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:

P Physical Possession (PP) R C

Ownership (Own) W
R H E O
Negotiation (N) O
O L T N
Promotion (Pr) E
D A S
Financing (F) S
U E I U
Risk Taking (R) L
C L L M
Ordering (Ord) E
E R E E

R Payment (P) R R
Information (I)

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- 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.

- 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.

- 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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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).

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 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.

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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:

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 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.

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- 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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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.

- 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/
Salesmanship Training Quarter
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
Research Skills/ Competition An average Area Sales Manager travels for around
Monitor 19 days in a month.
Advertisement Planning
Event Management

o Referent Power:

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 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.

- 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:

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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:

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- 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.

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 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.

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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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