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Chapter 10 Marketing Channels: Delivering Customer Value
CHAPTER 10
MARKETING CHANNELS: DELIVERING CUSTOMER VALUE
PREVIEWING THE CONCEPTS: CHAPTER OBJECTIVES
1 Explain why companies use marketing channels and discuss the functions these channels
perform.
2 Discuss how channel members interact and how they organize to perform the work of the
channel.
3 Identify the major channel alternatives open to a company.
4 Explain how companies select, motivate, and evaluate channel members.
5 Discuss the nature and importance of marketing logistics and integrated supply chain
management.
JUST THE BASICS
CHAPTER OVERVIEW
This chapter deals with distribution.
An individual firm’s success depends not only on how well it performs but also on how well its
entire marketing channel competes with competitors’ channels.
To be good at customer relationship management, a company must also be good at partner
relationship management.
The first part of this chapter explores the nature of marketing channels and the marketer’s
channel design and management decisions.
We then examine physical distribution—or logistics—an area that is growing dramatically in
importance and sophistication.
ANNOTATED CHAPTER NOTES/OUTLINE
FIRST STOP
Uber: Radically Reshaping Urban Transportation Channels
Uber, the is the app-based ride service that is revolutionizing urban transportation. Fast-growing
Uber is giving conventional taxi cab and car services a real ride for their money.
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Chapter 10 Marketing Channels: Delivering Customer Value
Why are so many customers around the world bypassing taxicabs in favor of newcomer Uber?
It’s all about convenience, ease of use, and peace of mind.
Uber’s smartphone app lets passengers hail the nearest cab or limo from any location with the
touch of a button, then track the vehicle on a map as it approaches. The Uber app gives riders an
accurate estimate in advance of the fare to their destinations (usually less than that charged by a
regular cab), eliminating guesswork and uncertainty.
After the ride, passengers simply exit and walk away. Uber automatically pays the driver
(including tip) from the passenger’s prepaid Uber account, eliminating the often inconvenient
and awkward moment of payment.
A two-way rating system—by which riders rate drivers and drivers rate riders in return—helps
keep both sides on their best behavior. Poorly rated drivers risk being rejected by future
passengers; poorly rated passengers risk rejection by drivers, who can choose which fares they
accept.
Uber has little to fear from like-minded competitors. In fact, the more competitors adopt the new
model, the more the revolutionary channel will grow and thrive versus traditional channels,
creating opportunities for all new entrants.
The new distribution model poses the biggest threat to traditional taxi cab and car-for-hire
companies, who are now losing both customers and drivers to Uber and its competitors.
INTRODUCTION
Most firms cannot bring value to customers by themselves. Instead, they must work closely with
other firms in a larger value-delivery network.
Use Chapter Objective 1 here.
SUPPLY CHAINS AND THE VALUE DELIVERY NETWORK
The supply chain consists of “upstream” and “downstream” partners.
Upstream from the company is the set of firms that supply the raw materials, components, parts,
information, finances, and expertise needed to create a product or service.
Marketers have traditionally focused on the “downstream” side of the supply chain—on the
marketing channels (or distribution channels) that look forward toward the customer.
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Chapter 10 Marketing Channels: Delivering Customer Value
A better term would be demand chain because it suggests a sense-and-respond view of the
market.
Under this view, planning starts with the needs of target customers, to which the company
responds by organizing a chain of resources and activities with the goal of creating customer
value.
Use Key Term Value Delivery Network here.
As defined in Chapter 2, a value delivery network is made up of the company, suppliers,
distributors, and ultimately customers who “partner” with each other to improve the performance
of the entire system.
THE NATURE AND IMPORTANCE OF MARKETING CHANNELS
Producers try to forge a marketing channel (or distribution channel)—a set of
interdependent organizations that help make a product or service available for use or
consumption by the consumer or business user.
Use Key Term Marketing Channel (Distribution Channel) here.
Use Figure 10.1 here.
How Channel Members Add Value
Figure 10.1 shows how using intermediaries can provide economies.
The role of marketing intermediaries is to transform the assortments of products made by
producers into the assortments wanted by consumers.
Members of the marketing channel perform many key functions. Some help to complete
transactions:
Information: Gathering and distributing marketing research and intelligence information
about actors and forces in the marketing environment needed for planning and aiding
exchange.
