MKT 243 FUNDAMENTALS OF MARKETING

CHAPTER 7

CHAPTER 7
Marketing Channels

Marketing Channel (Channel of Distribution)

Formerly, a marketing channel (also called a channel of distribution) is a business
structure of interdependent organizations that reach from the point of product
origin to the consumer with the purpose of moving products to their final
consumption destination.

Channel Members
Channel members (also called, intermediaries, resellers, and middlemen)
negotiate with one another,
buy and sell products, and
facilitate the change of ownership between buyer and seller in the course
of moving the product from the manufacturer into the hands of the final
consumer
The most prominent difference separating intermediaries is whether or not
they take title to the product.
Taking title means they own the merchandise and control the terms of the
salefor example, price and delivery date. Retailers and merchant
wholesalers are examples of intermediaries who take title to products in
the marketing channel and resell them.
3 types of channel member:
1) Retailers
Retailers are firms that sell mainly to consumers.
2) Merchant Wholesalers
Merchant wholesalers are those organizations that facilitate the movement of
products and services from the manufacturer to producers, resellers, governments,
institutions, and retailers.
All merchant wholesalers take title to the goods they sell, and most of them
operate one or more warehouses in which they receive goods, store them, and
later reship them.

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3) Agents and Brokers

Other intermediaries do not take title to goods and services they market but do
facilitate the exchange of ownership between sellers and buyers.
Agents and brokers simply facilitate the sale of a product from producer to end
user by representing retailers, wholesalers, or manufacturers.
Title reflects ownership, and ownership usually implies control. Unlike
wholesalers, agents or brokers only facilitate sales and generally have little input
into the terms of the sale. They do, however, get a fee or commission based on
sales volume.

Supply Chain
The supply chain is the connected chain of all of the business entities, both
internal and external to the company, that perform or support the marketing
channel functions.

Marketing Channel Function

a) Specialization and Division of Labor
b) Overcoming Discrepancies
c) Providing Contact Efficiency

a) Providing Specialization and Division of Labor

According to the concept of specialization and division of labor, breaking down a
complex task into smaller, simpler
Allocating them to specialists will create greater efficiency and lower average
production costs.
Marketing channels can also attain economies of scale through the specialization
and division of labor by aiding producers who lack the motivation, financing, or
expertise to market directly to end users or consumers.
Channel members can do some things more efficiently than producers because
they have built good relationships with their customers. Therefore, their
specialized expertise enhances the overall performance of the channel.

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b) Overcoming Discrepancies
Marketing channels also aid in overcoming discrepancies of quantity, assortment,
time, and space created by economies of scale in production.
Overcoming Discrepancies

Discrepancies of
Quantity

Discrepancies of
Assortment

Temporal
Discrepancies

Spatial
Discrepancies

1) Discrepancy of Quantity
The quantity produced to achieve low unit costs has created a discrepancy of
quantity, which is the difference between the amount of product produced and the
amount an end user wants to buy.
To overcome discrepancies of quantity, marketing channels overcome quantity
discrepancies by makes products available in quantities that consumers desire.
2) Discrepancy of Assortment
Mass production creates not only discrepancies of quantity but also discrepancies
of assortment.
A discrepancy of assortment occurs when a consumer does not have all of the
items needed to receive full satisfaction from a product.
For pancakes to have maximum satisfaction, several other products are required to
complete the assortment. At the very least, most people want a knife, fork, plate,
butter, and syrup.
To overcome discrepancies of assortment, marketing channels assemble in one
place many of the products necessary to complete a consumers needed
assortment.
3) Temporal Discrepancy
A temporal discrepancy is created when a product is produced but a consumer is
not ready to buy it.
To overcome temporal discrepancies, marketing channels maintain inventories in
anticipation of demand. For example, manufacturers of seasonal merchandise,
such as Christmas decorations, are in operation all year even though consumer
demand is concentrated during certain months of the year.

