CHANNEL CONCEPTS: DISTRIBUTING THE PRODUCT

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Chapter 10

• CHANNEL CONCEPTS DISTRIBUTING THE PRODUCT

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Learning Objectives

• Role of distribution channels
• Methods used in organizing channels
• Management of underlying behavioral dimensions
  present in most channels
• Elements of a channel strategy
• Tasks assigned to various channel institutions

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Channel of Distribution

• Primary purpose creation of time and place
  utility
• Extremely complex process, often the only element
  of marketing where cost savings still possible
• Channel selection is a dynamic part of marketing
  planning
• Channel needs to be managed to work
• Composed of individuals and groups with unique
  traits that may conflict, may need to be motivated

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Dual Functions

• Exchange sale of the product to various members
  of the distribution channel
• Physical distribution moves products through the
  exchange channel, simultaneously with title and
  ownership
• Key role satisfying customers and achieving
  profit for the firm
• Customer satisfaction maximizing time and place
  utility to the organizations suppliers,
  intermediate and final customers

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Evolution

• Barter to industrial specialization in goods
  products to service products
• Marketing channel sets of interdependent
  organizations involved in the process of making a
  product/service available for use/consumption
  providing a payment mechanism for the provider
• Institutions some under producers control, some
  not but all must be recognized, selected,
  integrated into efficient arrangement
• Process continuous management, monitoring,
  reappraisal
• Objectives make an acceptable profit

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Flows

• Multiple linkages that tie channel members and
  other agencies together
• Product
• Negotiation
• Ownership
• Information
• Promotion

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Product

• Movement of the physical product from the
  manufacturer through all the parties who take
  physical possession of the product until it
  reaches the ultimate consumer e.g.,
  transportation company to public warehouse to
  supermarkets

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Negotiation

• Institutions associated with the actual exchange
  process e.g., bottlers and beer distributors to
  supermarkets

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Ownership

• Shows the movement of title through the channel
  e.g., from bottlers and beer distributors to
  supermarkets

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Information

• Identifies the individuals who participate in the
  flow of information either up or down the channel
  e.g., from transportation company to public
  warehouse to bottlers and distributors to
  supermarkets

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Promotion

• Flow of persuasive communication in the form of
  advertising, personal selling, sales promotion
  and public relations e.g., from advertising
  agency to bottlers and beer distributors to
  supermarkets

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Institutions

• Producer of the product craftsman,
  manufacturer, farmer or other extractive industry
  producer
• User of the product individual, household,
  business buyer, institution, government
• Certain middlemen at the wholesale or retail
  level

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Channel Functions

• Transactional buying, selling, risk assumption
• Logistical assembly, storage, sorting,
  transportation
• Facilitating post-purchase service and
  maintenance, financing, information
  dissemination, channel coordination or leadership

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Characteristics

• While channel institutions can be eliminated or
  substituted, the functions of those institutions
  cannot be eliminated
• All institutional members are part of many
  channel transactions at any given point in time
• Satisfaction of transactions is based on
  routinization benefits
• When available middlemen are incompetent,
  unavailable or the producer feels he can perform
  the task better, the best channel arrangement is
  direct, from the producer to the ultimate user
• Service marketers face the problem of delivering
  their product in the form, at the place and time
  their customer demands, solutions banks- ATMs

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Types

• Members and non-members
• Members perform negotiation functions,
  participate in negotiation and/or ownership
  non-members do not
• Producer and manufacturer
• Retailing department stores, chain stores,
  supermarkets, discount houses, warehouse
  retailing, franchises, planned shopping
  centers/malls
• Non-store
• Retailing home-selling, automated vending, mail
  order, online marketing, catalog marketing,
  kiosks
• Wholesaling independent, part of vertical
  marketing system

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Producer Manufacturer

• Firms extract, grow or make products vary in
  size from one-person operation to those that
  employ several thousands people, generate
  billions in sales
• Channel members can be useful in designing,
  packaging, pricing, promoting of the product
  through the most effective channels

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Retailing

• All activities needed to market consumer goods,
  services to the ultimate consumer who are
  motivated to buy for individual/family needs
  e.g., computer at Circuit City
• Sales also made through means other than stores

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Departments and Chains

• Department stores wide product mixes e.g.,
  hardware, clothing, each product in different
  sections in the store e.g., Sears
• Chain stores large size enable buying of a wide
  variety of items in large quantity discounts
  prices lower than small competitors convenient
  locations increased market share e.g., Pizza Hut
  

