Ch-10(managing Marketing Channels)

Chapter-10. Managing Marketing Channels Chapter – 10. MANAGING MARKETING CHANNELS Market channels are sets of interdependent organizations involved in the process of making product/ service available for use/ consumption. - Independent organizations are called marketing intermediaries. Q: Why Are Marketing Intermediaries Used? o Producer Typically produces goods:  At limited locations.  In large quantities.  With limited variety.  Over the year (As evenly spread as possible). o Consumer consumes goods:  All over the country at their own location.  In limited quantity per consumer.  With large variety/ assortment.  Whenever they need. -

This differences/ discrepancy between production of goods & consumption of goods by consumer is bridged by marketing channel/ distribution channel/ marketing Intermediaries, referred to as discrepancy of time/ place/ quantity/ assortment.

Channel Functions & Flows: - Marketing Channels performs work of moving goods from producers to consumers. - For this, they perform some key functions. - They are:

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Physical Possession (PP)

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Ownership

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Negotiation

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Promotion

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Financing

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Risk Taking

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Ordering

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Payment

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Information

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W H O L E S E L L E R

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Chapter-10. Managing Marketing Channels -

Physical Possession: o Successive storage & movement of physical products from producers to customers. Ownership/Title: o Actual transfer of ownership from one organization/ person to another. Negotiation: o Attempt to reach final agreement on price/ other terms so that transaction takes place. Promotion: o Development/ Dissemination of persuasive communication designed to attract customers. Risk Taking: o Acquisition/ Allocation of funds required to financing inventories at different levels of marketing channels. Ordering: o Marketing channel member’s communication of intention to buy from manufacturer/producer. Payment: o Buyer’s payment for goods/ to clear bills through bank/ financing institution/ others. Information: o Collection/ Dissemination of market research information about product/ current customer/ competitors/ other players in marketing environment.

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All functions/ flows must be carried out by marketing channels as a whole. However, every member may/ may not be involved in each flow. Flows are referred to as universal flows. Channel levels could be: o Zero Level Channel (Direct Marketing Channel):  Manufacturer – Customer.  Example: Dell. o One Level Channel:  Manufactures – Retailer – Customer.  Example: Automobile. o Two Level Channel:  Manufacturer – Wholes-seller – Customer.  Example: White Goods/ Consumer Durables. o Three Level Channel:  Manufacturer – Whole-seller – Distributor – Retailer – Customer.  Example: FMCG.

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Channels in some cases may also have a backward flow of goods when there is some recycling required. This is called Reverse/ Backward channel.  Example: Soft-drink Bottles/ Old Newspapers.

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Chapter-10. Managing Marketing Channels

Channel Design: - First task in distribution is to design a suitable marketing channel. - For a new firm/ firms that desires to expand, one needs to decide what is: • Ideal. • Feasible. • Available/ Practically Implementable. -

To design a marketing channel, procedure to be followed is:  Analysing Customers Needs.  Establishing Channel Objectives.  Identifying Channel Alternatives.  Evaluating Channel Options.

Analysing Customer Needs: - Firstly, we try to understand:  “What”  “Where”  “Why” Target Customer Buy?  “When”  “How” - Answers to these would indicate service output levels that customers expect from marketing channel. - Typically, channel may produce five service output: o Lot Size:  Lot size is the number of units that the market channel permit’s a typical customer to purchase on a purchase occasion.  Smaller the lot size, greater the service output level required.  Example: Soap (1 soap & 4soaps take same time to be sold). o Waiting Time:  Waiting time is the average time that the customers of that channel wait for receipt of goods.  Faster service requires greater service output level.  Example: Retailer going to whole-seller alternatively rather than weekly will allow whole-seller to maintain low inventory and time taken to fill up the order will be less. o Spatial Convenience:  Spatial Convenience is the degree to which the marketing channel makes it easy for customer to purchase products.  Spatial Convenience is indicated by retail density. o Product Variety:  Product variety represents the assortment breadth provided by the marketing channel.  Normally, customer prefer greater assortment. o Service Back-Up:  Represents add-on services provided by marketing channel (credit/ delivery/ installation/ repairs). 3

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Chapter-10. Managing Marketing Channels More back-up required implies more work/service by channel.

Marketing channel designer must know/ understand service output designed by target customer and their perceived value. This is compared to cost of providing services to decide service levels that would actually be provided (cost of service would increase product price).