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4) Spatial Discrepancy
Furthermore, because mass production requires many potential buyers, markets
are usually scattered over large geographic regions, creating a spatial discrepancy.
Marketing channels overcome spatial discrepancies by making products available
in locations convenient to consumers. For example, automobile manufacturers
overcome spatial discrepancies by franchising dealerships close to customers.
c) Providing Contact Efficiency
The third need fulfilled by marketing channels is a way to provide contact
efficiency.
Consider your extra costs if supermarkets, department stores, and shopping
centers or malls did not exist. Suppose you had to buy your milk at a dairy and
your meat at a stockyard. Imagine buying your eggs and chicken at a hatchery and
your fruits and vegetables at various farms. You would spend a great deal of time,
money, and energy just shopping for a few groceries.

CHANNEL FUNCTIONS
PERFORMED BY
INTERMEDIARIES

Transactional

Logistical

Facilitating

a) Transactional Functions
Transactional functions involve contracting and communicating with
prospective buyers to make them aware of existing products and explain their
features, advantages, and benefits.
Contacting and promoting: Contacting potential customers, promoting products,
and soliciting orders.
Negotiating: Determining how many goods or services to buy and sell type of
transportation to use, when to deliver, and method and timing of payment.
Risk-taking: Assuming the risk of owning inventory that can become obsolete.

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b) Logistical Functions
Logistical functions include transporting, storing, sorting out, accumulating,
allocating, and assorting products into either homogeneous or heterogeneous
collections.
Physically distributing: Transporting and sorting goods to overcome temporal and
spatial discrepancies.
Sorting: Overcoming discrepancies of quantity assortment by :
Sorting out: Breaking down a heterogeneous supply into separate homogeneous
stocks
Accumulation: Combining similar stocks into a larger homogeneous supply.
Allocation: Breaking a homogeneous supply into smaller and smaller
lots (breaking bulk).
Assortment: Combining products into collections or assortments that buyers want
available at one place.

c) Facilitating Function
Researching: Gathering information about other channel members and
consumers.
Financing: Extending credit and other financial services to facilitate the flow of
goods through the channel to the final consumer.
Grading: inspect, testing, or judging product and assigning them quality
grades
Four ways manufacturers can route products to consumers

Channels for Consumer Products

Direct
Channel

Retailer
Channel

Wholesaler
Channel

Producer

Producer

Producer

Agent/Broker
Channel
Producer
Agents or
Brokers

Consumers

Wholesalers

Wholesalers

Retailers

Retailers

Retailers

Consumers

Consumers

Consumers

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Channels for

3 Business-to-Business Products
Agent/Broker
Industrial
Channel

Direct
Channel

Direct
Channel

Industrial
Distributor

Agent/Broker
Channel

Producer

Producer

Producer

Producer

Producer

Agents or
Brokers

Agents or
Brokers

Industrial
Distributor
Industrial
User

Govt.
Buyer

Industrial
User

Industrial
Distributor
Industrial
User

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Industrial
User
15

Channel can be classified:

1) Direct channel
2) Indirect channel Agent/broker, retailer, wholesaler
3) Multiple channel
4) Non traditional channel
5) Strategic channel Alliances

1) Direct Channel
Producers use the direct channel to sell directly to consumers.
Direct marketing activitiesincluding telemarketing, mail order and catalog
shopping, and forms of electronic retailing like online shopping and shop-at-home
television networksare good examples of this type of channel structure.
For example, home computer users can purchase Dell computers directly over the
telephone or directly from Dells Internet Web site. There are no
intermediaries.

