UNDERSTANDING

MARKETING CHANNEL
STRATEGIES
Chapter 1
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 A company’s overall marketing strategy focuses

on four marketing mix elements (4Ps):
product, price, promotion, and channel (or place).
 Each company must make a number of strategic
decisions to determine how to distribute its
products and service to its end customers.
 A marketing channel or marketing channel
system is defined as a set of interdependent
organizations that are involved in the process
of making a product or service available for
consumption or use.
Example of Channel
Structures
 I Phone Distribution
Channels
 Mobile Service Providers (Orange)
 Apple online stores
 Wholesalers
 General mass merchandisers (Carrefour)
 Apple retail stores
 Consumer electronics superstores
(Smart Buy)
 Online marketplace (Amazon)
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 The definition of marketing channel

indicates that a marketing channel is a set
of interdependent organizations.
 Many companies are involved in the
channel such as manufacturers, retailers,
and wholesaler and each of these company
depends on the each other to do their job.
 The definition of a marketing channel also
makes it clear that running a marketing
channel is a process not an event.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 Distribution usually takes time and , and

even when a sale finally occurs, the
relationship with the end-user is not over.
 For example: After a hospital buys a
medical equipment, it still needs to service
the equipment after the purchase.
 Finally, the definition of a marketing channel
indicates that the purpose of this process is
to make the product or service
available for use or consumption.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 This means the purpose of this process

is to satisfy the end-users ( consumers
or final business buyers).
 The goal of these end-users is the use or
consumption of the product or service
that is being sold.
 All channel members must focus their
attention on satisfying the end-user.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 Business managers want to make their

products and services available to
customers through marketing channels.
 Business managers also want to use
marketing channels to improve their
companies’ sustainable competitive
advantage.
 A sustainable competitive
advantage is a competitive advantage
that cannot be quickly or easily
copied by competitors.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 In today’s global competitive arena, gaining a

sustainable competitive advantage by
emphasizing the first three Ps of the marketing
mix (product, price, and promotion) has become
more difficult.
 More companies are now focusing on channel
strategy especially multi-channel strategy as a
way to gain a sustainable competitive advantage.
 The main reason for this is that well-formulated
channel strategies are more difficult to quickly
copy.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 Manager are investing their limited

resources to turn their marketing
channels into strategic assets that
can:
 1) Increase customer satisfaction
 2) Reduce distribution costs
 3) Minimize competitor rivalry
 4) Improve financial performance
Q1:
 Which term refers to a set of independent
organizations involved in the process of
making a product or service available for use
or consumption?
 A) value chain
 B) supply chain
 C) marketing channel
 D) wholesale consortium
 E) multinational enterprise
 Answer: C
Q2:
 Which type of strategy did Walmart
decide to use to compete with Amazon?
 Class Exercise
 Do you think shopping from a company’s
online channel via a social networking
site is different from shopping on the
company’s regular Web site? Explain.
 Class Exercise
Growth in online retail sales has been outperforming
traditional sales in retail stores. This online sales growth might
be increased significantly by the latest online sales
phenomenon of mobile commerce.—shopping via mobile
phones. But so far, mobile commerce has not grown as much
as experts have predicted.

Question:
Do you think mobile commerce will grow more rapidly in the future? Why
or why not (use examples to support your answer).
 Class Exercise
 ROCKAUTO.COM is a leading online auto parts store that prides
itself on offering a huge selection of auto parts, everyday low
prices, fast shipping, and an easy to use Web site.
 Some ROCKAUTO.COM advertisements have even claimed this
online auto parts store is “head and shoulders” above any brick
and mortar part stores.
 The company’s slogan, “All The Parts Your Car Will Ever Need,”
suggests that customers have all the choice they could possibly
want from ROCKAUTO.COM and that they need look no further
than this online auto parts store to satisfy all their needs.
 Question:
 Do you agree with ROCKAUTO.COM’s claim? Might customers
seeking auto parts need other channel options? Explain.
 WHAT IS A MARKETING CHANNEL
STRATEGY?

 Therefore the definition of a

marketing channel strategy is:
 “The set of activities focused on

designing and managing a

marketing channel to improve the
company’s sustainable
competitive advantage and
financial performance.”
Who Participates in Marketing Channels?