Establishing Channel Objectives: - Channel objectives need to be stated in terms of targeted service output levels. - Channel institutions should arrange them final task so as to minimize total channel costs with respect to desired outputs. - Channel objectives vary with product characteristic. - Product could be:  Perishable.  Bulky.  Non-Standardised.  Requiring Installation/Training.  High Unit Value.  Packaged. -

Channel design should take into account strengths & weakness of different types of intermediaries. Also, competitive channels should be understood & analysed.

Identifying Channel Alternatives: - Channel alternatives are described by:  Types of Intermediaries Available.  Number of Intermediaries Needed.  Terms/ Responsibilities of each Channel Members. Types of Intermediaries could be: - Typical distribution of consumer goods who have:  Investment Ability.  Warehousing Ability.  Transportation Strength.  Willingness to Build Business. - Company Sales Force:  To cover territory directly. - Agents:  Manufacturer’s agents who could be hired region-wise for sales. - Dealers:  Retailers who deal directly with manufacturer. - Industrial Distributors:  Distributors who would work with manufacturer to build markets to corporate. - Unconventional Intermediaries Required:  Example: Value Added Reseller (VAR)/ Mail Order. 4

Chapter-10. Managing Marketing Channels o Software companies.

Number of Intermediaries Required: - Company has to decide on number of intermediaries to use at each level. - Strategies could be: o Exclusive Distribution:  Involves limiting the number of intermediaries.  Used when company desires more control over services provided by intermediaries.  Intermediaries may agree not to carry competitive brands (Exclusive Dealing).  Example: Automobiles. o Selective Distribution:  Involves use of more than a few, but less than all intermediaries who are willing to carry a particular product.  This enables producer to have just right amount of outlets to cover territory.  This also helps intermediaries to be profitable.  In turn helps producer to control services to customer better coverage. Coverage cost is lower for company. o Intensive Distribution:  Manufacturer places goods in as many outlets as possible.  Used for products where consumer demand location convenience. Terms & Responsibilities of Channel Intermediaries: - Relationship marketing is an important part of managing marketing channel. - Producer must clearly indicate rights/ duties of each channel member. Each channel member’s profitability is to be ascertained & they should be treated with respect. - Elements of terms (Trade-Relations Mix) could be: o Price Policy:  Producer should establish a price test & trade accounts that are fair. o Conditions of Sale:  Include payment terms & producer’s guarantees (Defects/ Price Decrease/ Warranty). o Territorial Rights:  Whether geographical division holds/ does not hold & applicability. o Mutual Services & Responsibilities:  Who would take care of what activity?  Joint working norms for sales promotion.  Training/ Technical support/ Record keeping. Evaluating Channel Alternatives: - Channel alternatives evaluated against: 5

Chapter-10. Managing Marketing Channels   

Economic Criteria. Control Criteria. Adaptive Criteria.

Economic Criteria: - Each channel alternatives would produce a different level of sale & costs. - First the sale level of various alternatives used to be assumed. o Example:  Company Sales Force: • Concentrate on company’s products only. • Well Trained. • Aggressive since their career is at stake. • Customer may prefer to deal with them. • Hence, they sell more.  Sales Agency: • May have larger number of sales staff. • May be as aggressive as company sales force. • Some customer may prefer to deal with agents who represent several manufacturers. • Agency may have market place knowledge. • Hence, they may be preferred over company sales force in certain situation. - Next, costs of each channel alternatives are seen.  Sales agency may be more cost effective to manufacturer than its own sales force in many cases. - Based on comparison of costs at varying sales volume levels, company may decide on which channel alternatives to implement. Control Criteria: - Using an independent business entity like a sales agency, distribution may pose a control problem. - Sales agency may seek to:  Maximise its own profit.  May concentrate on customers who buy the most, but not necessarily manufacturer’s goods.  Technical details of company’s product may not be mastered by sales agency. -

Hence, using a sales agency/ Distribution would need effective control measured by company in the form of good channel management.

Adaptive Criteria: - To develop a channel, channel members must make some level of commitment to each other for specified time frame. - This may reduce producer’s ability to respond to a changing market place. 6

Chapter-10. Managing Marketing Channels -

If product market is  Changing rapidly.  Volatile.  Uncertain. Then, producer needs to seek channel structure that: • Maximise control. • Allow marketing strategy change in short time.

