may be pessimistic. In the beverage category, it is not uncommon for disputes to arise between manufacturers and their distributors about the optimal advertising

strategy.

Intermediaries’ dependence on the manufacturer. The fortunes of exclusive dealers, such as auto dealers, are profoundly affected by the manufacturer’s product and pricing decisions. This situation creates a high potential for conflict.

Conflict, Cooperation, and Competition (4 of 5)

Table 17.2 Strategies to Manage Channel Conflict

Strategic justification

Dual compensation

Superordinate goals

Employee exchange

Joint memberships

Co-potation

Diplomacy, mediation, or arbitration

Legal recourse

Table 17.2 lists some mechanisms for effective conflict management that we discuss next.

Strategic Justification In some cases, a convincing strategic justification that they serve distinctive segments and do not compete as much as they might think can reduce potential for conflict among channel members.

Dual Compensation Dual compensation pays existing channels for sales made through new channels.

Superordinate Goals Channel members can come to an agreement on the fundamental or superordinate goal they are jointly seeking, whether it is survival, market share, high quality, or customer satisfaction.

Employee Exchange A useful step is to exchange persons between two or more channel levels. Thus participants can grow to appreciate each other’s point of view.

Joint Memberships Similarly, marketers can encourage joint memberships in trade associations.

Co-optation is an effort by one organization to win the support of the leaders of another by including them in advisory councils, boards of directors, and the like.

Diplomacy, Mediation, and Arbitration When conflict is chronic or acute, the parties may need to resort to stronger means. Diplomacy takes place when each side sends a person or group to meet with its counterpart to resolve the conflict. Mediation relies on a neutral third party skilled in conciliating the two parties’ interests. In arbitration, two parties agree to present their arguments to one or more arbitrators and accept their decision.

Legal Recourse If nothing else proves effective, a channel partner may choose to file a lawsuit.

Conflict, Cooperation, and Competition (5 of 5)

Dilution and cannibalization

Marketers must be careful not to dilute their brands through inappropriate channels

Legal and ethical issues in channel relations

Exclusive dealing/territories, tying agreements, and dealers’ rights

Calvin Klein and Tommy Hilfiger both took a hit when they sold too many of their products in discount channels. Given the lengths to which they go to pamper customers in their stores—with doormen, glasses of champagne, and extravagant surroundings—luxury brands have had to work hard to provide a high-quality digital experience.

We saw earlier that in exclusive distribution, only certain outlets are allowed to carry a seller’s products, and that requiring these dealers not to handle competitors’ products is called exclusive dealing. Exclusive arrangements are legal as long as they do not substantially lessen competition or tend to create a monopoly and as long as both parties enter into them voluntarily. Exclusive dealing often includes exclusive territorial agreements. The producer may agree not to sell to other dealers in a given area (which is perfectly legal), or the buyer may agree to sell only in its own territory (which has become a major legal issue).

Producers of a strong brand sometimes sell it to dealers only if they will take some or all of the rest of the line. This practice is called full-line forcing. Such tying agreements are not necessarily illegal, but they do violate U.S. law if they tend to lessen competition substantially. Producers are free to select their dealers, but their right to terminate them is somewhat restricted. In general, sellers can drop dealers “for cause,” but not if, for example, a dealer refuses to cooperate in a doubtful legal arrangement, such as exclusive dealing or tying agreements.