Channel Management

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Channel Management

• Marketing Management

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Agenda

• Purpose of Distribution Channels
• Channel Design
• Multiple Channels
• Managing Channel Conflict
• Gray Markets

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Importance of Channels

• Channel choices affect other marketing mix
  decisions
• A strong distribution system can be a competitive
  advantage (e.g., Dell, Avon)
• Channel decisions involve long-term commitments

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Purpose of Distribution Channel How Channel
Members Add Value

• Middlemen require fewer contacts to move the
  product to final customer
• Middlemen help match product assortment demand
  with supply
• And they help bridge major time, place, and
  possession (inventory) gaps that separate
  products from those who would use them

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Channel Design

• Step 1Analyze Customer Needs
• Customer analysis (who?, why?,...)
• Lot size
• Waiting time
• Spatial convenience
• Product variety
• Service backup
• Where and how do they prefer to buy?
• Customer trade-offs? Priorities?
• Benefit segmentation

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Channel Design

• Step 2 Benchmarking (Redesign)
• Against competition
• Against segments ideal channel

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Channel Design

• Step 3 Establish Channel Objectives
  Constraints

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Channel Design

• Step 4 Identify Channel Options
• Types of intermediaries
• Company sales force, web, distributors
• Coverage - number
• Intensive, selective, exclusive
• Length
• Responsibilities
• Price policy
• Conditions of sale (payment terms, guarantees
  against defective merchandise)
• Territorial rights

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When to go direct?

• Information needs are high (technical complexity)
• Product customization matters
• Quality assurance matters
• Large purchase orders
• Logistics are complex
• Good odds channel might become rival

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When to go indirect?

• One-stop shopping matters
• Availability crucial
• After-sales service important

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Channel Design

• Step 5 Evaluation Selection
• Criteria are threefold
• Economic (sales potential versus costs)
• Control
• Flexibility

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Multi-Channel Systems (Hybrid Channels)

• Firm uses two or more marketing channels
• Different channels serve different segments
• Coordination management issues become more
  important (e.g., how to divide commission on a
  sale)
• Overlap customers wearing different hats on
  different purchase occasions

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Multiple Channels Adding an Internet Channel

• Performance-enhancing capacity
• Performance-destroying Capacity

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Adding Internet Channel Performance Enhancing

• Demand side
• Market expansion
• New segments
• Brand switching
• Relationship deepening
• Higher prices
• Loyal customers
• High-income customers

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Adding Internet ChannelPerformance Enhancing

• Supply side
• Lower physical-distribution costs
• Lower transaction costs

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Adding Internet Channel Performance Destroying

• Demand side
• Demand reduction
• Less impulse purchases
• Less support from disenchanted distributors
• Lower prices
• Intensified price competition
• Lower search costs

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Adding Internet ChannelPerformance Destroying

• Supply-side
• Higher physical distribution costs
• setup (hardware software Internet hosting
  services)
• advertising expenditures

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Channel Conflict

• Occurs when channel members disagree over roles,
  activities, or rewards
• Types of conflict
• Horizontal among partners at same level
• Vertical among partners at different levels

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How to Resolve Conflict?

• Focus on common goals and/or threats
• Mediation, arbitration or legal suits
• Bill of rights (e.g., Goodyear)
• Vertical Marketing Systems (VMS)

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Vertical Marketing Systems (VMS)

• Conventional system
• Independent producers, wholesalers, retailers
• Maximize own profits
• VMS
• Unified system
• Three types
• Corporate
• Contractual
• Administered

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Corporate VMS

• Successive stages of production distribution
  under single ownership
• Example - Luxotticca

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Contractual VMS

• Independent firms at different levels of
  production distribution who join through
  contracts to get economies or sales impact
• Franchise agreements most common type

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Administered VMS

• Coordinates successive stages through size
  power of one of the dominant channel members
• Dominant member could be
• Manufacturer strong brand names
• Retailer size
• Wal-Mart, Carrefour
• Mobile phone service providers

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Horizontal Marketing Systems

• Channel arrangements where two or more companies
  at one level join in pursuit of market
  opportunities
• Combine resources strengths to create synergies

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Horizontal Marketing Systems - Examples

• Cereal Partners
• Nestle General Mills)
• Nestea
• Nestle Coca-Cola

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Gray Markets

• Unauthorized distributors selling product in
  parallel with legitimate distributors

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Gray Markets Whose Problem

• Manufacturer
• Upsets pricing control
• Hurts premium image
• Harder to maintain channel support
• Distributor
• Lost sales
• Free rider

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Gray Markets Causes

• Supplier Pricing
• Reseller Cost Differentials
• Contract Terms

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Gray Markets Cures

• Terminate offenders
• One-Price-For-All
• Buy up gray market merchandise
• Warning ads

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Bottom Line

• There are many different channel structures not
  one system is proper for every industry, category
  or firm
• Think of your channel as a customer
• Channels must evolve as customers evolve
• Savvy marketers obtain differential advantage
  through channel decisions that deviate from
  conventional wisdom (e.g. Avons global army of
  3.5 million ladies in 139 countries90 of rev)