Channel Management Decision: - Once a company has chosen a channel alternative, individual intermediaries must be:  Selected.  Motivated.  Evaluated. Selecting Channel Members: - To select channel member, company should make a blue print/ checklist of characteristics that would distinguish good intermediaries from average intermediaries. - Typically, checklist may contain following parameter on which each distribution applicant is evaluated.  Financial Strength.  Solvency (Ability to clear bills in specified time frame).  Number of years in business.  Reputation.  Ability to develop down-line distribution.  Corporate contacts.  Sales force (Size/quantity).  Location of stores (Especially for retailers).  Future growth potential.  Type of clientele (For retailers).  Sales promotion experience.  Transportation strength (For whole seller).  Ware housing facilities (For whole sellers).  Co-operativeness.  Willingness to do company’s business. Motivating Channel Members: - Intermediaries must be continuously motivated to do their job. This is achieved through fair terms & good channel management through: • Training. • Supervision. • Encouragement. - Producer must first sell to them & then sell through them. - To stimulate channel member to perform well, one first need to understand them well. - Typically, any intermediaries would: o Be interested in selling any product which his/her customer desires to buy. o Be interested in selling his/her assortments of products rather than an individual product.

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Chapter-10. Managing Marketing Channels o May look at overall information sales rather than brand win information that could be used in product development/ pricing/ packaging/ promotional planning. -

To manage distribution & elicit their co-operation, producer may use various channel power bases.

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Power bases could be: o Reward Power:  Manufacturer offers intermediaries extra benefit for performing special acts/ functions. • May lead to motivated effort to earn extra reward. • May lead to reward expectation everytime if on used. • Withdrawal may lead to resentments. o Coercive Power:  Punishment/Threat to withdraw a resource or terminate a relationship if intermediaries fail to co-operate.  To be used as a last resort as it may lead to resentment/ ill will creating long term damage. o Expert Power:  Used when intermediaries believe that manufacturer representatives have special knowledge that is of value to intermediaries.  Example: • Sales Lead Generation: o Most effective power base. o May weaken once full expertise is passed on. Hence, manufacturer must continuously develop new expertise to ensure intermediaries co-operation.  Example: Category Numbers Visit Frequency Visit Day/ Quarter Salesmanship Training Product Training A 3 1 per month 9 Leadership Training B 12 2 per quarter 24 Communication Skills C 25 1 per quarter 25 Performance Planning & Total Days 58 per quarter Assessment Market Knowledge/ Trend An average Area Sales Manager travels for around Research Skills/ Competition 19 days in a month. Monitor Advertisement Planning Event Management o Referent Power:

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Chapter-10. Managing Marketing Channels  Occurs when manufacturer commands high respect from intermediaries. As a result, intermediaries are proud to be associated/ identified with manufacturer.  Example: HLL/ Titan. o Legitimate Power:  Legitimate Power is wielded when manufacturer requests for behaviour from intermediaries that is warranted by the contracts.  Manufacturer feels this is its rights & intermediaries are obligated to do so.  Works as long as intermediaries accepts manufacturer’s rights.  Example: Minimum Stocking Level. -

For Good channel management, channel manager should prefer to use referent power & expert power, then legitimate power and reward power. Coercive power should be avoided. Channel power bases used in combination for more motivation & performance.

Evaluating Channel Members: - Every producer must periodically evaluate intermediaries performance. - Performance parameters could be:  Sales target/ quota achievement.  Average inventory levels.  Customer delivery time/ customer handling.  Treatment of damaged/ lost goods.  Co-operation in promotion/ training program.  After sales service as applicable. -

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Performers are motivated/ rewarded. Under performers need to be:  Analysed for under performance.  Counseled.  Retained & re-motivated. Consistent underperformance may need to be replaced without harming company’s interest.

Channel Dynamics: - Distribution channels keep on evolving new whole-sellers/ retailers. Institutions emerge to give rise t new channel system. - Typically, emerging marketing system are:  Vertical Marketing System (VMS).  Horizontal Marketing System (HMS).  Multi-channel Marketing System (MMS). Vertical Marketing System (VMS): Conventional marketing system comprises independent producer/ whole-seller/ retailer. Each is a separate business entity. - Vertical marketing system comprises the producer/ whole-seller/ retailer acting as a unified system. - Producer may either: 9

Chapter-10. Managing Marketing Channels

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 Own all/most of them.  Franchise them & control activities.  Have so much power that each channel member co-operates. Vertical marketing system may be of following type: o Corporate:  Corporate VMS combines successive stages of production/ distribution under single ownership.  Example: NIIT/ ApTech during initial stages. o Administered:  Administered VMS co-ordinates successive stages of production/ distribution not through common ownership, but through size/power of producer.  Example: HLL/ Colgate. o Contractual:  Contractual VMS consists of independent firms integrating their programs on a contractual basis to obtain more economies or higher sales.  Typically, this may be manifest through franchise system.  Franchise could be: • Retail Franchise : Automobile. • Whole-seller Franchise: Soft Drink Bottlers. • Service Franchise : Computer Education.

