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Chapter 12: Channels of Distribution
Chapter Objectives
After reading this chapter, students should understand:
·The functions of channels of distribution
·Key factors affecting the choice among alternative channel structures
·Channel options
·Managing channels of distribution, particularly resolving conflicts between
channel members
·Special topics in channels of distribution, including the web, changes in
supermarket retailing, and multi-level marketing
·Channel decisions in global and high-tech contexts
Chapter Overview
The purpose of this chapter is to introduce methods of distributing products and
services to customers.
Chapter Outline and Key Terms
Key Terms:
·Channels of distribution
·Logistics
·Push
·Pull
·Direct channel
·Indirect channel
·Disintermediation
·Multiple-channel system
·Multi-channel marketing
·Hybrid system
·Channel power
·Value-added reseller (VAR)
·Gray market
·Parallel importing
·Diverters
·Category management
·Efficient consumer response (ECR)
·Continuous replenishment program (CRP)
A. Definitions
1. Channels of distribution: The system by which customers have access to a
company’s product or service.
2. Logistics: Physical distribution of goods from one location to another.
3. Push: One of two kinds of basic activities of channel management that requires
motivating customers to ask for your brand by name.
4. Pull: One of two kinds of basic activities of channel management that requires
getting channels to carry and sell the product.
5. Direct channel: Is one where the product or service remains under the control of
the company from production to customer.
6. Indirect channel: Is an independent party paid by a company to distribute the
product; in this case, the channel member and not the company have direct
contact with the end organization.
7. Disintermediation: The process by which companies are eliminating
intermediate channels of distribution through information technology.
8. Multiple-channel system: A channel of distribution that uses a combination of
direct and indirect channels and in which the multiple channel members service
different segments.
9. Multi-channel marketing: Marketing using multiple channels of distribution
simultaneously.
10. Hybrid system: A modification of the multiple-channel system in which
members of the channel system perform complementary functions, often for the
same customer, thereby allowing for specialization and better levels of
performance.
11. Channel power: The ability of one channel member to get another channel
member to do what it otherwise would not have done.
12. Value-added reseller (VAR): Organizations that buy products from a variety of
vendors, assemble them in packages, and resell the packages to specialized
segments; part of the channel of distribution for technology-based products.
13. Gray market: A market in which trademarked goods are sold through channels
of distribution that are not authorized by the holder of the trademark.
14. Parallel importing: The development of gray markets across country lines, often
as a result of significant currency exchange rate or price differences between
countries that make it profitable to purchase goods in one country and import
them into another.
15. Diverters: In international marketing, middlemen who purchase products or
arrange for their purchase and thereby divert the products away from normal
channels.
16. Category management: A process that considers product categories to be the
business units that should be customized on a store-by-store basis in a way that
satisfies customer needs.
17. Efficient consumer response (ECR): A process seeking to reduce costs
throughout the entire distribution system, resulting in lower prices and increased
consumer demand.
18. Continuous replenishment program (CRP): A program wherein members of a
supply chain partner with supermarkets, working together to attempt to
accurately forecast demand, which is then used to generate inventory
replenishment data electronically.
B. Importance of Channels of Distribution
1. Channels:
·Provide a way for customers to get to the products and services and vice
versa.
·Are there intermediaries that provide a value to the process (Value-add)?
·Figure 12.1, Page 342 The Value-Added Chain of Distribution Channels
Shows the concept of the value-added chain of channels. The channel
members are an extension of the firm, but not a substitute.
·Types of marketing intermediaries include:
·Middlemen
·Merchant middlemen
·Agents
·Wholesalers
·Retailers
·Broker
·Manufacturer’s agent
·Distributor
·Jobber
·Facilitating agent
·Table 12.1 Page 343 Major Types of Marketing Intermediaries
Lists different types of marketing intermediaries
·Illustration Snapple (www.snapple.com) Page 342
·Illustration: New England Confectionary Company (www.necco.com)
Page 342
·Figure 12.2 Page 344 Alternative Channel Systems Shows some general
channel structures for industrial and consumer products.
C. Channel Dynamics
1. Channels of distribution are dynamic in nature. Just in the same way that
customers can change their attitudes and behaviors, channels can also change over
time.
2. A marketing manager needs to attend to the logistics and the customers in the
value chain that distribute products to customers.
3. Channels have changed because of technology (Consumers and business-to-
businesses can now use the web for online ordering, etc.)
4. Differential advantage can be obtained through channel structure decisions that
deviate from conventional wisdom.