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Supermarkets

• Large, self-service stores with central checkout
  facilities extensive line of food items, often
  nonfood products e.g., Safeway
• Mass-merchandising, low-cost distribution methods
• Availability of large assortments of a variety of
  goods like food, household cleaning, maintenance
  products at a minimal price

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Discount Houses

• Cut-rate retailers e.g., Walmart
• Emphasis on price as the main sales appeal
• Merchandise assortments are broad including hard
  and soft goods, but limited to most popular
  items, colors and sizes
• Large self-service operations with long hours,
  free parking, relatively simple fixtures

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Warehouse Franchise

• Warehouse
• Relatively new type
• Catalog showrooms largest type e.g., Costco

• Franchise
• Response to competition from large chain stores
• Only sell the products of the franchiser
• Operate the business to some extent as the
  manufacturer wishes
• e.g., dealer of Chevrolet

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Shopping Centers/Malls

• Wide assortment of products, many alternatives in
  one location
• Regional larger centers that have one or more
  major department stores as major tenants
• Community moderately sized with junior
  department stores
• Neighborhood small with the key store a
  supermarket
• Local clusters shopping districts grown over
  time around key intersections, courthouses
• String street locations along major traffic
  routes
• Isolated locations freestanding sites not
  necessarily in heavy traffic areas use promotion
  to attract shoppers

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In-home, Demonstration party

• In-home selling pre-select prospects, cold calls
  e.g., Avon
• Demonstration party one customer acts as host
  and invites friends e.g., Tupperware

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Mail-order, Catalog, Kiosks

• Mail order product description through flyer,
  catalog convenience, larger geographic coverage,
  limited service e.g., CD Now
• Catalog companies mail one or more product
  catalogs to select addresses that have a high
  likelihood of placing an order e.g., J.C. Pennys
• Kiosks customer-order placing machines
  located at airports, stores e.g., Florsheim Shoe
  Company

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Automated Vending

• Coin-operated, self-service machines, variety of
  products, services at convenient locations e.g.,
  banking transactions

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Online

• Commercial online channels both retailer and
  consumer need computer and modem companies set
  up online information and marketing services that
  can be assessed by those who have signed up and
  paid a monthly fee
• Internet global web that allows instantaneous
  and decentralized global communication users can
  send e-mails, exchange views, shop for products,
  access real-time news marketers can use e-mails,
  participate in forums, newsgroups, bulletin
  boards, place ads online, create electronic
  storefront

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Wholesaling

• All activities required to market goods, services
  to businesses, institutions, industrial users
  motivated to buy for resale or to produce and
  market other goods, services e.g., a bank buying
  computer for data processing

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Wholesaling Functions

• Warehousing receiving, storing, packaging
• Inventory control and order processing track
  physical inventory, manage its composition and
  level, process transactions
• Transportation arranging physical movement of
  goods
• Information supplying information about markets
  to producers and about products and suppliers to
  buyers
• Selling personal contact with buyers
• Planning, financing, developing marketing mix

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Types of Wholesaling

• Full-service merchandise general, limited-line
• Limited service merchant cash and carry, rack
  jobbers, drop shippers, mail orders
• Agents and brokers agents buying agents,
  selling agents, commission merchants,
  manufacturers agents brokers real estate,
  food, other products
• Manufacturers sales
• Facilitator warehouses, finance companies,
  transportation companies, trade marts

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Full vs. Limited

• Take title to the merchandise assume the risk
  involved in an independent operation buy and
  resell products offer a complete range of
  services
• Same as full but offer a limited range of services

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Agents and Brokers

• Do not take title to the merchandise bring
  buyers and sellers together negotiate the terms
  of the transactions
• Agents merchants represent either the buyer or
  seller, usually on a permanent basis
• Brokers bring parties together on a temporary
  basis

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Manufacturer's sales, Facilitator

• Owned directly by the manufacturers performs
  wholesaling functions for the manufacturer
• Perform some specialized functions such as
  financing or warehousing to facilitate the
  wholesale transactions may be independent or
  owned by producer or buyer

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Physical Distribution

• Provide the bridge between production activities
  and markets that are spatially and temporally
  separated
• Process of strategically managing the movement
  and storage of materials, parts, finished
  inventory from suppliers, between enterprise
  facilities, and to customers
• Valuable marketing tool to stimulate consumer
  demand

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Relationships

• Defining the physical distribution (P.D.)
  standards that channel members want
• Making sure the proposed P.D. program designed by
  an organization meets the standard of channel
  members
• Selling channel members on P.D. programs
• Monitoring the results of P.D. once it has been
  implemented

