Chapter 12

Marketing Channels

Skander Esseghaier | Koc University

What are Marketing Channels?

Set of interdependent organizations (i.e., intermediaries)

involved in theflow of products (goods and services)
from producer to consumers and the flow of information
on the other direction

The channel
Th h l performs
f th
the work
k off moving
i g products
d t
from producers to consumers to overcome the
time, place, and possession gaps that
separate products from users

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Intermediary

The channel performs the work of moving products

from producers to consumers to overcome the
time, place, and possession gaps that
separate products from users

It also matches product assortment demand with supply

Contact Efficiency

Fewer Contacts

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Channel Functions

Flows Facilitation

• Physical product functions

– Movement of physical products
– Product customization
– Creation of assortments
– Breaking down units

• Information functions
– Product information exchange
– Consumer information exchange
– Order collection
– Transfer of ownership
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Logistics and Risk Spreading

• Payment functions
– payment transfer

• Warehousing
– spatial benefits
– temporal benefits

• Risk spreading
– product risk
– client risk
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Sales Function

• Pre Sales
– product promotion and demand generation

• After sales
– service
– return / exchange
– quality assurance

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Channel Structure

1- Channel Length

Direct Retailer Wholesaler Agent/Broker

Channel Channel Channel Channel
Manufacturer Manufacturer Manufacturer Manufacturer

Agent

Wholesaler Wholesaler

Retailer Retailer Retailer

Consumer Consumer Consumer Consumer

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Length of a Channel – Direct or Indirect?

Direct Channel Advantages Indirect Channel Advantages

• Control over distribution - • Specialized channel

pricing, ads, display intermediaries performing
functions
• Closer to customer - establish
relationships; sell other
products

• Customize product, meet

customer needs (Dell)

• Timely distribution

• Cost saving

• Differentiation -if other firms

using distributors

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2- Channel Intensity

Number of intermediaries through which

a manufacturer distributes its goods

Intensive Selective
Distribution Distribution

Exclusive
Distribution

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 Number of
Intensity Level Objective
Intermediaries

Achieve mass market

Intensive selling
Many
Convenience goods

Work with selected

Intermediaries
Selective Several
Shopping and some
specialty goods

Work with single

intermediary
Exclusive One
Specialty goods and
industrial equipment

Using an Intensive Distribution Strategy

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Using a Selective Distribution Strategy

Using an Exclusive Distribution Strategy

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Channel Power & Conflicts

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Power is the ability of one channel member to get another

to do what it otherwise would not

Conflict arises when there is a divergence in the interests

of different members of the channel

Vertical channel conflict Horizontal channel conflict

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Horizontal Channel Conflict

Occurs between channel members at the same level.

Producer

Intermediary A Intermediary A
conflict

End Users

Horizontal Channel Conflict

Interests of different members at same level are opposed

e g : territorial encroachment
e.g.:

Resolution: diplomacy, mediation, arbitration

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Vertical Channel Conflict

Occurs between channel members at different levels

Resolution: the different players need to get the right
incentives

Producer

conflict

Intermediary

End Users

Channel Inefficiencies

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 • Double Marginalization

• Asymmetric information

• Sales force compensation

• Competing Channels

Channel Coordination

“when the members of the channel are brought

together to advance the goals of the channel,
rather then their own independent (and likely
conflicting) goals, the channel is said to be
coordinated”
-- Coughkan, Anderson, Stern and El-Ansry, 2001

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Contractual Arrangements Provide Solutions

• Non Linear Pricing contracts:

– Two part tariff contract:
• Two prices: Fixed fees (salary) and per unit price (commission)
– Quantity discount
– Quantity target discount

• Return policies

• Buy back

• Revenue Sharing

Vertical Marketing Systems

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 Corporate VMS

• The entire channel is integrated under single

ownership

• Channel leadership and coordination is

established through common ownership

Contractual VMS

• Channels members join together through contracts

• Channels member coordinate their activities and

manage conflicts through contractual agreements

• The franchise organization is a common example

off contractuall relationship
l i hi

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Administered VMS

The size and the power of one or few

dominant channel members coordinates the
activities of the entire channel

Large retailers (Walmart, Migros, Carrefour)

can play this coordinating role

Summary

• Channels have different functions

• Channel members have different objectives …

which leads to channel conflicts & inefficiencies

• Channel members have to find ways to resolve

these issues

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