LEARNING OBJECTIVES
In this chapter, we will address the following questions:
1. What is a marketing channel system and value network?
2. What work do marketing channels perform?
3. How should channels be designed?
4. What decisions do companies face in managing their channels?
5. How should companies integrate channels?
6. What are the key channel issues in e-commerce?
7. What are the key channel issues in m-commerce?
8. How should companies manage channel conflict?
SUMMARY
1. Most producers do not sell their goods directly to final users. Between producers and
final users stands one or more marketing channels, a host of marketing intermediaries performing
a variety of functions.
2. Marketing channel decisions are among the most critical decisions facing management.
The company’s chosen channel(s) profoundly affect all other marketing decisions.
3. Companies use intermediaries when they lack the financial resources to carry out direct
marketing, when direct marketing is not feasible, and when they can earn more by doing so. The
most important functions performed by intermediaries are information, promotion, negotiation,
ordering, financing, risk taking, physical possession, payment, and title.
4. Manufacturers have many alternatives for reaching a market. They can sell direct or use
one-, two-, or three-level channels. Deciding which type(s) of channel to use calls for analyzing
customer needs, establishing channel objectives, and identifying and evaluating the major
alternatives, including the types and numbers of intermediaries involved in the channel.
5. Effective channel management calls for selecting intermediaries and training and
motivating them. The goal is to build a long-term partnership that will be profitable for all
channel members.
6. Marketing channels are characterized by continuous and sometimes dramatic change.
Three of the most important trends are the growth of vertical marketing systems, horizontal
marketing systems, and multichannel marketing systems.
7. E-commerce has become firmly established as more companies have adopted
“brick-and-click” channel systems. M-commerce (selling via smart phones and tablets) is also
gaining in importance. Some consumers engage in showrooming by which they shop in stores to
inspect products but buy online later to seek a lower price.
8. Channel integration must recognize the distinctive strengths of online, offline, and mobile
selling and maximize their joint contributions.
9. All marketing channels have the potential for conflict and competition resulting from
goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent
relationships. Companies can try to manage conflict through dual compensation, superordinate
goals, employee exchange, co-optation, and other means.
10. Channel arrangements are up to the company, but certain legal and ethical issues to be
considered include exclusive dealing or territories, tying agreements, and dealers’ rights.
C H A P T E
R
1
7
DESIGNING AND
MANAGING INTEGRATED
MARKETING CHANNELS
OPENING THOUGHT
Most students are not familiar with channels of distribution, except, perhaps, from the retailer in
which they have bought products. Therefore, the instructor has to ensure that they clarify the
various channels of distribution during this chapter lecture. Examples of the various channels for
products familiar to the students can help illustrate the complexity of the process.
Second, because marketing channel decisions are mostly hidden from the final consumer, the
instructor should make every effort to diagram the decision-making process for each level of
channel distribution. Starting with the retail price of the product, then subtracting each
distribution level margins or markups shows the effects of distribution to or for the product.
Managing channels of distribution will be new to most students, as will the definitions of channel
conflict and channel support. The instructor can best serve the student by fully diagramming a
particular product from a channel of distribution perspective and talking about channel roles,
conflicts, training, and motivation.
The students will probably be most interested in, or knowledgeable about, e-commerce and see
e-commerce as the future of business. The instructor should caution the students about assuming
that all business transactions (or a great majority of them) will flow to e-commerce by
describing to the students the various consumer demographic groups, buying habits, and
comfortableness with technology. An in-class discussion on the merits and demerits of
e-commerce should provide for a lively cross-section of opinions.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long project, students should present their channel decisions for
getting their product or service to the consumer. In evaluating this section, the instructor
should evaluate the completeness of the projects to the material contained in this chapter.
2. Progressive companies have begun developing a value network system to get products in the
hands of consumers. A value network includes a firm’s suppliers, its suppliers’ suppliers, its
immediate customers, and their end customers. Students should identify a company that has
successfully set up a value network, then compare and contrast the components of the value
system to a competitor that does not have one. Students should be able to identify the
components of the value network that produced the augmented offering.
3. Sonic PDA Marketing Plan: Manufacturers need to pay close attention to their marketing
channels. By planning the design, management, evaluation, and modification of their
marketing channels, manufacturers can ensure their products are available when and where
customers want to buy.
