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Chapter 1

13Marketing ChannelProfessor Close

Chapter 13 Copyright 2012 by Cengage Learning Inc. All rights reserved #

LO 1 Explain what a marketing channel is and why intermediaries are needed

LO 2 Define the types of channel intermediaries and describe their functions and activities

LO 3 Describe the channel structures for consumer and business products and discuss alternative channel arrangements

LO 4 Discuss the issues that influence channel strategy

Learning Outcomes


Chapter 13 Marketing Channels

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LO 5 Describe the different channel relationship types and their unique costs and benefits

LO 6 Explain channel leadership, conflict, and partnering

LO 7 Discuss channels and distribution decisions in global markets

LO 8 Identify the special problems and opportunities associated with distribution in service organizationsLearning Outcomes



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Explain what a marketing channel is and why intermediaries are neededMarketing Channels



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Marketing Channels

a set of interdependent organizations that eases the transfer of ownership as products move from producer to business user or consumer.A Marketing Channel is



5Notes:A marketing channel can be viewed as a large pipeline through which products, their ownership, communication, financing and payment, and accompanying risk flow to the consumer.

Marketing channels facilitate the physical flow of goods through the supply chain, representing place or distribution in the marketing mix.

Marketing Channel Functions

Specialization and division of labor Overcoming discrepancies Providing contact efficiencyLO1



6Notes:As products move through the supply chain, channel members facilitate the distribution process by providing specialization and division of labor, overcoming discrepancies, and providing contact efficiency.

Specialization and Division of LaborCreates greater efficiency Provides lower production costsAchieves economies of scaleAids producers who lack resources to market directlyBuilds good relationships with customers



7Notes:Specialized expertise of channel members enhances the overall performance of the channel.

Overcoming DiscrepanciesDiscrepancyof QuantityDiscrepancyofAssortmentThe difference between the amount of product produced and the amount an end userwants to buy.The lack of all the items a customer needs to receive full satisfaction from a product or products.



8Notes:Marketing channels help overcome discrepancies of quantity, assortment, time, and space created by economies of scale in production. Discrepancy of Quantity: Efficient production for lower unit costs creates a much larger quantity produced than the end user wants to buy. Marketing channels store and distribute the product in appropriate amounts, and make the products available in quantities that consumers desire. Discrepancy of Assortment: Marketing channels assemble in one place many of the products necessary for a consumers needed assortment.

Overcoming DiscrepanciesTemporalDiscrepancySpatialDiscrepancyA situation that occurs when a product is produced but a customer is not ready to buy it.The difference between the location of a producer and the location of widely scattered markets.



9Notes:Temporal Discrepancy: Marketing channels overcome temporal discrepancies by maintaining inventories in anticipation of demand. This is particularly true of seasonal/holiday merchandise.

Spatial Discrepancy: Marketing channels overcome spatial discrepancies by making products available in locations convenient to consumers.

Exhibit 13.1How Marketing Channels Reduce the Number of Required Transactions



10Notes:Exhibit 13.1 demonstrates the purchase of a television set by four consumers. Without a retail intermediary like Best Buy, the individual television manufacturers would have to make four contacts to reach the four buyers. With Best Buy as an intermediary, each producer only has to make one contact, and the consumer buys from one retailer instead of five producers.

Define the types of channel intermediaries and describe their functions and activities Channel Intermediaries and Their Functions



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Channel IntermediariesRetailerA channel intermediary that sells mainly to customers.MerchantWholesaler

An institution that buys goods from manufacturers, takes title to goods, stores them, and resells and ships them.

Agents andBrokersWholesaling intermediaries who facilitate the sale of a product by representing channel members.



12Notes:Intermediaries in a channel negotiate with one another, facilitate the change of ownership between buyers and sellers, and physically move products from the manufacturer to the final consumer.

Channel Intermediaries

RetailersMerchant WholesalersAgents andBrokersTake Title to GoodsTake Title to GoodsDo NOT Take Title to GoodsLO2



13Notes:The most prominent difference separating intermediaries is whether or not they take title to the product. Taking title means they own the merchandise and control the terms of the sale.

Retailers and merchant wholesalers take title to goods, while agents and brokers do not.

Factors Suggesting Type of Wholesaling Intermediary to UseProduct characteristicsBuyer considerationsMarket characteristicsLO2



14Notes:Product characteristics, buyer considerations, and market conditions determine the type of intermediary the manufacturer should use.

Factors Suggesting Type of Wholesaling Intermediary to UseFactorMerchant WholesalersAgents/ BrokersNature of productStandardNonstandard, customComplexity of productSimpleComplexProducts gross marginHighLowFrequency of orderingFrequentInfrequentTime between order and receipt of shipmentShorter lead timeLonger lead timeNumber of buyersManyFewConcentration of buyersDispersedConcentrated



15Notes:This slide shows the factors determining the type of wholesaling intermediary.