Promotion: Developing and spreading persuasive communications about an offer.
Contact: Finding and communicating with prospective buyers.
Matching: Shaping and fitting the offer to the buyer’s needs, including activities such as
manufacturing, grading, assembling, and packaging.
Negotiation: Reaching an agreement on price and other terms of the offer so that
ownership or possession can be transferred.
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Chapter 10 Marketing Channels: Delivering Customer Value
Others help to fulfill the completed transactions:
Physical distribution: Transporting and storing goods.
Financing: Acquiring and using funds to cover the costs of the channel work.
Risk taking: Assuming the risks of carrying out the channel work.
Use Discussion Question 10-1 here.
Number of Channel Levels
A channel level is each layer of marketing intermediaries that performs some work in bringing
the product and its ownership closer to the final buyer.
Use Key Term Channel Level here.
The number of intermediary levels indicates the length of a channel. (Figure 10.2)
A direct marketing channel has no intermediary levels; the company sells directly to
consumers.
An indirect marketing channel contains one or more intermediaries.
Use Key Terms Direct Marketing Channel and Indirect Marketing Channel here.
Use Figure 10.2 here.
Use Discussion Question 10-2 here.
From the producer’s point of view, a greater number of levels means less control and greater
channel complexity.
Use Chapter Objective 2 here.
CHANNEL BEHAVIOR AND ORGANIZATION
Channel Behavior
A marketing channel consists of firms that have partnered for their common good. Each channel
member depends on the others.
Each channel member plays a specialized role in the channel. The channel will be most effective
when each member assumes the tasks it can do best.
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Chapter 10 Marketing Channels: Delivering Customer Value
Disagreements over goals, roles, and rewards generate channel conflict.
Horizontal conflict occurs among firms at the same level of the channel.
Vertical conflict occurs between different levels of the same channel.
Use Discussion Question 10-3 here.
Use Key Term Channel Conflict here.
Vertical Marketing Systems
Use Key Term Conventional Distribution Channel here.
A conventional distribution channel consists of one or more independent producers,
wholesalers, and retailers. Each is a separate business seeking to maximize its own profits,
perhaps even at the expense of the system as a whole.
A vertical marketing system (VMS) consists of producers, wholesalers, and retailers acting
as a unified system. One channel member owns the others, has contracts with them, or wields so
much power that they must all cooperate. (Figure 10.3)
A Corporate VMS integrates successive stages of production and distribution under single
ownership.
A Contractual VMS consists of independent firms at different levels of production and
distribution, who join together through contracts to obtain more economies or sales impact than
each could achieve alone.
The franchise organization is the most common type of contractual relationship—a channel
member called a franchisor links several stages in the production-distribution process.
There are three types of franchises.
1. The manufacturer- sponsored retailer franchise system—for example, Ford and its
network of independent franchised dealers.
2. The manufacturer- sponsored wholesaler franchise system—Coca-Cola licenses bottlers
(wholesalers) in various markets who buy Coca-Cola syrup concentrate and then bottle
and sell the finished product to retailers in local markets.
3. The service-firm-sponsored retailer franchise system—examples are found in the
auto-rental business (Avis), the fast-food service business (Burger King), and the motel
business (Holiday Inn).
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Chapter 10 Marketing Channels: Delivering Customer Value
In an Administered VMS, leadership is assumed not through common ownership or contractual
ties but through the size and power of one or a few dominant channel members.
Use Key Terms Vertical Marketing System (VMS), Corporate VMS, Contractual VMS,
Franchise Organization, and Administered VMS here.
Use Figure 10.3 here.
Use Critical Thinking Exercise 10-7 here.
Horizontal Marketing Systems: Two or more companies at one level join together to follow a
new marketing opportunity.
Use Key Term Horizontal Marketing System here.
Multichannel Distribution Systems: Occurs when a single firm sets up two or more marketing
channels to reach one or more customer segments. (Figure 10.4)
Use Key Term Multichannel Distribution System here.
Use Figure 10.4 here.
Use Marketing Ethics here.
Changing Channel Organization
Disintermediation occurs when product or service producers cut out intermediaries and go
directly to final buyers, or when radically new types of channel intermediaries displace
traditional ones.
Use Key Term Disintermediation here.
Use Marketing at Work 10.1 here.