 There following are the main types

of entities who are involved in every
marketing channel:
 1) Manufacturers and producers
 2) Intermediaries
 3) Facilitating agencies
 4) End-users
Who Participates in Marketing Channels?

 Usually there is one channel member

who serves as the channel captain,
taking the most interest in the workings
of the channel for a specific product or
service.
 The channel captain is the member who
establishes and maintains channel
links.
 The channel captain is usually the
manufacturer but other members could
be channel captains.
 Members and Nonmembers of the
Channel

 The term contactual organization

refers to those firms or parties who are
involved in negotiatory functions as a
product or service moves from the
producer to its end-user.
 Negotiatory functions consist of
buying, selling, and transferring title to
products or services.
 Only those firms or parties that engage
in these functions are members of the
marketing channel.
 Members and Nonmembers of the
Channel

 Other firms (usually referred to as

facilitating agencies) such as
transportation companies, public
warehouses, banks, insurance
companies, advertising agencies that
perform functions other than
negotiatory, are excluded.
Classification of Channel Participants
Who Participates in Marketing Channels?

 1) Manufacturers and producers: Upstream

Channel Members: Producers and
manufacturers are companies that are involved
in extracting, growing, or making products.
 Producers and manufacturers are found in
industries such as agriculture, forestry and
fishing, mining, construction, manufacturing, and
some service industries.
 Producing and manufacturing companies must
insure that their products are distributed to
their intended markets.
Who Participates in Marketing Channels?

 Most producing and manufacturing organizations are not in

a favorable position to distribute their products directly to
the final user markets.
 They often to do not have the required expertise and
economies of scale (and/ or scope) to perform all the
tasks necessary to distribute their products effectively and
efficiently to their final users.
 Economies of scale: Reduction in cost per unit resulting
from increased production, realized through operational
efficiencies.
 Economies of scope: are cost advantages that result when
firms provide a variety of products rather than specializing
in the production or delivery of a single product or service.
Who Participates in Marketing Channels?

 With regard to the required expertise,

many producers and manufacturers do
not have the level of expertise in
distribution that they have acquired in
production or manufacturing.
 Example: An electronics manufacturer
may be operating at the leading edge of
industry technology yet the
manufacturer knows little about the best
way to distribute its sophisticated
products to its markets.
Who Participates in Marketing Channels?

 Even for those producing and manufacturing

companies that have or are capable of developing
expertise in distribution, the economies of scale
that are necessary for efficient production do not
necessarily make for efficient distribution.
 Producing and manufacturing companies usually
face high average costs for distribution tasks
when they attempt to perform them by themselves.
 Average cost: Computed by dividing the total of
fixed costs and variable costs by the number of total
units produced (total output).
Who Participates in Marketing Channels?

 Producing and manufacturing companies

can reduce cost by shifting distribution
tasks to other channel participants such as
wholesalers and retailers.
 The reason for this is that intermediaries
distribute the products of many other
manufacturers and are therefore able to
spread the high fixed costs of performing
the distribution tasks over large quantities
of different products.
 By doing this, intermediaries can achieve
economies of scale as well as economies
Who Participates in Marketing Channels?

 2) Intermediaries: The term

intermediary refers to any channel
member other than the manufacturer or
end-user.
 There two main types of
intermediaries:
 A) Wholesalers
 B) Retailers
Who Participates in Marketing Channels?

 A) Wholesalers: includes merchant

wholesalers, agents, and brokers.
 A wholesaler sells to other channel
members such as retailers, or to
business end-users but usually not to
individual consumer end-users.
Who Participates in Marketing Channels?

 Types and kinds of wholesalers:

 1. Merchant wholesalers: Are firms
engaged mainly in buying, taking title to,
usually storing and physically handling
products in relatively large quantities.
 They then resell the products in smaller
quantities to retailers, other wholesalers,
and to business end-users.
 Merchant wholesalers earn profits by
buying at wholesale from the manufacturers
and selling at a marked-up price to
downstream customers .
Who Participates in Marketing Channels?

 2. Agents and brokers: Are also independent

middlemen who do not, for all or most of their
business take title to the goods in which they
deal.
 But they are actively involved in negotiatory
functions of buying and selling while acting on
behalf of their clients.
 They are compensated in the form of
commissions on sales or purchases.
 Examples of Agents, brokers and
commission merchants:
 Manufacturer agents, selling agents, and
Who Participates in Marketing Channels?