At Sonic, you have been asked to develop a channel strategy for Sonic 1000. Based on the
information you previously gathered and the decisions you have already made about the
target market, product, and pricing, answer the following:
What decisions must Sonic make to develop the five marketing flows (physical product,
title, payment, information, and promotion) for Sonic 1000?
How many levels would be appropriate for the consumer and business markets you are
targeting for Sonic 1000?
Should you plan for exclusive, selective, or intensive distribution?
What decisions must Sonic make to develop the five service outputs (lot size, waiting
time, spatial convenience, product variety, and service back up) for Sonic 1000?
Document your recommendations about marketing channels and strategy in a written marketing
plan or type the recommendations into the Marketing Mix and Channels sections of Marketing
Plan Pro.
ASSIGNMENTS
Top marketing companies are employing both a “push” and a “pull” strategy to deliver
incremental sales. Take the example of the company called Sepracor, Inc. as defined in the
chapter. Its product Lunestra has caused the company’s stock price to soar. Using this product as
an example, have the students a) track the number of pharmaceutical products advertised on
television and b) comment on whether or not this increased advertising is increasing the demand
by increasing the “awareness of” certain medical conditions.
Ask the students to comment on the hybrid channel of distribution. The hybrid channel as defined
in the chapter poses an interesting channel for future marketers. As students grow into consumers
will they or won’t they rely on purchasing products exclusively through the Internet? Or will they
demand hybrid distribution choices like free shipment to store sites (like Walmart) or pick up at
the store like Best Buy?
Today, some of the countries more successful companies are using a hybrid channel system to
increase its effectiveness of reaching the consumer. The text uses the examples of IBM, Charles
Schwab, and others and notes that channel integration and its features are what the consumer
prefers. Students should choose or find one additional example of a firm using the hybrid system,
and comment on how they see this system delivering value to the consumer. Student answers
should be directed toward the three features of channel integration found in the textbook.
In the Marketing Insight article entitled, “Trasforming Your Go-to-Market Stratgey: The Three
Disciplines of Channel Management,” V. Kasturi Rangan Boston, MA: Harvard Business School
Press, 2006 identifies new opportunities for marketing products through multiple channels by
crafting a “channel steward.” Ask the students to read this article and comment on its practicality
in light of the changes posed by Internet shopping.
Channel members add value to the consumer’s purchase of certain products and services. Table
17.1 details key channel member functions. Yet some firms have abandoned channel partners and
tried to reach the consumer on a one-to-one basis. Selecting a product or firm that (a) is
maintaining its channel members, and (b) a firm that has decided to sell directly to the consumer
thus bypassing channel intermediaries. Comment on these two systems in terms of the
information contained in the chapter.
DETAILED CHAPTER OUTLINE
Opening vignette: Successful value creation needs successful value delivery. Instead of limiting
their focus to their immediate suppliers, distributors, and customers, holistic marketers are
examining the whole supply chain as a value network, including their suppliers’ suppliers
upstream and their distributors’ customers downstream. They are also looking at how technology
is changing the way customers shop and retailers sell and finding new and different means to
distribute and service their offerings. L.L.Bean develops strong customer ties with a
well-executed channel strategy
I. Marketing Channels and Value Networks
A. Intermediaries between producers and users constitute a marketing channel (also
called a trade channel or distribution channel).
i. Marketing channels are sets of interdependent organizations participating in
the process of making a product or service available for use or consumption.
ii. They are the set of pathways a product or service follows after production,
culminating in purchase and consumption by the final end user.
iii. Merchants buy, take title to, and resell the merchandise.
iv. Agents are brokers, manufacturers’ representatives, sales agents who search
for customers and may negotiate on the producer’s behalf but do not take title
to the goods.
B. The Importance of Channels
i. Marketing channel system is the particular set of marketing channels a firm
employs, and decisions about it are among the most critical ones
management faces.
ii. Marketing channels must not just serve markets, they must also make them;
the channels chosen affect all other marketing decisions
1. Pricing depends on whether it uses online discounters or high-quality
boutiques
2. Sales force and advertising decisions depend on how much training
and motivation dealers need
3. Holistic marketers ensure that marketing decisions in all these
different areas are made to maximize value overall.
iii. A push strategy uses the manufacturer’s sales force, trade promotion money,
or other means to induce intermediaries to carry, promote, and sell the
product to end users.
iv. A pull strategy uses advertising, promotion, and other forms of
communication to persuade consumers to demand the product from
intermediaries, thus inducing the intermediaries to order it.
