CHANNEL DESIGN

Dr RP Sharma, IIFT

Customer-oriented marketing channels

Starbucks vs. McDonalds

Owns stores vs. franchise.

Sony and Apple vs. Philips

Which approach is more reasonable?

Channel Analysis Framework

CHANNEL DESIGN CHANNEL IMPLEMENTATION

Segmentation

Channel Power

Channel Conflict

Channel Structure Splitting the Workload Degree of Commitment Gap Analysis

Manage/Defuse Conflict

Channel Coordination

INSIGHTS FOR SPECIFIC CHANNEL INSTITUTIONS

Service Outputs
Bulk breaking

Spatial convenience
Waiting time Product variety Customer service Information provision

SOD and Channel design

Consumer goods

Bread, womens hats, refrigerators

Computer printer ink cartridges Uranium ( nuclear power plants) Cement Data processing equipments

Industrial goods

Balancing Service Outputs and Price

End-users choose between:

Low-service-output, low-price channel High-service-output, high-price channel

Service OutputsAlienable or Inalienable

Running shoes at NB store versus zappos.com Service Output Alienable Inalienable

Trying on
Expert advice Easy returns Association with pro runners

X X X

Segmenting the Market

Identify all relevant service outputs

Service output segmentation

Marketing Research for Segmentation

Please divide 100 points between these different services, such that the most important have the most points
Demonstrations Assistance Installation Support after sale Relationship Low price

14 18 13 10 2 43

13 11 19 44 14 9 VAR

GAPS ANALYSIS
Sources of gaps Types of gaps Solutions to gaps

Gaps
Sources Environmental Legal Infrastructure Cost Managerial Policies due to
Distrust Poor integration

Types Demand-side Supply-side

Demand Side Gaps

SOS < SOD Segment currently receives insufficient service E.g., supermarkets not delivering groceries E.g., same day delivery of specialty books

SOS > SOD Excessive service excessive prices for any significant segment Wheel of Retailing stores keep adding services and lower priced alternatives then emerge Where to draw the line e.g., Costco

Supply-Side Gaps
Total cost of performing all

flows is higher than needed

E.g., travel agents E.g., neighborhood pharmacies

Combined Gaps
Cost/ Performance SOD>SOS SOD = SOS SOD < SOS

No supply side gap (efficient)

Room for higher price, more SO Too low value at too high cost

No gap

Room for lower price, less SO Insufficient value

Supply side gap (excess cost)

SO demanded even at high cost

Channel Gaps
Demand Shortfall No Gap Oversupply Side Supply (SOD>SOS) (SOD=SOS) (SOD<SOS) Side Reduce SOs No Gap Increase or target a SOs without (efficient No Gaps more making costs total flow demanding inefficient cost) segment Gap Find better Reduce Increase efficiencies costs by (total flow SOs and to reduce reducing costs too reduce costs costs SOs high)

STEPS IN CHANNEL DESIGN

Step 1. Analyze Customer Needs for Channel Services * * * * Step 2. Step 3. Locational convenience Delivery time Product variety Service backup * Lot size

Establish Channel Objectives for Delivering Service Levels Set Channel Strategy in Terms of: * Coverage

Step 4.
Step 5.

* Support & Ownership Select Appropriate Channel from Available Alternatives * Direct or Indirect Select Specific Channel Partners

CHANNEL OBJECTIVES
I. Channel structure must be derived from channel objectives. These objectives, in turn, result from a careful analysis of the service levels desired by consumers and from managements long-run overall goals for the organization. II. The specific objectives for the channel must be couched in terms of the service levels that are needed to meet the demands of the channels target market. EXAMPLE A well-known food processor recently developed a high-quality prepared frozen entree to be sold in supermarkets and convenience stores. The channel objectives for this company were clearly stated.

WE WANT THIS PRODUCT TO BE NO MORE THAN A TENMINUTE DRIVE FROM 75 PERCENT OF THE FULL-TIME WORKING WOMEN IN INDIA. WE PLAN TO REACH THIS GOAL WITHIN 12 MONTHS OF OUR PRODUCT ROLL-OUT.

Vertical integration vis--vis Channel outsourcing

Buy Classical Market Contracting Quasi-Vertical Integration (Relational Governance) How does the the work get done Make Vertical Integration

Third Party Does it (for a price) Their people Their money Their risk Their responsibility

You do it

The costs

You and third party share costs and benefits

Your people Your money Your risk Your responsibility

Their operation (control) Their gain or loss

The benefits

Your operation (control) Your gain or loss

Channel Design to meet requirements

Market Contracting
Selling (only) Manufacturers Representatives

Quasi-vertical Integration
Captive Sales Agency

Vertical Integration
Company Sales Force (direct salespeople) Distribution Arm Company Stores

Wholesale Distribution Retail Distribution

Independent Wholesaler Independent (3rd party) Stores

Distribution Joint Venture Franchise Store

Six basic channel decisions

Direct or indirect channels

Single or multiple channels

Length of channel Types of intermediaries Number of intermediaries at each level Which intermediaries? Avoid intrachannel

conflict