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Chapter 6
DESIGNING THE MARKETING CHANNEL
Teaching Notes
This chapter begins the discussions regarding the elements necessary in the decision
Chapter Objectives
Channel design refers to those decisions involving the development of new marketing
channels where none had existed before or to the modification of existing channels.
Channel design is a seven-step process of which six steps are covered in this chapter and
the seventh or final step is covered in Chapter 7.
Learning objectives
1. Understand the definition of channel design and the key distinguishing points
associated with it.
2. Realize that channel design is a complex process.
Designing the Marketing Channel
Chapter Topics
1) What is Channel Design?
2) Who Engages in Channel Design?
3) A Paradigm of the Channel Design Decision
Chapter Outline
What is Channel Design?
Key Term and Definition
▪ Channel design: Those decisions involving the development of new marketing
channels where none had existed before, or the modification of existing channels.
Channel design is presented as a decision faced by the marketer, and it includes either
Who Engages in Channel Design?
Producers and manufacturers, wholesalers, and retailers all face channel design decisions.
A Paradigm of the Channel Design Decision
The channel design decision can be broken down into seven phases or steps. These are:
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1. Recognizing the need for a channel design decision
2. Setting and coordinating distribution objectives
Figure 6.1 shows these tasks schematically.
Phase 1: Recognizing the Need for a Channel Design Decision
Many situations can indicate the need for a channel design decision. Among them are:
1. Developing a new product or product line
2. Aiming an existing product to a new target market
3. Making a major change in some other component of the marketing mix
Phase 2: Setting and Coordinating Distribution Objectives
In order to set distribution objectives that are well coordinated with other marketing and
firm objectives and strategies, the channel manager needs to perform three tasks:
1. Become familiar with the objectives and strategies in the other marketing mix
A) Become Familiar with Objectives and Strategies
Whoever is responsible for setting distribution objectives should also make an effort to
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B) Setting Explicit Distribution Objectives
C) Checking for Congruency
A congruency check verifies that the distribution objectives do not conflict with the other
Phase 3: Specifying the Distribution Tasks
The job of the channel manager in outlining distribution functions or tasks is a much
more specific and situationally dependent one. The kinds of tasks required to meet
specific distribution objectives must be precisely stated.
Phase 4: Developing Possible Alternative Channel Structures
The channel manager should consider alternative ways of allocating distribution
objectives to achieve their distribution tasks. Often, the channel manager will choose
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A) Number of Levels
The number of levels in a channel can range from two levels – which is the most direct –
up to five levels and occasionally even higher.
B) Intensity at the Various Levels
Intensity refers to the number of intermediaries at each level of the marketing channel.
▪ Intensive: sometimes called saturation means that as many outlets as possible are used
at each level of the channel.
C) Types of Intermediaries
The third dimension of channel structure deals with the particular types of intermediaries
D) Number of Possible Channel Structure Alternatives
Given that the channel manager should consider all three structural dimensions (level,
Phase 5: Evaluating the Variables Affecting Channel Structure
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Having laid out alternative channel structures, the channel manager should then evaluate
a number of variables to determine how they are likely to influence various channel
structures.
These six basic categories are most important:
1. Market variables
A) Market Variables
Market variables are the most fundamental variables to consider when designing a
marketing channel.
1) Market Geography
Market geography refers to the geographical size of the markets and their physical
2) Market Size
The number of customers making up a market (consumer or industrial) determines the
market size.
3) Market Density
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4) Market Behavior
Market behavior refers to the following four types of buying behaviors:
1) How customers buy
B) Product Variables
Product variables such as bulk and weight, perishability, unit value, degree of
standardization (custom-made versus standardized), technical versus nontechnical, and
newness affect alternative channel structures.
1) Bulk and Weight
Heavy and bulky products have very high handling and shipping costs relative to their
2) Perishability
Products subject to rapid physical deterioration and those of rapid fashion obsolescence
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3) Unit Value
The lower the unit value of the product, the longer the channel should be. This is because
4) Degree of Standardization
Custom-made products should go from producer to consumer while more standardized
5) Technical versus Nontechnical
In the industrial market, a highly technical product will generally be distributed through a
6) Newness
New products, both industrial and consumer, require extensive and aggressive promotion
in the introductory stage to build demand. Usually, the longer the channel of distribution
C) Company Variables
The most important company variables affecting channel design are (A) size, (B)
financial capacity, (C) managerial expertise, and (D) objectives and strategies.
1) Size
2) Financial Capacity
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3) Managerial Expertise
For firms lacking in the managerial skills necessary to perform distribution tasks, channel
4) Objectives and Strategies
The firm’s marketing and general objectives and strategies, such as the desire to exercise
D) Intermediary Variables
The key intermediary variables related to channel structure are (A) availability, (B) costs,
and (C) the services offered.
1) Availability
2) Cost
3) Services
This involves evaluating the services offered by particular intermediaries to see which
E) Environmental Variables
F) Behavioral Variables
The channel manager should review the behavioral variables discussed in Chapter 4.
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Phase 6: Choosing the “Best” Channel Structure
In theory, the channel manager should choose an optimal structure that would offer the
desired level of effectiveness in performing the distribution tasks at the lowest possible
cost. In reality, choosing an optimal structure is not possible.
A) “Characteristics of Goods and Parallel Systems” Approach
First laid out in the 1950s by Aspinwall, the main emphasis for choosing a channel
structure should be based upon product variables. Each product characteristic is
identified with a particular color on the spectrum. These variables are:
1. Replacement rate
Table 6.2 shows the color classification used by Aspinwall’s “Characteristic of Goods”
Theory.