C. Multichannel Marketing: using two or more marketing channels to reach customer
segments in one market area.
i. Each channel can target a different segment of buyers, or different need states
for one buyer, to deliver the right products in the right places in the right way
at the least cost.
ii. Channel conflict, excessive cost, or insufficient demand can result from bad
channel decisions.
iii. Research has shown that multichannel customers can be more valuable to
marketers
D. Integrating Multichannel Marketing Systems
i. Companies are increasingly employing digital distribution strategies, selling
directly online to customers or through e-merchants who have their own Web
sites (omnichannel marketing—multiple channels work seamlessly together
and match each target customer’s preferred ways of doing business)
ii. An integrated marketing channel system is one in which the strategies and
tactics of selling through one channel reflect the strategies and tactics of
selling through one or more other channels.
1. Increased market coverage.
2. Lower channel cost
3. Ability to do more customized selling
4. New channels typically introduce conflict and problems with control
and cooperation.
5. Companies should use different sales channels for different-sized
business customers—a direct sales force for large customers, a
digital strategy or telemarketing for midsize customers, and
distributors for small customers—but be alert for conflict over
account ownership.
6. Multichannel marketers also need to decide how much of their
product to offer in each of the channels.
II. Value Networks
A. The company should first think of the target market and then design the supply chain
backward from that point = demand chain planning
B. The company can be viewed as at the center of a value network—a system of
partnerships and alliances that a firm creates to source, augment, and deliver its
offerings.
i. The company can estimate whether more money is made upstream or
downstream, in case it can integrate backward or forward.
ii. The company is more aware of disturbances anywhere in the supply chain
that might change costs, prices, or supplies.
iii. Companies can go online with their business partners to speed
communications, transactions, and payments; reduce costs; and increase
accuracy.
C. Managing a value network means making increasing investments in information
technology (IT) and software.
D. The Digital Channels Revolution is profoundly transforming distribution strategies.
i. Traditional brick-and-mortar channel strategies are being modified or even
replaced.
ii. Online retail sales (or e-commerce) have been growing at a double-digit rate;
apparel and accessories, consumer electronics, and computer hardware are
the three fastest-growing categories.
iii. Customers expect seamless channel integration
iv. Retailers and manufacturers are assembling massive amounts of social,
mobile, and location (SoMoLo) information they can mine to learn about
their customers.
III. The Role of Marketing Channels
A. Producers delegate some of the selling job to intermediaries, relinquishing control
over how and to whom its products are sold because through their contacts,
experience, specialization, and scale of operation, intermediaries make goods widely
available and accessible to target markets, offering more effectiveness and efficiency
than the selling firm could achieve on its own.
B. Channel Functions and Flows
i. A marketing channel performs the work of moving goods from producers to
consumers.
ii. It overcomes the time, place, and possession gaps that separate goods and
services from those who need or want them.
iii. They gather information, develop and disseminate communications,
negotiate, place orders, get funds, take on risk, provide storage, arrange
financing, and oversee transfer of ownership
1. Storage and movement, title, and communications constitute a
forward flow of activity from the company to the customer;
2. Ordering and payment constitute a backward flow from customers to
the company.
iv. A manufacturer selling a physical product and services might require three
channels: a sales channel, a delivery channel, and a service channel.
1. The question for marketers is not whether various channel functions
need to be performed—they must be—but, rather, who is to perform
them.
2. All channel functions have three characteristics in common:
a. They use up scarce resources
b. They can often be performed better through specialization
c. They can be shifted among channel members.