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2) Indirect Channel
Agent/Broker Channel
Agent/broker channel involves a fairly complicated process. Agent/broker
channels are typically used in markets with many manufacturers and many
retailers that lack the resources to find each other.
Agents or brokers bring manufacturers and wholesalers together for negotiations,
but they do not take title to merchandise. Ownership passes directly to one or
more wholesalers and then to retailers. Finally, retailers sell to the ultimate
consumer of the product.
Retailer Channel
Most consumer products are sold through distribution channels similar to the
other two alternatives: the retailer channel and the wholesaler channel.
A retailer channel is most common when the retailer is large and can buy in large
quantities directly from the manufacturer. Tesco,Wal-Mart, Macro, and car
dealers are examples of retailers that often bypass a wholesaler.
Wholesaler Channel
A wholesaler channel is frequently used for low-cost items that are frequently
purchased, such as candy, cigarettes, and magazines.
For example, M&M/Mars sells candies and chocolates to wholesalers in large
quantities. The wholesalers then break these quantities into smaller quantities to
satisfy individual retailer orders. Other examples, NSK wholesaler.
3) Multiple Channels
Dual Distribution (or Multiple Distribution)
When a producer selects two or more channels to distribute the same product to
target markets, this arrangement is called duel distribution (or multiple
distribution).
For example, Whirlpool sells its washers, dryers, and refrigerators directly to
home and apartment builders and contractors, but it also sells these same
appliances to retail stores that sell to consumers.
4) Nontraditional Channels
Often nontraditional channel arrangements help differentiate a firms product
from the competition.
For example, manufacturers may decide to use nontraditional channels such as the
Internet, mail-order channels or infomercials, to sell its products instead of going
through traditional retailer channels.
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5) Strategic Channel Alliances

Producers often form strategic channel alliances, which use another
manufacturers already-established channel.
Alliances are used most when the creation of marketing channel relationships may
be too expensive and time consuming.
Starbucks and Kraft Foods have a long-term licensing arrangement to stock
Starbucks coffee in the supermarkets, first in the United States and eventually
around the world. By forming a strategic channel alliance with Kraft, Starbucks
brand of coffee will be sold by Krafts 3,500 salespeople, one of the largest directselling teams in the food industry. The alliance will allow Starbucks to distribute
its coffee through grocery stores nationwide much quicker than it would have
been able to do alone.

What makes you choose a particular

channel?

Factors
Factors
Affecting
Affecting
Channel
Channel
Choice
Choice

2
\
2

Level
Level of
of
Distribution
Distribution
Intensity
Intensity

A) Market
Market Factors
Factors

A) Intensive
Intensive Distribution
Distribution

B) Product
Product Factors
Factors

B) Selective
Selective Distribution
Distribution

C) Producer
Producer Factors
Factors

C) Exclusive
Exclusive Distribution
Distribution

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Factor Affecting Channel Choice

a) Market Factor
i)
ii)
iii)

Consumer or industrial consumer need to used more channel to end

customers.
Size of market if the size of the market is bigger need to use more
channel.
Geographic Location if sells all over Malaysia, need to use more
channel.

b) Product Factors
i)
ii)
iii)

Product complexity if the product is complex such as oil drill machine,

no need to use more channel.
Product price the higher the products price, less channel is needed.
Product life cycle if the product is at Decline Stage, less channel is
needed.

c) Producer Factors
i)
ii)

Producer resources if the producer has no problem with financial, he/she

can use more channel.
Number of product lines if the number of product lines is more, can use
more channel.

Level of Distribution Intensity

Levels of Distribution Intensity

Intensity
Intensity Level
Level
Intensive
Intensive

Objective
Objective
Achieve
Achieve mass
mass
market
market selling.
selling.
Convenience
Convenience goods.
goods.

Number
Number of
of
Intermediaries
Intermediaries
Many
Many

Selective
Selective

Work
Work with
with selected
selected
intermediaries.
intermediaries.
Shopping
Shopping and
and some
some
specialty
specialtygoods.
goods.

Several
Several

Exclusive
Exclusive

Work
Work with
with single
single
intermediary.
intermediary. Specialty
Specialty
goods
goods and
and industrial
industrial
equipment.
equipment.

One
One

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Transportation
Cost
Cost
Transit
Transit Time
Time
Reliability
Reliability

Criteria
Criteria
for
for
Transportation
Transportation
Mode
Mode
Choice
Choice

Capability
Capability
Accessibility
Accessibility
Traceability
Traceability
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Criteria for Ranking

Modes of Transportation
Lowest

Highest
Relative
Cost
Transit
Time

Air

Truck

Rail

Pipe

Water

Water

Rail

Pipe

Truck

Air

Reliability

Pipe

Truck

Rail

Air

Water

Capability

Water

Rail

Truck

Air

Pipe

Accessibility

Truck

Rail

Air

Water

Pipe

Traceability

Air

Truck

Rail

Water

Pipe

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