marketing channels
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sales and disistribution mgt subjectTRANSCRIPT
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SDM- Ch 9 Tata McGraw Hill Publishing 1
Chapter 9
Marketing Channels
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Learning Objectives
• Understand channel structure and how channels manage discrepancies
• Understand concept of channel flows• Relationship of channel flows to service levels• Understand channel formats and levels• Understand what channel systems are
expected to deliver• Prominent marketing and channel systems
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Channel Functions
• Information gathering• Consumer motivation• Bargaining with suppliers• Placing orders• Financing • Inventory management• Risk bearing• After sales support
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Role of Intermediaries
Company 1 Company 2 Company 3
Intermediary
Large number of CONSUMERS
Direct and Indirect….
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Direct Distribution
• Company to consumers or retailers without use of intermediaries. Also includes reaching Institutional buyers.
• Selling on the Internet• If products are technically complex, this
system is preferred• Cost is a major consideration to adopt
this mode
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Direct Distribution - Examples
• Banking services• Credit cards• Petrol / diesel – company own outlets• Land line phone connections• Health services• Utilities – electricity, water• Subsidized ration• Education
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Indirect Distribution
• Goods may move through a set of intermediaries– Most FMCG companies follow this route
• The intermediary has a far better reach than the company
• The cost of operations of an intermediary like a wholesaler / retailer is shared with many businesses.
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Indirect Distribution - Examples
• All FMCG, consumer durables and pharmaceutical
• Petrol / diesel / cooking gas - franchisees
• Insurance
• Mobile phones
• All kinds of passenger transport
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Marketing Channel Systems
• Vertical:– Corporate– Administered– Contractual
• Horizontal
• Multi-channel
Vertical….
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Vertical Marketing System
• Various parties like producers, wholesalers and retailers act as a unified system to avoid conflicts
• Improves operating efficiency and marketing effectiveness
• 3 types:– Corporate– Administered – Contractual
Corporate…
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Corporate VMS
• Combines successive stages of production and distribution under single ownership
• Examples: – Bata, Bombay Dyeing, Raymond– Sears, Goodyear– Suppliers of food items could be also their
own supplying firms - like NilgirisAdministered…
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Administered VMS
• Co-ordinates distribution activities• Gains market power by dominating a channel• Usually true of dominant brands like GE,
Kodak, Pepsi, Gillette, Coke and HLL in certain locations– Command high level of co-operation in shelf
space, displays, pricing policies and promotion strategies
Contractual…
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Contractual VMS
• Independent producers, wholesalers and retailers operate on a contract
• Could take the forms of:– Wholesaler sponsored voluntary chains– Retailer co-operatives– Manufacturer sponsored retail or wholesale
franchise– Franchise organizations – Service firm sponsored retail franchise
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Horizontal MS
• Two or more unrelated companies join together to pool resources and exploit an emerging market opportunity– In-store banking in hotels, big stores– Retail outlets in petrol bunks– Coffee Day outlets in airports
Multi-channel…
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Multi-channel Distribution
• Company uses different channels to reach / same or different market segments– Most FMCG companies have separate
networks for retail market and institutions
– Pharma companies may use different channels to reach doctors, chemists and hospitals
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Multi-channel Distribution
• Used in situations where:– Same product but different market
segments– Unrelated products in same market –
detergents and ice creams (HLL)– Size of buyers varies – Geographic concentration of potential
consumers varies– Reach is difficult
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Distribution Channels
• Take care of the following ‘discrepancies’– Spatial– Temporal – Breaking bulk– Assortment and– Financial support
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Spatial Discrepancy
• The channel system helps reduce the ‘distance’ between the producer and the consumer of his products.– Consumers are scattered– Have to be reached cost effectively
• Example: companies produce products in one location even for global needs
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Temporal Discrepancy
• The channel system helps in speeding up in meeting the requirement of the consumers– Time when the product is made and when it is
consumed is different– Limited number of production points but hundreds
of consumers
• Maruti plant in Gurgaon – cars and spares are available when the consumer wants
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Breaking Bulk
• The channel system reduces large quantities into consumer acceptable lot sizes– Production has to be in large quantities to benefit
from economies of scale– Consumption is necessarily in small lot sizes
• India is the ultimate example in breaking bulk – you can buy one cigarette, one Anacin, one toffee etc
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Need for Assortment
• The channel system helps aggregate a range of products for the benefit of the consumer – it could be made by one company or several of them.– For the same product, it could be a variety
of brands and pack sizes
• MICO makes fuel injection equipment, spark plugs etc in different plants but its dealer will sell the entire range.