C. Channel Levels
i. The producer and the final customer are part of every channel.
ii. A zero-level channel, also called a direct marketing channel, consists of a
manufacturer selling directly to the final customer. (e.g., mail order,
telemarketing, manufacturer-owned stores)
iii. A one-level channel contains one selling intermediary, such as a retailer.
iv. A two-level channel contains two intermediaries, typically a wholesaler and a
retailer, and a three-level channel contains three.
v. An industrial-goods manufacturer can use its sales force to sell directly to
industrial customers, or it can sell to industrial distributors who sell to
industrial customers, or it can sell through manufacturer’s representatives or
its own sales branches directly to industrial customers or indirectly to
industrial customers through industrial distributors. Zero-, one-, and
two-level marketing channels are quite common.
vi. Channels normally describe a forward movement of products from source to
user, but reverse-flow channels are also important (1) to reuse products or
containers (such as refillable chemical-carrying drums), (2) to refurbish
products for resale (such as circuit boards or computers), (3) to recycle
products, and (4) to dispose of products and packaging.
vii. Reverse-flow intermediaries include manufacturers’ redemption centers,
community groups, trash-collection specialists, recycling centers,
trash-recycling brokers, and central processing warehousing.
D. Service Sector Channels
IV. Channel-Design Decisions
A. Analyzing Customer Needs and Wants
i. Consumers may choose the channels they prefer based on price, product
assortment, and convenience as well as their own shopping goals (economic,
social, or experiential).
ii. Channel segmentation exists, and marketers must be aware that different
consumers have different needs during the purchase process.
iii. Showrooming lets them physically examine a product and collect
information in a store but make their actual purchase from the retailer later
online or, in the store’s least desirable outcome, from a different retailer
altogether, typically to secure a lower price.
B. Channels serve five service functions
i. Desired lot size
ii. Waiting and delivery time
iii. Spatial convenience
iv. Product variety
v. Service backup
C. Establishing Objectives and Constraints
i. Channel objectives vary with product characteristics.
ii. Marketers must adapt their channel objectives to the larger environment.
iii. In entering new markets, firms often closely observe what other firms are
doing
D. Identifying Major Channel Alternatives
i. Each channel—from sales forces to agents, distributors, dealers, direct mail,
telemarketing, and the Internet—has unique strengths and weaknesses.
1. Sales forces can handle complex products and transactions, but they
are expensive.
2. The Internet is inexpensive but may not be as effective for complex
products.
3. Distributors can create sales, but the company loses direct contact
with customers.
4. Several clients can share the cost of manufacturers’ reps, but the
selling effort is less intense than company reps provide.
ii. Types of Intermediaries
iii. Number of Intermediaries
1. Exclusive distribution severely limits the number of intermediaries.
2. Selective distribution relies on only some of the intermediaries
willing to carry a particular product.
3. Intensive distribution places the goods or services in as many outlets
as possible.
iv. Manufacturers are constantly tempted to move from exclusive or selective
distribution to more intensive distribution to increase coverage and sales.
v. Each channel member must be treated respectfully and be given the
opportunity to be profitable.
vi. The main elements in the “trade relations mix” are price policies, conditions
of sale, territorial rights, and specific services to be performed by each party.
E. Evaluating Major Channel Alternatives
i. Economic Criteria: Every channel member will produce a different level of
sales and costs. Sellers try to replace high-cost channels with low-cost
channels as long as the value added per sale is sufficient.
ii. Control and Adaptive Criteria: Using a sales agency can pose a control
problem. Agents may concentrate on the customers who buy the most, not
necessarily those who buy the manufacturer’s goods.
V. Channel Management Decisions
A. After a company has chosen a channel system, it must select, train, motivate, and
evaluate intermediaries for each channel.
i. It must also modify channel design and arrangements over time, including
the possibility of expansion into international markets.
ii. To customers, the channels are the company.
B. Training and Motivating Channel Members
i. Carefully implemented training, market research, and other
capability-building programs can motivate and improve intermediaries’
performance.
ii. The company must constantly communicate that intermediaries are crucial
partners in a joint effort to satisfy end users of the product.
C. Channel Power is the ability to alter channel members’ behavior so they take actions
they would not have taken otherwise
i. Coercive power. A manufacturer threatens to withdraw a resource or
terminate a relationship if intermediaries fail to cooperate.
ii. Reward power. The manufacturer offers intermediaries an extra benefit for
performing specific acts or functions.
iii. Legitimate power. The manufacturer requests a behavior that is warranted
under the contract.
iv. Expert power. The manufacturer has special knowledge the intermediaries
value.
v. Referent power. The manufacturer is so highly respected that intermediaries
are proud to be associated with it.