Horizontal Marketing System (HMS): - In an HMS, two/more unrelated companies put together resources/ programs to exploit an emerging marketing opportunity. - Also called symbiotic marketing.  Example: • Whirlpool (Washing m/c). • Country wide Finance (Hire/ Purchase). Multi-Channel Marketing System (MMS): - MMS occurs when a single firm uses two/ more marketing channel to reach one/ more customer segments.  Example: Zenith:  Company Sales Force (Corporate).  Distribution Network (SOHO-small office small home). - Benefits of MMS could be:  Increased market share.  Lower channel cost.  More customized selling. -

Disadvantages could be:  Requirement for better control.  Higher channel conflict.

Roles of Individual Firms in a Channel: 10

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Chapter-10. Managing Marketing Channels Each channel member may play different roles in a marketing channel. Roles could be:

Insider: - Members of dominant company. - Enjoy access to preferred supply & high respect in industry. - Want to perpetuate existing channel. - Main enforcers of industry code of conduct. Strivers: - Firms seeking to become insider. - Follow industry code due to their desire. Complementor: - Follow code laid down by insider. - Handle smaller segments/ quality. - Usually benefit from present system. Transient: - Outside dominant channel & do not seek membership, but are part of small channel. - Have short term outlook & do not adhere to code of conduct. - May disrupt existing channel. Outside Innovators: - Challenge/ Disrupt dominant channel. - May develop new ways of distribution. - May be producers in search of better distribution.  Example: Dell. Channel Captain: - Dominant member of a particular channel. - Leads full channel to better performance. 

Good channel manager identify which channel members are playing what roles. This is an aid for better channel management.

Channel Conflict: - Typically, in a channel, interests of independent business entity may not always coincide. - This gives rise to channel conflict. - Types of conflict could be: o Vertical Channel Conflict:  Exists when there is conflict between different levels within the same channel.  Example: • Conflict between Manufacturer & Distributor. • Conflict between Distributor & Retailer. o Horizontal Channel Conflict:  Occurs when there is conflict between different members at the same level within the channel. 11

Chapter-10. Managing Marketing Channels  Example: maruti dealers in Pune city getting into conflict on a single corporate order. o Multi-channel Conflict:  Occurs when a manufacturer has established two/more channel that compete with each other in selling to same market.  Example: Zenith company sales force & dealer trying to obtain same corporate order. Causes of Channel Conflict: - Conflict may arise due to: o Goal Incompatibility:  Goals of manufacturer may be in conflict with that of distributor.  Discount may be an issue.  Example: • Increased market share through low pricing. • Maintaining premium pricing. o Unclear Roles/ Rights:  Could be manifest through: • Territory Allocation. • Credit terms differences. o Differences in Perception:  Manufacturer may be optimistic in short term sales outlook & hence may want distributor to stock more product quantity. Distributor may feel otherwise. o Overdependence:  Conflict may arise due to overdependence of distributor on manufacturer.  Hence, distributor is highly susceptible to change in market & manufacturer’s strategies.  This leads to high conflict potential. Managing Channel Conflicts: - Some amount of conflict may be constructive. - However, excess conflict may be dysfunctional. Hence, conflict need to be managed rather than eliminated. - Mechanisms for conflict management could be: o Adoption of Super-ordinate Goals:  Arrive at an agreement on fundamental goals.  Work close together to achieve goals with focus on work objective rather than persons. o Exchange of Persons/ Staff:  Two channel levels may exchange staff for short duration to understand each other’s point of view/ perspective better. o Co-Optation:  Include certain channel members in joint decision making on issues that have an impact on the whole channel. This ensures joint responsibility on objective fulfillment. 12

Chapter-10. Managing Marketing Channels o Membership of Trade Association:  As a result, informal discussion can happen between conflicting groups & solutions can be arrived at. -

When conflict is chronic/ acute, parties may have to resort to: o Diplomacy:  Representative sent over to conflicting groups to resolve/ minimize conflict. o Mediation:  Conflict referred to neutral third party who may reconcete conflicting groups.  Third party is normally respected by both groups. o Arbitration:  Conflicting parties agree to present their argument to an arbitrator & also agree to accept arbitrator’s decisions.

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