 B) Retailers: include department stores,

hypermarkets, specialty stores,
convenience store, franchises, online
retailers and many others.
 Retailers sell directly to individual
consumer and business end-users.
Distribution Tasks Performed by Retailers

 1. Provide manpower and physical

facilities that allows producers,
manufactures, and wholesalers to have
many points of contact with customers
close to their home.
 2. Provide personal selling, advertising,
and display to help in selling suppliers’
products.
 3. Interpret consumer demand and
relay this information back through the
channel.
Distribution Tasks Performed by Retailers

 4. Divide large quantities into consumer-sized

in order to provide economies for supplies (by
accepting large shipments) and convenience
for consumers.
 5. Provide storage, so that suppliers can have
a broadly dispersed inventories of their
products at low cost.
 6. Removing substantial risk from the
producer and wholesaler by ordering and
accepting delivery in advance of the season.
Who Participates in Marketing Channels?

 3) Facilitating agencies: are companies that assist

in the performance of the distribution tasks other
than buying, selling and transferring title.
 Examples of facilitating agencies include:
 1) Transportation companies
 2) Storage agencies
 3) Order processing agencies
 4) Advertising agencies
 5) Financial agencies
 6) Insurance companies
 7) Marketing research firms
Who Participates in Marketing Channels?

 1. Transportation agencies: Includes all

companies that offer transportation
services on a public basis such as United
Parcel Service (UPS) and Aramex.
 Because of the great economies of
scale and scope, these transportation
agencies are able to perform
transportation services much more
efficiently and cost effectively than
manufacturers, wholesalers, or retailers.
Who Participates in Marketing Channels?

 2. Storage agencies: Is made up of

mainly public warehouses that specialize
in the storage of goods for a fee.
 3. Order processing agencies: Are
companies that focus on order fulfillment
tasks.
 They relieve manufacturers,
wholesalers, and retailers from some or
all of the tasks of processing orders for
shipment to customers.
Who Participates in Marketing Channels?

 5. Advertising agencies: offer the channel

member expertise in developing promotion
strategy.
 This can range from providing a small amount of
assistance in writing an ad to complete design
and execution of the advertising or promotional
campaigns.
 6. Financial agencies: Are made up of firms
such as banks, and finance companies.
 These firms posses the financial resources and
expertise that the channel manager often lacks.
Who Participates in Marketing Channels?

 7. Insurance companies: Provide the channel

manager with a means for transferring some of
the risks involved in any business venture, such
as fire and theft loses, in-transit damage of
goods, and in some cases severe weather.
 8. Marketing research firms: The channel
manager can call on these firms to provide
information when his or her own company does
not have the necessary skills to acquire the
marketing information relevant to distribution.
 Class Exercise
 In your opinion, which task performed by
facilitating agents is most important
for manufacturer, wholesalers, retailers
to perform themselves if they had the
resources and expertise to avoid the
risk of having someone else perform the
task. Explain your answer.
Who Participates in Marketing Channels?

 4) End-users: Down stream Channel

members: are business or individual
consumers who consume the product or
service that is being sold by other
channel members.
Q:
 In the context of a marketing channel, the relationship
with an end-user is considered finished once a product
or service has been distributed.
 Answer: FALSE
 Channel captains are typically manufacturers of
branded products.
 Answer: TRUE
 Since intermediaries usually increase costs for
producers and lower value for consumers, a
decentralized system of exchange is more efficient
than a centralized network.
 Answer: FALSE
 Distribution through
Intermediaries
 The term disintermediation refers to
the removal of intermediaries in a supply
chain, or “eliminating the middlemen".
 Disintermediation has not occurred on a
large scale.
 The fact that the Internet can connect
hundreds of millions of people and
organizations does not necessarily
remove the need for intermediaries.
Q:
 Which term refers to reducing the use of
intermediaries?
 A) allocation
 B) facilitation
 C) routinization
 D) reintermediation
 E) disintermediation
 Answer: E
 Factors that determine the role of
Intermediaries