D. Most producers see gaining intermediaries’ cooperation as a huge challenge.
E. To streamline the supply chain and cut costs, many manufacturers and retailers have
adopted efficient consumer response (ECR) practices to organize their relationships
in three areas:
i. Demand-side management, or collaborative practices to stimulate consumer
demand by promoting joint marketing and sales activities,
ii. Supply-side management, or collaborative practices to optimize supply (with
a focus on joint logistics and supply chain activities),
iii. Enablers and integrators, or collaborative information technology and
process improvement tools to support joint activities that reduce operational
problems, allow greater standardization, and so on.
F. Evaluating Channel Members: periodic evaluation of intermediaries’ performance
G. Modifying Channel Design and Arrangements: The optimal channel structure will
inevitably change over time.
i. A new firm typically starts as a local operation selling in a fairly
circumscribed market, using a few existing intermediaries.
ii. If the firm is successful, it might branch into new markets with different
channels.
iii. Early buyers might be willing to pay for high-value-added channels, but later
buyers will switch to lower-cost channels. Small office copiers were first sold
by manufacturers’ direct sales forces, later through office equipment dealers,
still later through mass merchandisers, and now by mail-order firms and
Internet marketers. In short, the channel system evolves as a function of local
opportunities and conditions, emerging threats and opportunities, and
company resources and capabilities.
H. Channel Modification Decisions
i. The distribution channel may not work as planned, consumer buying patterns
change, the market expands, new competition arises, innovative distribution
channels emerge, and the product moves into later stages in the product life
cycle
ii. To add or drop individual channel members, the company needs to make an
incremental analysis.
iii. Customer databases and sophisticated analysis tools can provide guidance.
I. Global Channel Considerations
i. International markets pose distinct challenges, including variations in
customers’ shopping habits and the need to gain social acceptance or
legitimacy among others, but opportunities do exist
ii. Developing markets have become a target for many retailers.
1. India’s complex regulations, poor infrastructure, and expensive real
estate also make it a difficult market for retail chains to enter.
2. China has similar logistical challenges, though a growing middle
class offers opportunity.
3. The first step in global channel planning, as so often in marketing, is
to get close to customers.
VI. Channel Integration and Systems
A. A conventional marketing channel consists of an independent producer,
wholesaler(s), and retailer(s), each wanting to maximize its own profits.
B. A vertical marketing system (VMS) includes the producer, wholesaler(s), and
retailer(s) acting as a unified system.
i. One channel member, the channel captain, sometimes called a channel
steward, owns or franchises the others or has so much power that they all
cooperate.
ii. Stewards accomplish channel coordination without issuing commands or
directives by persuading channel partners to act in the best interest of all.
iii. Channel stewardship has two important outcomes.
1. Expands value for the steward’s customers, enlarging the market or
increasing existing customers’ purchases through the channel.
2. Creates a more tightly woven and yet adaptable channel in which
valuable members are rewarded and the less valuable are weeded
out.
iv. VMSs arose from strong channel members’ attempts to control channel
behavior and eliminate conflict over independent members pursuing their
own objectives.
v. A corporate VMS combines successive stages of production and distribution
under single ownership.
vi. An administered VMS coordinates successive stages of production and
distribution through the size and power of one of the members.
vii. A contractual VMS consists of independent firms at different levels of
production and distribution integrating their programs on a contractual basis
to obtain more economies or sales impact than they could achieve alone
1. Wholesaler-sponsored voluntary chains
2. Retailer cooperatives
3. Franchise organizations
viii. The New Competition in Retailing
1. Many independent retailers that have not joined VMSs have
developed specialty stores serving special market segments.
2. The result is a polarization in retailing between large vertical
marketing organizations and independent specialty stores, which
creates a problem for manufacturers.
C. Horizontal Marketing Systems: two or more unrelated companies put together
resources or programs to exploit an emerging marketing opportunity.
i. Each company lacks the capital, know-how, production, or marketing
resources to venture alone, or it is afraid of the risk.
ii. The companies might work together on a temporary or permanent basis or
create a joint venture company.