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Organizing Channels

• Conventional channels
• Vertical Marketing systems
• Horizontal channel systems

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Conventional

• Group of independent businesses, each motivated
  by profit, having little concern about any other
  member of the distribution sequence
• No all-inclusive goals
• Assignment of tasks and evaluation process are
  totally informal can create deficiencies

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Vertical Marketing Systems

• Solution to problems of conventional networks
• When a member (usually the manufacturer) assumes
  a leadership role and attempts to coordinate the
  efforts of the channel so that mutually
  beneficial goals like better profits, product
  exposure, can be attained

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Types of VMS

• Administered informally guided by goals and
  programs developed by one or a limited number of
  firms in the existing channel channel captain
  administrative skills and power of one individual
  may be the driving force of the channel e.g.,
  Xerox problems of polarization
• Contractual members formalize relationship
  provides additional control spells out marketing
  functions
• Corporate members on different levels are owned
  and operated by one organization forward (own
  various intermediaries e.g., Dannon Yogurt) or
  backward (retailer who takes over wholesaling and
  manufacturing e.g., Sears) integration

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Horizontal Channel Systems

• When two or more companies do not have the
  capital, technical or production know-how to
  effectively market their products alone
• Establish temporary or quasi-permanent
  relationship in order to work with each other to
  create the channel mechanism needed to reach
  their target markets

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Management Process

• Analyze the customer
• Establish objectives
• Specify distribution tasks
• Evaluate and select channel alternatives
• Evaluating channel member performance
• Correct or modify

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Analysis

• Whom to sell the merchandise immediately?
• Who is the ultimate buyer and user?
• Discover buying specifications of the ultimate
  user e.g., comparison of prices, willingness to
  bear with inconvenience
• Helps to decide on the type of wholesaler or
  retailer through which a product should be sold
• Discover buying specifications of resellers

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Objectives

• Growth in sales reach new markets, and/or
  increase sales in existing one
• Maintenance or improvement of market share
  educate or assist members in their efforts to
  increase the amount of product they handle
• Achieve a pattern of distribution structure to
  achieve certain time, place, form, information
  utilities
• Create an efficient channel improve performance
  by modifying flow mechanisms

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Specify Distribution Tasks

• Fully identify tasks, define how tasks can change
  with situation, assign costs
• Provide delivery within a specific period of time
• Offer adequate storage space
• Provide credit to other intermediaries
• Facilitate a product return network
• Provide readily available inventory (quantity,
  type)
• Provide for absorption of size and grade
  obsolescence

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Evaluate, Select Alternatives

• Bases
• Number of levels two to several
• Intensity of the levels actual number of
  components
• Types of intermediaries at each level
• Application of selection criterion to channel
  alternatives

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Types of Intermediaries

• Exclusive single/few outlets high dealer
  loyalty, sales support greater control limits
  potential sales volume success dependent on the
  ability of single intermediary e.g., Ethan Allen
• Intensive maximum number of intermediaries
  increased sales, recognition, impulse purchasing
  low price, margin, small order sizes difficult
  to stimulate and control large number of
  intermediaries e.g., Candies
• Selective intermediary strategy, outlets number
  dependent on market potential, density of
  population, dispersion of sales, competitors
  policies some strengths and weaknesses of the
  other two difficult to determine optimal number
  of intermediaries e.g., Baskin Robbins

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Leadership

• Passive to active very negative, based on fear
  and punishment, to very positive, based on
  encouragement and reward
• Manufacturer if control of the product
  (merchandising, repair) is critical and if the
  design and redesign of the channel is best done
  by the manufacturer
• Wholesaler where the manufacturers and retailers
  have remained small in size, large in number,
  relatively scattered geographically, are weak in
  finance, marketing expertise
• Retailer when product development and demand
  stimulation are relatively unimportant, personal
  attention to the customer is important

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Evaluate Performance

• Sales popular criteria current vs. historical
  comparison with other members comparison of
  members sales with predetermined quotas
• Maintenance of adequate inventory
• Selling capabilities
• Attitudes of intermediaries toward product
• Competition from other intermediary, from other
  product line carried by manufacturers own
  channel members

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Human Aspects

• Role clearly defining role/tasks prescriptions
  of various participants and communicating them in
  order to achieve desired results
• Communication sending and receiving information
  relevant to operation detect behavioral problems
  that inhibit effective flow of information and
  resolve them
• Conflict personal and direct often
  confrontational manage by establishing
  mechanisms to detect, appraise the effect of and
  resolve conflict
• Power willingness to use force in a
  relationship means of influencing/controlling
  behavior of the other party