Illustration: Online Groceries (www.safeway.com) Page 346-347
Illustration: Movie Rentals (www.netflix.com and www.apple.com/itunes ) Page
347
D. Channel Functions
1. Channels function in many ways including:
·Marketing Research—since channels have direct access to customers it is
logical that they can perform a function of gathering information about
products/services and customers that would benefit the company
·Communications—providing information to the customer about the
product/service or about the company
·Contact—the channels could have direct contact with the customers as
independent wholesalers
·Matching/Customizing—channels that try to match the product or service
with the customers need
·Negotiation—of prices with the customer such as someone in a sales
position
·Physical Distribution—logistical services
·Financing—through the retailer vs. through the manufacturer
·Risk Taking—purchasing a product prior to selling it to the customer
·Service—repair services, warranty programs, answer customer questions
about the product
·Relationship Management—the channel is often an extension of the firm
and the entity that often works directly with the customer
·Product Assembly—puts products together for display for customers
2. Framework for choosing among channels: can be used to determine which
channels may be more effective given the current task and the table can also be used
to evaluate how the current channels of distribution are performing in certain areas.
·Table 12.2 Page 349 Channel Function Analysis Provides a template to
assess the characteristics of a current channel structure.
·Framework can rate and rank each channel option and evaluate the ability of
the option to provide the function.
E. Factors Affecting the Channel System
1. Customer Behavior: understanding customer behavior will aid in understanding
what channel of distribution might meet the needs of what segment of the target
customers.
·Table 12.3 Page 351 Consumer Wants and Needs Driving the Saturn
Distribution System displays how customers behavior helped shape its
channels of distribution.
2. Competitors: knowing competitor’s distribution systems will help to either
differentiate the products, if the company chooses to distribute the product
differently, or provide the customer with the same distribution method as they
expect with the competitor.
3. The Marketing Strategy: can determine the distribution system each of these
factors impact on the channel of distribution structure. Linking the channels of
distribution and the marketing plan is through the value proposition (that which
separates the product from the competition’s)
·Inbound logistics
·Operations
·Outbound logistics
·Marketing and sales
·Service
4. Resources: factor into the type of distribution system a company will adopt. If a
company is launching a product and not certain of the volume, it may be
advantageous to contract a company to distribute the product at a less expensive
way than a strict company-owned distribution system. It is important that every
company determine how much of the distribution they will keep in house and
how much they will need to contract out.
5. Changes in Technology: Rapid changes in IT are rapidly adding channel options
and broadening the set of channels from which a manager can choose. Advances
in technology are adding many forms of channels that were not formerly
available.
F. Channel Options
1. Direct and Indirect Channels
·Direct is when the channel of distribution is under the control of the
company from the time of production until it reaches the customer
·Indirect is when the channel of distribution is when an independent party is
contracted to perform channel distribution for the company
·Disintermediation: Information technology is disrupting the channel
structure by allowing some channels to be bypassed.
2. Multiple-Channel System: systems that utilize both direct and indirect channel
distributions to service different customer segments
·Coordination and management can be more complicated
·Loss of control over one part of the system (indirect) and control over the
other (direct) can be frustrating for managers
·Customers can purchase the same product from different channels at
different prices
·Figure 12.4 Page 355 Multiple Channels Problem areas are demonstrated
in this figure between the price-sensitive and service-sensitive customers.
·Illustration: Ingersoll Rand (www.ingersollrand.com) Page 356
3. Hybrid Systems: A modification of a multiple-channel system.
·Channel members may perform complementary functions for same
customer
·Permits specialization and therefore improves levels of performance Figure
12.6 Page 357 Hybrid Channel Design shows this kind of system.
·Key difference between hybrid and more conventional multiple-channel
systems is hybrids are more horizontal
·Figure 12.7 Page 358 Example of a Hybrid Channel Design More
detailed look at a hybrid channel design. Channels vary by the tasks they
perform.
·Illustration: JCPenney (www.jcpenney.com ) Page 358
G. Channel Power and Management
·Channel Power—channel members may have some bargaining power over the
product company under certain circumstances
·The channel’s sales volume is large relative to the product’s total sales
volume
·The product is not well differentiated from competitors
·The channel has low switching costs
·The channel poses a credible threat of backward integration or
competing product (private labels in grocery stores)
·The channel has better information than you about market conditions
·Channel Management
·Channel Conflict:
·Figure 12.9 Page 361 Levels of Conflict Between
Manufacturers and Channel Members Illustrates levels of
conflicts and divides them into three increasingly fractious
intensities
·The four major sources of conflict are:
·Goal divergence
·Who owns the domain (population to be served, the
territory to be covered, the functions or duties to be
performed and the technology to be employed in
marketing)
·Differing perceptions of reality
·Misuse of power
Illustration: Goodyear Tires (www.goodyeartires.com ) Page 361
·Conflict Resolution:
·Determine where conflict exists and try and understand the
channels concerns
·Discriminate products
·Develop joint solutions
·Put more money into push and pull activities
·Develop financial arrangements such as commissions
and higher margins
·Charging higher prices in direct channel
·Channel power can also be used as a conflict resolution tool.
Power sources can be converted into persuasion through:
·Threats
·Legalistic please
·Promises
·Requests
·Recommendations
·Information exchanges