VII. E-Commerce Marketing Practices
A. E-Commerce uses a Web site to transact or facilitate the sale of products and services
online.
B. Online retailers compete in three key aspects of a transaction: (1) customer
interaction with the Web site, (2) delivery, and (3) ability to address problems when
they occur.
i. Pure-click companies = those that have launched a Web site without any
previous existence as a firm
ii. Brick-and-click companies = existing companies that have added an online
site for information or e-commerce.
iii. E-Commerce Success
1. Customer service is critical.
2. To improve conversion rates, firms should make the Web site fast,
simple, and easy to use.
3. To increase customer satisfaction and the entertainment and
information value of online shopping experiences, some firms are
employing avatars, animated characters that act as company
representatives, personal shopping assistants, Web site guides, or
conversation partners.
4. Ensuring security and privacy online remains important.
iv. Although business-to-consumer (B-to-C) Web sites have attracted much
attention in the media, even more activity is being conducted on
business-to-business (B-to-B) sites, which are changing the
supplier–customer relationship in profound ways.
1. Firms are using B-to-B auction sites, spot exchanges, online product
catalogs, barter sites, and other online resources to obtain better
prices.
2. The largest of the B-to-B market makers is Alibaba, homegrown in
China where businesses have faced decades of Communist hostility
to private enterprise
3. Effect of B-to-B mechanisms is to make prices more transparent. For
undifferentiated products, price pressure will increase.
VIII. Mobile Marketing Channels
A. Mobile channels and media can keep consumers as connected and interacting with a
brand as they choose.
B. M-commerce is very well established in some parts of the world.
C. In the United States, mobile marketing is becoming more prevalent and taking all
forms.
D. Changes in Customer and Company Behavior:
i. Consumers are fundamentally changing the way they shop in stores,
increasingly using a cell phone to text a friend or relative about a product
while shopping in stores.
ii. Companies are trying to give their customers more control over their
shopping experiences by bringing Web technologies into the store, especially
via mobile apps.
E. M-commerce Marketing Practices
i. Understanding how consumers want to use their smart phones is critical to
understanding the role of advertising, which should fit in a small space and
avoid intrusions
ii. Consumers often use their smart phones to find deals or capitalize on
promotions
iii. Geofencing targets customers with a mobile promotion when they are within
a defined geographical space, typically near or in a store.
F. Privacy
i. The fact that a company can pinpoint a customer’s or employee’s location
with GPS technology raises privacy issues.
ii. Many consumers are happy to tolerate cookies, profiles, and other online
tools that let e-commerce businesses know who they are and when and how
they shop, but they are nevertheless concerned when such tracking occurs in
the store.
IX. Conflict, Cooperation and Competition
A. Channel conflict is generated when one channel member’s actions prevent another
channel from achieving its goal.
B. Channel coordination occurs when channel members are brought together to advance
the goals of the channel instead of their own potentially incompatible goals
i. What types of conflict arise in channels?
ii. What causes conflict?
iii. What can marketers do to resolve it?
C. Types of Conflict and Competition: horizontal (same level), vertical (different levels),
and multichannel (two or more channels that sell to the same market) conflict
D. Causes of Channel Conflict
i. Goal incompatibility
ii. Unclear roles and rights
iii. Differences in perception
iv. Intermediaries’ dependence on the manufacturer.
E. Managing Channel Conflict
i. Strategic justification
ii. Dual compensation
iii. Superordinate goals
iv. Employee exchange
v. Joint memberships
vi. Co-optation
vii. Diplomacy, mediation, or arbitration
viii. Legal recourse
F. Dilution and Cannibalization: Marketers must be careful not to dilute their brands
through inappropriate channels
G. Legal and Ethical Issues in Channel Relations: Companies are generally free to
develop whatever channel arrangements suit them.
i. Exclusive arrangements are legal as long as they do not substantially lessen
competition or tend to create a monopoly and as long as both parties enter
into them voluntarily.
ii. Exclusive dealing often includes exclusive territorial agreements.
iii. If a producer tries to keep a dealer from selling outside its territory it can
become a major legal issue.
iv. Producers of a strong brand sometimes sell it to dealers only if they will take
some or all of the rest of the line.