Marketing

Channels:
Structure and
Functions
14th February 2008

Middlemen are responsible for

the increase in prices!!!
You have good reasons to agree
to this statement.
Comment!!!

Marketing Channel
is a set of

interdependent organizations
involved in the process of making
a product or service
available
for use or consumption
The purpose of a marketing channel is to satisfy
the end users in the market.

Concepts underlying
the Distribution System
A middleman is an independent business
concern standing between the producer and
the ultimate user
Either he
- Takes title to the merchandise as it
flows from producer to consumer
- or he actively negotiates the transfer
of title

Classifying Middlemen
Basis :

Whether they take title to the

products involved

Type :

Merchant Middlemen
Wholesalers and retailers who take title

Agent Middlemen
Brokers and manufacturers agents who do not
take title but actively assist in the transfer of title

Exchange without Intermediaries

Cloth

Shovels

Meat

Number of Exchanges

Vegetables

Baskets

= n(n -1)
2
= 10

Where n = number of consuming units

Number of Transactions
Without Marketing Intermediaries

In the real world the number of producing

and consuming units would be far greater.
Number of
Units
25
100
500
1000

Number of
Transactions
300
4950
124750
499500

Exchange with Intermediaries

Cloth

Shovels

Meat

Trading
Post

Number of Exchanges

Vegetables

= 5

Baskets

Contact Cost to Reach the Market

with and without Intermediaries
Selling Directly

Manufacturers
40 Contact
Lines

Retailers

Contact Cost to Reach the Market

with and without Intermediaries
Selling Through One Wholesaler

Manufacturers

Wholesaler

Retailers

14 Contact
Lines

Contact Cost to Reach the Market

with and without Intermediaries
Selling Through Two Wholesalers
Manufacturers

Wholesalers

Retailers

28 Contact Lines

Number of Transactions and

Marketing Costs
Activities involved in sale to
a retailer

Costs involved for each

activity

Contact with the retailer by

salesman

Travel costs and selling time to

canvass biz

If its a new account, credit

investigation

Unchanged with number of

products sold

If an order is received, processing

of the order

Marginal increase with increase in

size of order

Delivery of the goods

Unchanged or relatively higher for

smaller orders

Billing

Unchanged

Collection of payments

Unchanged

Why are there

Marketing Channels???
Demand side factors :

Facilitation of search
Adjustment of assortment
discrepancy

Supply side factors :

Routinization
Reduction in number of contacts

What is the work of the

Marketing Channels???
Performance of the
Marketing Flows
The term FLOWS is used
(instead of functions or activities)
to emphasize that
these processes flow through the channel.

Physical
Possession
Ownership

Physical
Possession
Ownership

Promotion

Promotion

Promotion

Negotiation

Negotiation

Financing

Financing

Risking

Risking

Risking

Ordering

Ordering

Ordering

Payment

Payment

Payment

Negotiation
Financing

Commercial Channel Subsystem

Note :Each flow carries a cost

Consumers Industrial
and Household

Physical
Possession
Ownership
Wholesalers

Producers

Marketing Flows in Channels

Examples of Costs of various

Flows
Marketing
flow

Cost represented

1.

Physical possession

Storage and delivery costs

2.

Ownership

Inventory carrying costs

3.

Promotion

Personal selling, advertising, sales

promotion, public relations, publicity

4.

Negotiation

Time and legal costs

5.

Financing

Credit terms, terms and conditions of sale

6.

Risking

Warranties, repair, after sales service

costs

7.

Ordering

Order-processing costs

8.

Payment

Collections, bad debts costs

Who Belongs to a Marketing

Channel???
The key members are :

Manufacturers producer or originator of the product

Intermediaries (wholesalers, agents, brokers,

retailers) that assist producers and manufacturers (and final
users) in the performance of negotiatory functions

End-users either individual or business customers

Intermediaries
Refers to any channel member other than
the manufacturer or the end-user.
Three types of intermediaries :
Our focus during
Wholesalers
this course is on

Retailers

Specialized such as insurance companies,

banks, shipping firms, advertising agencies

Sales contact

Customer service

Inventory holding
Order processing
Market information

Tasks
performed
by
Wholesalers

For Consumers

Product availability

For Manufacturers

Market coverage

Credit
Assortment
convenience
Breaking bulk

Customer support
Result?

Effective and efficient marketing channels

Advice and
technical support

Distribution Tasks performed

by Retailers
The role of a retailer in the distribution channel,
regardless of his size or type, is to :

Interpret the demands of his customers

Find and stock the goods these customers

want

When they want them,

And in the way the want them.

Facilitating Agencies
1. Transportation agencies
2. Storage agencies
3. Order processing agencies
4. Advertising agencies
5. Financial agencies

6. Insurance companies
7. Marketing research firms

What is the best channel

for a particular product???