Channel Functions Performed by Intermediaries

Contacting/PromotionNegotiatingRisk Taking

ResearchingFinancing

Physically distributingStoringSorting

FacilitatingFunctionsTransactionalFunctionsLogistical Functions



16Notes:The three basic functionstransactional, logistical, and facilitating--performed by intermediaries are shown in Exhibit 13.2.

LogisticsLogistics

The efficient and cost-effective forward and reverse flow and storage of goods, services, and related information, into through, and out of channel member companies.



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Channel Intermediaries and FunctionsCHANNELINTERMEDIARIESRetailersWholesalersAgents and BrokersCHANNELFUNCTIONSTransactionalLogisticalFacilitating

Perform



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Describe the channel structures for consumer and business products and discuss alternative channel arrangementsChannel Structures



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LO3

Exhibit 13.3Marketing Channels for Consumer Products



20Notes:Exhibit 13.3 illustrates the four ways manufacturers can route products to consumers. Direct channel is used to sell products directly to consumers. No intermediaries are used. Examples are telemarketing, catalog shopping, on-line shopping, and television shopping networks.

At the other end of the spectrum, an agent/broker channel may be used in markets with small manufacturers/retailers that lack the resources to find each other. The agents or brokers bring the manufacturers and wholesalers together for negotiations, but they do not take title to merchandise.

Most consumer products are sold through distribution channels similar to the retailer channel and the wholesaler channel.

Discussion/Team Activity:Identify various products and discuss the channel for distribution utilized by each.

Channels for Consumer ProductsDirect Channel

A distribution channel in which producers sell directly to consumers.

AP Photo/Matt Slocum



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Exhibit 13.4Channels for Business and Industrial Products



22Notes:Exhibit 13.4 illustrates the five channel structures common in business and industrial markets.

Direct channels are typical in business and industrial markets. Manufacturers buy large quantities of raw materials, major equipment, processed materials, and supplies directly from other manufacturers, particularly if detailed technical specifications are required. The channel from producer to government is also a direct channel.

Companies selling standardized items of moderate/low value often rely on industrial distributors. Industrial distributors are wholesalers and channel members that buy and take title to products.

Business-to-Business Exchanges on the Internet

Companies drop the intermediary from the supply chainPrivate exchanges with select suppliers automate the supply chain The Internet has forced traditional distributors to expand their model.



23Notes:More companies are using the Internet to create more efficient business-to-business channels. Three forms include:* New Internet companies that serve as paid agents to link buyers and sellers* Existing companies dropping intermediaries from the supply chain* Private exchanges sharing information only with select suppliers

Alternative Channel Arrangements

Multiple channelsStrategic channel alliances Nontraditional channels



24Notes:Usually a producer employs several different or alternative channels, which includes multiple channels, nontraditional channels, and strategic channel alliances.

Multiple channels: Two or more channels selected is called multiple or dual distribution.

Nontraditional channels: Nontraditional channels, including the Internet and mail-order channels, help differentiate a firms product from the competition.

Strategic channel alliances: Producers use another manufacturers already-established channel.

Discuss the issues that influence channel strategyMaking Channel Strategy Decisions



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Channel Strategy DecisionsFactors Affecting Channel ChoiceProducer FactorsProduct FactorsMarket FactorsExclusive DistributionSelective DistributionIntensive DistributionLevel ofDistributionIntensity



26Notes:Before choosing a marketing channel, supply chain managers must analyze several factors, which often interact. These factors can be grouped as market factors, product factors, and producer factors. An explanation follows.

Market Factors

Market FactorsThat Affect ChannelChoices

Customer profiles

Consumer or IndustrialCustomer

Size of market

Geographic location



27Notes:Market factors include the target customer considerations, such as these questions: Who are the potential customers? What/where/when/how do they buy?

Also important to channel selection is the distinction between consumer or industrial customers. Consumers buy in small quantities and dont require much service, whereas industrial customers purchase in larger quantities and require more customer service.

If the target market is concentrated in specific areas, direct selling is appropriate. If widely dispersed, intermediaries would be less expensive.

In general, a large market requires more intermediaries.

Product Factors

Product FactorsThat Affect ChannelChoices

Product Complexity Product StandardizationProduct Life CycleProduct DelicacyProduct Price



28Notes:Products that are more complex, customized, and expensive benefit from shorter and more direct marketing channels and through a direct sales force. Standardized products can be sold through longer distribution channels with greater numbers of intermediaries.

The choice of channel may change over the life of the product. As products become more common, producers turn from a direct channel to more alternative channels.

Perishable items and fragile products require fairly short marketing channels and a minimum amount of handling.

Producer Factors

Producer FactorsThat Affect ChannelChoices

Producer Resources Number of Product LinesDesire for Channel Control



29Notes:Producers with larger financial, managerial, and marketing resources are able to use more direct channels. These producers can maintain their own sales force, warehouse their own goods, and extend credit to customers.

Producers with several products in a related area choose channels that are more direct, and sales expenses can be spread over more products.