Figure 6.5 identifies the relationship between product characteristics and length of
marketing channels.
B) Financial Approach
Lambert offers another approach, which argues that the most important variables for
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C) Transaction Cost Analysis (TCA) Approach
Based on the work of Williamson, TCA addresses the choice of marketing channel
structure only in the most general case situation of choosing between the manufacturer
performing all of the distribution tasks itself through vertical integration versus using
independent intermediaries to perform some or most of the distribution tasks. It is based
upon opportunistic behaviors of channel members.
The main focus of TCA is on the cost of conducting the transactions necessary for a firm
D) Management Science Approaches
It would certainly be desirable if the channel manager could take all possible channel
structures, along with all the relevant variables, and “plug” these into a set of equations,
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E) Judgmental-Heuristic Approaches
These approaches rely heavily on managerial judgment and heuristics for decisions.
F) Straight Qualitative Judgment Approach
The qualitative approach is the crudest but, in practice, the most commonly used
approach for choosing channel structures. The various alternative channel structures that
G) Weighted Factor Score Approach
A more refined version of the straight qualitative approach to choosing among channel
alternatives is the weighted factor approach suggested by Kotler.
H) Distribution Costing Approach
Under this approach, estimates of costs and revenues for different channel alternatives are
made, and the figures are compared to see how each alternative compares to another.
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I) Using Judgmental-Heuristic Approaches
Regardless of which judgmental-heuristic approach is used, large doses of judgment,
estimation, and even “guesstimation” are virtually unavoidable.
Answers to Review Questions
1. Channel design refers to those decisions a firm faces when it is creating a channel
where none has existed before or when it is modifying an existing channel. It is a
conscious, active and deliberate process. Conversely, evolution of channels refers to
channels that have come into existence without a conscious channel design process.
2. Gaining differential advantage should be uppermost in the channel manager’s mind
when he/she is designing channels. The channel design strategy should be to devise a
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3. There are almost an unlimited number of conditions that may foster the need for
channel design decisions, some of the most common of which are mentioned in the
4. A distribution objective is a statement about what the distribution component of the
marketing mix is expected to contribute toward achieving the firm’s overall
5. If a firm’s general marketing objective is to reach an affluent “carriage trade” target
6. The channel manager in a producing or manufacturing firm cannot rely on a
traditional generalized list of distribution tasks (functions). Rather he/she must look at
7. In evaluating alternative channel structures, the channel manager should consider six
categories of variables:
▪ Market Variables are fundamental information about the target market that the
channel is designed to satisfy. The market variables are market geography, market
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8. Channel structures are described on three dimensions:
▪ The Number of levels in a channel can range from a minimum of two (the
producer and the user) to five or more in the U.S. In other countries, more levels
are not uncommon.
9. Heuristics or rules of thumb are useful because they suggest general or typical
relationships that can serve as a rough guide as to what should be done in a typical
10. Choosing an optimal channel structure in the strict sense of the term would mean that:
(1) the channel manager would have to know what all of the possible channel
(3) he/she would have to be capable of choosing the alternative that yields the highest
payoff.
11. The essential idea behind this question is to get students thinking about the practical
limitations of choosing a channel structure that at present must emphasize suboptimal
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Commentaries on Issues for Discussion
1. “The old joke is that Best Buy is Amazon’s showroom,” said Scot Ciccarelli, a senior
retail analyst with RBC Capital Markets. However, Best Buy is not laughing and its
launch of the smaller 3,000 store is designed to attract consumers who shop and buy
via multiple channels. This new line of stores focuses almost exclusively on
electronics such as smart phones and tablet computers. With more than 150 stores
2. A growing channel trend in the U.S. is the use of vending machines for a growing list
of products. Once restricted to low-end convenience products, these new vending
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in which they are found. Well known brands, such as Apple and Sony, are can now be
found in vending machines.
From a channel design perspective, there are several variables that could influence the
3. The answer to this question is straightforward: Quaker Oats Co. is not a soft drink
company. Though it is indeed a giant food products company, it lacked the
knowledge, experience, tradition, and culture of giant soft drink makers such as Coca-
4. It is hard to put the genie back in the bottle. Instant messaging has made it easy for
small businesses to communicate with the customer base and alert them changes in
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5. The point of this issue for C. F. Martin & Co. is to show an example of how careful a
firm with a highly regarded reputation must be when it examines its distribution
6. Since Chrysler and Fiat have gone to great lengths to plan and implement a new
channel design, it must be assumed that they believed the existing dealership network
was not appropriate to adequately promote the Fiat 500. One reason for designing a
new marketing channel is to create the capability to distribute existing products in
new markets. In this example, the Fiat 500 was to be sold for the first time in the
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7. In the doctor-to-patient channel, the doctor has been the decision maker, and the
hospital or individual patient the buyer. This market behavior now is changing:
▪ Who: Who makes the purchase decision is changing as health care administrators
determine what product will be purchased by the hospital or prescribed for the
patient. As MBAs rather than the MDs make the purchase and prescription
The changes in where and how the market buys will impact drug stores and other
retailers of prescription drugs. The types of intermediaries needed and the channel
member selection criteria may change.
These market behavior changes are precipitated by changes in the environment of the
channel. Societal concern for, and political action regarding, the availability and cost