An
Analytic Framework
for
Channel Design
and
Implementation

Designing the Right Channel

The steps in designing the Right Channel are :

Segmenting the market by service outputs

desired

Positioning

Targeting

Segmentation
for
Marketing Channel
Design:
Service Outputs

The Marketing Channel

System Design and Management requires
starting with the

END USERs
each of whom will have differential
preference for service output levels that
reduce their
Search, Waiting time, Storage and other
Costs

Segmenting for Channel Design

Segmenting on the basis of the
demands for the outputs of the
marketing channel

Service outputs include :

Bulk breaking
Assortment
Variety
Waiting and delivery time
Spatial convenience

Role of Service Output Demand

Analysis in
Marketing Channel Design
After segmenting the market on the basis of SODs,
the channel manager can easily
1. Assess segment attractiveness
2. Target a subset of the segments identified

3. Customize the marketing channel system

solution for each targeted segment

Service Output Demand Differences

SERVICE
OUTPUT

FAMILY
SERVICE OUTPUT
DESCRIPTOR
DEMAND LEVEL

Bulk-breaking

I buy groceries
weekly for my
family, and all of us
like soft drinks

Spatial
convenience

I drive to the
supermarkets in my
area to shop

Quick delivery

We usually have some

extra cans of soft drinks
in the house, so Ill just
come back the next time
if I cant find the drinks
I want on this trip

Assortment
and variety

My husband and I like

Coke and Pepsi, but our
kids arent permitted to
drink caffeinated soft
drinks. They like
caffeine-free fruitflavored soft drinks

LOW

OFFICE EMPLOYEE
SERVICE
DESCRIPTOR

OUTPUT
DEMAND
LEVEL

Im on my coffee
break and I have only
have time for one can
of soft drink

HIGH

LOW

I only have 15 minutes

for my break, so I need to
buy whatever is handy

HIGH

LOW

If I dont get my soft

drink right at 3:00
when my break starts,
Ill never have a
chance to go back later
and get one

HIGH

HIGH

I cant be too
particular about which
soft drink I pick. Its
important to me to get
one, as long as it has
caffeine

MODERATE

Service Output Demand Template

for Laptop Computers
SERVICE OUTPUT DEMAND:
SEGMENT
NAME/
DESCRIPTOR

SPATIAL
CONVENIENCE

DELIVERY/
WAITING
TIME

ASSORTMENT/
VARIETY

Low

High

High

Low

2. Home
buyer

High

High

Low

High

3. Student

High

High

High

High

1. Business
buyer

4.

5.

BULK
BREAKING

OTHER
SERVICE
OUTPUT
DEMANDS

Targeting
The segments to be targeted would depend
upon :

Internal environment the constraints

the company faces
External environment such as
legal constraints, trade practices,
channel power.

Channel design : Positioning

Each segment will have its own set of service output
demands
The channel designer must therefore decide :
1. The type - optimal channel structure to produce the channel flows
2. The identity exact identity of the channel partner to use at each
level of the channel

3. The intensity how many of each type of channel members

of the channel members at each level
At the minimum channel flow cost

Channels of Distribution - Levels

Consumer Goods
Manufacturer

Manufacturer

Retailer
One Level

Manufacturer

Wholesaler

Retailer
Two Level

Manufacturer

Agent

Wholesaler

Retailer

CONSUMER

Zero Level

Channels of Distribution
Industrial Goods

Manufacturer

Manufacturers
Agent

Manufacturer

Industrial
Supply House

CONSUMER

Manufacturer

Channel Design
Establish new channels Zero based
channel design

Modify existing channels after a

Gap Analysis (the differences between the zero
based and actual channels)

Demand and Supply Side

Gaps
Demand Side Gaps at least one of the service
output demands is not being appropriately met by
the channel.
Undersupplied

Dissatisfaction

Oversupplied

High cost
leading to drop
in sales and
market share

Service Output

Supply Side Gaps at least one flow in the channel

is carried out at too high a cost

Channel Power
A channel members
power to control
the decision variables
in the marketing strategy of
another member

in a given channel at a
different level of distribution

Channel Conflict
When one channel members actions
prevents the channel from achieving its
goal, there is Channel Conflict.
Types of Channel Conflicts :
* Goal conflict
* Domain conflict
* Perceptual conflict

Channel Management Schematic

1.
SEGMENTATION

Define
SODs by
segment
Identify
environmental
characteristics
and constraints

2.
POSITIONING

Define optimal
channel flow
performance for
each segment

Define
optimal
channel
structure for
each segment

3.
TARGETING
Choose segments to
target, subject to:
Environmental
bounds

Managerial bounds

Competitive
Benchmarks

4A. ESTABLISH
NEW CHANNELS
Channel flow
performance
Channel
structure
4B. REFINE
EXISTING
CHANNELS
Gap Analysis
Channel flow
performance
Channel
structure

CHANNEL DESIGN PROCESS

THATS ALL FOR

TODAY!!!