Use Linking the Concepts here.
CHANNEL DESIGN DECISIONS
Marketing channel design calls for analyzing consumer needs, setting channel objectives,
identifying major channel alternatives, and evaluating them.
Use Chapter Objective 3 here.
Use Key Term Marketing Channel Design here.
Analyzing Consumer Needs
As noted previously, marketing channels are part of the overall customer-value delivery network.
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Chapter 10 Marketing Channels: Delivering Customer Value
The company must balance consumer needs not only against the feasibility and costs of meeting
these needs but also against customer price preferences.
Setting Channel Objectives
Companies should state their marketing channel objectives in terms of targeted levels of
customer service.
The company should decide which segments to serve and the best channels to use in each case.
The company’s channel objectives are influenced by the nature of the company, its products, its
marketing intermediaries, its competitors, and the environment. Environmental factors such as
economic conditions and legal constraints may affect channel objectives and design.
Identifying Major Alternatives
Types of Intermediaries
A firm should identify the types, number, and responsibilities of channel members available to
carry out its channel work.
Number of Marketing Intermediaries
Companies must also determine the number of channel members to use at each level.
Three strategies are available:
1. Intensive distribution: Ideal for producers of convenience products and common raw
materials. It is a strategy in which they stock their products in as many outlets as possible.
2. Exclusive distribution: Purposely limit the number of intermediaries handling their
products. The producer gives only a limited number of dealers the exclusive right to
distribute its products in their territories.
3. Selective distribution: This is the use of more than one, but fewer than all, of the
intermediaries who are willing to carry a company’s products.
Use Key Terms Intensive Distribution, Exclusive Distribution, and
Selective Distribution here.
Use Marketing by the Numbers here.
Use Discussion Question 10-4 here.
Use Online, Mobile, and Social Media Marketing here.
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Chapter 10 Marketing Channels: Delivering Customer Value
Responsibilities of Channel Members
The producer and intermediaries need to agree on the terms and responsibilities of each channel
member.
They should agree on price policies, conditions of sale, territorial rights, and specific services to
be performed by each party.
Evaluating the Major Alternatives
Using economic criteria, a company compares the likely sales, costs, and profitability of
different channel alternatives.
Using control issues means giving them some control over the marketing of the product, and
some intermediaries take more control than others.
Using adaptive criteria means the company wants to keep the channel flexible so that it can
adapt to environmental changes.
Designing International Distribution Channels
In some markets, the distribution system is complex and hard to penetrate, consisting of many
layers and large numbers of intermediaries.
At the other extreme, distribution systems in developing countries may be scattered, inefficient,
or altogether lacking.
Sometimes local customs can greatly restrict how a company distributes products in global
markets.
Use Critical Thinking Exercise 10-8 here.
CHANNEL MANAGEMENT DECISIONS
Marketing channel management calls for selecting, managing, and motivating individual
channel members and evaluating their performance over time.
Use Chapter Objective 4 here.
Use Key Term Marketing Channel Management here.
Selecting Channel Members
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Chapter 10 Marketing Channels: Delivering Customer Value
When selecting intermediaries, the company should determine what characteristics distinguish
the better ones.
Managing and Motivating Channel Members
The company must sell not only through the intermediaries but to and with them.
Most companies practice strong partner relationship management (PRM) to forge long-term
partnerships with channel members.
Evaluating Channel Members
The company should recognize and reward intermediaries who are performing well and adding
good value for consumers.
Those who are performing poorly should be assisted or replaced.
Companies need to be sensitive to their channel partners.
Use Linking the Concepts 2 here.
PUBLIC POLICY AND DISTRIBUTION DECISIONS
Exclusive distribution occurs when the seller allows only certain outlets to carry its products.
Exclusive dealing occurs when the seller requires that these dealers not handle competitors’
products.
Exclusive arrangements exclude other producers from selling to these dealers. This brings
exclusive dealing contracts under the scope of the Clayton Act of 1914.
Exclusive territorial agreements occur when the producer agrees not to sell to other dealers in a
given area, or the buyer may agree to sell only in its own territory.
Full-line pricing occurs when producers of a strong brand sell it to dealers only if the dealers
will take some or all of the rest of the line. This is also known as a tying agreement.
In general, sellers can drop dealers “for cause.”
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