A producers desire to control pricing, positioning, brand image, and customer support may avoid channels in which discount retailers are present. Furthermore, manufacturers of upscale products may sell only in expensive stores to maintain an image of exclusivity.

Levels of Distribution Intensity

IntensiveA form of distribution aimed at having a product available in every outletSelectiveA form of distribution achievedby screening dealers to eliminate all but a few in any single areaExclusive

A form of distribution that established one or a few dealers within a given area



30Notes:Organizations have three options for intensity of distribution: intensive distribution, selective distribution, or exclusive distribution.

Levels of Distribution IntensityIntensiveAchieve mass marketselling. Convenience goods.ManySelectiveExclusiveWork with selected intermediaries. Shopping and some specialty goods.Work with singleintermediary. Specialty goods and industrial equipment.SeveralOneIntensity LevelObjectiveNumber of Intermediaries



31Notes:This slide compares the three options for intensity of distribution.

Discussion/Team Activity:Discuss product examples in each of the intensity levels, and in which stores the products are stocked.

Types of Channel RelationshipsDescribe the different channel relationship types and their unique costs and benefits



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BenefitsHazardsArms Length RelationshipFulfills a one time or unique need; low involvement/riskParties unable to develop relationship; low trust levelCooperative RelationshipFormal contract without capital investment/long-term commitment; happy mediumSome parties may need more relationship definitionIntegrated RelationshipClosely bonded relationship; explicitly defined relationshipsHigh capital investment; any failure could affect every channel member

Types of Channel Relationships



33Notes:A marketing channel is more than a set of institutions linked by economic ties. Social relationships play an important role in building unity among channel members.

Explain channel leadership, conflict, and partneringManaging Channel Relationships



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Social Dimensions of ChannelsPartneringConflictLeadershipControlPower



35Notes:In addition to considering the multiple different types of channel relationships and their costs and benefits, managers must also be aware of the social dimensions that are constantly impacting their relationships.

The basic social dimensions of channels are shown on this slide and defined on the following slides.

Channel Power, Control, and Leadership

ChannelPowerA channel members capacity to control or influence the behavior of other channel membersChannelControlA situation that occurs when one marketingchannel member intentionally affects another members behaviorChannel Leader

A member of a marketing channel that exercises authority/power over the activities of other members



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Channel Conflict

ChannelConflictA clash of goals and methods between distribution channel members



37Notes:Inequitable channel relationships often lead to channel conflict. In a broad context, conflict may not be bad: if traditional members refuse to keep pace with the times, removing an outdated intermediary may reduce costs for the entire channel.

Channel ConflictConflicts may occur if channel members:

Have conflicting goals

Fail to fulfill expectations of other channel members

Have ideological differences

Have different perceptions of reality



38Notes:Conflicts arise because channel members have conflicting goals, or when channel members fail to fulfill expectations of other channel members.

Further, different perceptions of reality can cause conflict among members.

Conflict within a channel can be either horizontal or vertical. Horizontal conflict occurs among channel members at the same level, such two or more different retailers that handle the same manufacturers brands. Vertical conflict occurs between different levels in a marketing channel.

Channel PartneringBy COOPERATING, channel members can speed up inventory replenishment, improve customer service, and reduce the total costs of the marketing channel.the joint effort of all channel members to create a channel that serves customers and creates a competitive advantage.Channel Partnering (Channel Cooperation) is



39Notes:Channel alliances and partnerships help managers create the parallel flow of materials and information required to leverage the channels intellectual, material, and marketing resources.

Discuss channels anddistribution decisions in global markets Channels and Distribution Decisions for Global Markets



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Channels and Distribution Decisions for Global Markets

Global Channel DevelopmentChannel structure and type differGray marketing channelsDistribute directly or through foreign partners



41Notes:With the spread of free-trade agreements, such as the European Union and the North American Free Trade Agreement, global marketing channels have become increasingly important to U.S. corporations.When designing marketing channels for foreign markets, the type of channel structure must be considered. The more highly developed a nation is economically, the more specialized its channel types. Marketers must be aware of gray marketing channels, in which products are distributed through unauthorized channel intermediaries. Sales of counterfeit luxury items, for example, is estimated at $2 billion a year. The Internet has proved a way for pirates to circumvent authorized distribution channels.

Identify the special problems and opportunities associated with distribution in service organizationsChannels and Distribution Decisions for Services



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Distribution in Service Organizations



43Notes:The fastest-growing part of our economy is the service sector. Service distribution focuses on three major areas:

Minimizing wait times Managing service capacity. Improving service delivery

Discussion/Team Activity:Does your bank deliver any of its services online? Visit its Web site to find out. Which online services would you be inclined to use? Are there any that you would definitely not use? Why not?

Beyond the BookChapter 13 VideosSephora Marketing ChannelsDiscuss Sephoras marketing channel for consumer products.http://www.cengage.com/marketing/book_content/1439039429_lamb/company_clips/ch13.html


44Chapter 13 Marketing Channels