 1. Specialization and Division of Labor:

By dividing a complex task into smaller, less
complex tasks and assigning these tasks to
parties who are specialists at performing
them, much greater efficiency occurs.
 2. Contactual efficiency: Is the level of
negotiation effort between sellers and buyers
relative to achieving a distribution objective.
 The use of additional intermediaries will often
increase the level of contactual efficiency.
 Use of the Term Channel
Manager
 Channel manager refers to anyone in an
organization who is involved in marketing
channel decision making.
 Few organizations have a single executive
position called channel manager.
 Many different executive are involved in making
channel decisions.
 For example: the vice president of marketing,
general marketing manager, product manager,
and sales executive, such as the vice president of
sales might be the key channel decision maker.
Q:
 Which statement is most likely true about a marketing
channel system?
 A) Firms in the marketing channel typically work
independently.
 B) Modifying a channel system is usually a simple,
inexpensive task.
 C) Marketing channels represent a very small portion of the
world’s business.
 D) Most marketing channel systems are easily duplicated
by other firms in an industry.
 E) Efficient marketing channels reduce distribution costs
and increase customer satisfaction.
 Answer: E
Q:
 What is the most likely outcome of an
ineffective marketing channel strategy?
 A) limited product reach
 B) too many channel captains
 C) quick product line maturation
 D) excessive gatekeeper control
 E) wasted marketing mix components
 Answer: A
Q:
 Sony produces televisions and computers and
sells them through electronics stores. In a
marketing channel, Sony would best be
described as a ________.
 A) trading company
 B) manufacturer
 C) wholesaler
 D) distributor
 E) retailer
 Answer: B
Q:
 Manufacturers are LEAST likely to use
intermediaries to:
 A) negotiate terms of trade
 B) manage production levels
 C) transport products to customers
 D) facilitate product orders and
payments
 E) sell products directly to final
consumers
 Answer: B
Q:
 Which of the following statements is false?
 a. Consumer expectations have moved firms to add
additional channels.
 b. Both B2C and B2B businesses are increasing the number
of channels they use to distribute their products
 c. The flexibility to respond to consumers does not appear
to be relevant to channel design.
 d. Channels must be targeted to reach intended customer
segments.
 e. The increasing role of technology is helping to foster the
use of multiple channels.

 ANS:C
Q:
 Channel management is concerned mainly with
 a. Providing for the physical availability of products.
 b. Planning and overseeing the firm’s logistics
activities.
 c. The entire process of setting up and operating
the contactual organization.
 d. Developing the firm’s overall strategic marketing
program.
 e. Operating the firm’s entire marketing mix.

 ANS:C
 Channel Structure
 Channel structure is the group of
channel members to which a set of
distribution tasks have be allocated.
 The definition suggests that in
developing channel structure, the
channel manager is faced with an
allocation decision.
 The manager must decide how to
allocate or structure the tasks.
 Channel Structure
 Multi-channel strategy means that the
company has chosen to reach its customers
through more than one channel.
 A multi-channel marketing strategy results in a
multi-channel structure.
 Example: The multi-channel structure used by
Polo by Ralph Lauren apparel to reach its
customers is made up of sales through upscale
department stores and specialty retailers, its
own company stores, and online sales through
its Web site.
Example of a Multi-Channel Structure
 Ancillary Structure
 Ancillary structure is defined as the group of
institutions (facilitating agencies) that assists
channel members in performing distribution tasks.
 The basic decisions facing the channel manager in
trying to develop ancillary structure is the same as
developing channel structure.
 The problems faced in developing ancillary
structures are usually less complex than those
faced in developing channel structures.
 This is because facilitating companies do not play a
part in the channel decisions that control the
distribution of goods and services.
What are the nine universal channel
functions? What direction does each
function move? Why do some channel
functions move in both directions?
 The marketing channel, through its members, performs a range of
channel functions that constitute a process, flowing through the
channel that is performed at different points in time by different
channel members. Some functions move forward through the
channel (physical possession, ownership, and promotion); others
move up the channel from the end-user (ordering and payment);
and still other channel functions can move in either direction or
reflect activities by pairs of channel members (negotiation,
financing, risk, information sharing). Some functions, like
information sharing, move in either direction. Manufacturers share
product and sales information with their distributors, independent
sales representatives, and retailers, which helps them perform the
promotion function better. Consumers provide their preference
information to the channel, which improves its ability to supply
valued services.
 References
 Palmatier, R.W., Stern, L., & El-Ansary, A.I. (2016).
Marketing Channel Strategy, 8Th edition, Routledge.
 Rosenbloom, B. (2013). Marketing
Channels: A Management View, 8th
edition, Cengage Learning.