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Financial Support
• The channel system provides critical working capital to its customers by extending credit.
• Some channel members like stockists and wholesalers finance the business of their customers.– Medical diagnostic equipment to hospitals
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Channel Flows
• Forward flow – company to its customers – goods and services
• Backward flow – customers to the company – payment for the goods. Returned goods.
• Flows both ways - information
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Three Flows Recognized
FORWARD
BOTH WAYS
BACKWARD
Goods and Services
Information
Payment for goods / returns
Company Customers
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The Five Channel Flows
• Physical flow of goods
• Title flow of goods (negotiation, ownership and risk sharing also)
• Payment flows (financing and payment)
• Information flow (about goods, orders placed and orders executed)
• Promotion flowsWho is responsible?
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Channel Flows• Some channel member/s have to perform them• There is a cost associated with each flow• If a channel member is discontinued, the flow
has to be performed by another• All flows and transactions can be effective only
with timely, accurate and correct information• The channel flow is ideally to be handled by the
most competent channel member who can deliver best service at the lowest cost.
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Degree of Involvement
Manufacturer C&FA or Distribution
Center
Distributor,
dealers
Wholesaler or retailer
Physical
Title / ownership
Information
Risk sharing
Promotions
Physical
Title
Information
Payment
Order processing
Physical
Title / ownership
Information
Payment
Order placement
Negotiation
Risk sharing
Promotions
Physical
Title / ownership
Information
Payment
Order placement
Negotiation
Risk sharing
Promotions
Channel formats…
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Channel Formats
• Is decided by who ‘drives’ the channel system:– Producer driven– Seller driven– Service driven– Others
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Producer Driven
• This is the effort of the manufacturer to reach the product to his consumers. Examples:– Company owned retail outlets – petrol, Bata,
Reliance mobiles– Licensed outlets – KMF– Consignment selling agents– Franchisees– Brokers– Vending machines– Company contracted distributors
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Seller Driven
• Use of existing channels to reach the largest number of end users– Existing wholesalers and retailers – Modern retail formats– Specialty stores – Shoppers’ Stop– Discount stores – Subhiksha– Pheriwalas
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Service Driven
• These are the people who facilitate the distribution– Transporters and freight forwarders– Providers of warehouse space– C&F agents– 3P Logistics service providers– Couriers
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Other formats• Multi-level marketing systems – Amway,
Modicare, Tupperware, Herbalife• Co-operative societies• Telephone kiosks• TV home shopping• Catalogue marketing• The internet• Exhibitions, fairs and trade shows• Data base marketing
Channel levels…
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Channel Levels
• Zero level – if the product or service is provided to the end user directly by the company.– Used mostly by companies delivering service like
health, education, banking (also known as service channels)
• One level – consists of one intermediary• Two level – consists of two intermediaries
and is the most common for FMCG products
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Service Channel • Companies establish their own unique
channels to deliver services like health, education, banking, insurance etc– Hundreds of bank branches to be close to
prospects– Banks may also recruit independent agents to get
customers to walk in– Consulting or IT firm uses one team for Biz
Development and another for execution– Musician or magician may use mass media,
events or web sites to reach customers
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Channel LevelsManufacturer ManufacturerManufacturer
End User
Retailer
End User
Retailer
End User
Distributor/ wholesaler
Zero level Two levelOne level
Summarize Expectations…
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Key Learnings
• Marketing channels are responsible for flows – physical possession, title, payments, information and promotion covered by forward, backward and flows both ways
• Each channel partner has a different role in supporting customer service through suitable channel flows
• Number of categories operating in a channel system define the channel levels as one, two etc
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Key Learnings
• Channel system deliverables are: bulk breaking, place utility, reduced waiting time, providing assortment, financial help, installation and after sales support.
• Customer service has to be done at optimum cost
• Marketing channel systems are categorised as vertical, horizontal and multi-channel depending on the structure and the functionality