Types of Distribution Channels

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Types of Distribution Channels

Consumer channels
Direct Manufacturer-retailer-consumer Manufacturer-wholesaler-retailer-consumer

Business-to-business channels
Direct Manufacturer-industrial distributor-business

customer

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Channel Design Options for a Consumer Product

A Producer B Producer C Producer D Producer Agents E Producer Agents

Wholesaler
Retailer Consumer Consumer Retailer Consumer

Wholesaler
Retailer Consumer Retailer Consumer

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Channel options for industrial goods and services

A Producer

B Producer

C Producer Agent

D Producer Agent Wholesaler

Wholesaler

Industrial Buyer Industrial Buyer Industrial Buyer Industrial Buyer

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Dual Distribution Systems

Multiple channel usage
Example: pharmaceutical industry sells to hospitals, clinics, and organizational customers directly and to consumers indirectly through drug retailers

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HUB AND SPOKE DISTRIBUTION STRATEGY

HUB

Walmart Stores

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CHANNEL ALTERNATIVES
Conventional

Vertical marketing system

(VMS)
(channel is managed as a

coordinated or programmed system)

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Vertical Marketing Systems

Vertical Marketing Systems (VMS) consists of producers, wholesalers, and retailers acting as a unified system - that seek to maximize profits for the whole channel.
Here, one channel members owns the others, has contracts with them or use so much power that they all cooperate. Such systems occur to control channel behavior and manage channel conflict.
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 There are three major types of VMSs which has different means for setting up leadership and power in the channel;
Corporate VMS Contractual VMS Wholesaler-sponsored voluntary chains Retailer cooperatives Franchise organizations Administered VMS

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Types of Vertical Marketing Systems

Vertical marketing systems (VMS)

Corporate VMS

Contractual VMS

Administered VMS

Wholesalersponsored voluntary chains

Retailer cooperatives

Franchise organizations

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Corporate VMS
In a corporate VMS, production and distribution

stages are combined under single ownership, in order to manage cooperation and conflict management e.g. AT&T markets its products through its own chain of distributors.

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Contractual VMS
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.
There are three types of contractual VMSs;
wholesaler-sponsored voluntary chains; are contractual

marketing systems in which wholesalers organize voluntary chains of independent retailers to help them compete with large corporate chain organizations.
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 retailer cooperatives; are contractual marketing systems in

which retailers organize a new, jointly owned business to carry on wholesaling and possibly production. franchise organizations; are contractual marketing systems in which a channel member, called a franchiser, links several stages in the production-distribution process. There are three forms of franchisees;

manufacturer-sponsored retailer franchise system e.g. Ford licenses dealers to sell its cars. The dealers are independent businesspeople who agree to meet various conditions of sales and service. manufacturer-sponsored wholesaler franchisee system e.g. Coca-Cola licenses bottlers (wholesalers) in varius markets who buy Coca-Cola syrup concentrate and then carbonate, bottle and sell the finished product to retailers in local markets.

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service-firm-sponsored retailer franchise system in which a service firm e.g. Hertz, Avis, McDonalds, Burger King, Holiday Inn, Ramada Inn licenses a system of retailers to bring its service to consumers.

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Administered VMS
A vertical marketing system that coordinates production and distribution stages, not through common ownership or contractual ties, but through the size and power of one of the parties e.g. Procter & Gamble, Kraft, Campbell Soup (or retailers like Wal-Mart, Toys `R` Us) are very strong that they can command special displays, shelf space, promotions and prices form the other parties.
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feature
Channel Captain: a dominant and controlling member of

a marketing channel

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Horizontal Marketing Systems

Horizontal marketing systems is a channel

arrangement in which two or more companies at one level join together to follow a new marketing opportunity. The major benefit is that companies combine their capital, production capabilities, marketing resources and therefore accomplish more. Companies might join forces with competitors or noncompetitors. They might work with each other on a temporary or permanent basis or they may create a separate company.
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 E.g. Coca-Cola and Nestle formed a joint venture to market ready-to-drink coffee and tea worldwide. Coke provided worldwide experince in marketing and distribution beverages and Nestle contributed two established brand names - Nescafe and Nestea.

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Innovations in Marketing Systems

Horizontal Marketing System Two or more companies at one channel level join together to increase coverage Example:Banks in Grocery Stores Hybrid Marketing System A single firm sets up two or more marketing channels to increase coverage Example:Retailers, Catalogs, and Sales Force

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Hybrid Marketing Systems

Hybrid marketing systems is also called

multichannel distribution systems where the company uses several marketing channels (e.g. direct mail - telemarketing, retailers, distributors, dealers, own sales force) to sell its products to different customer segments. E.g. IBM uses its own sales force + IBM direct which is the catalog and telemarketing operation of IBM + independent IBM dealers + IBM dealers for business segments + large retailers like Wal-Mart.
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 The major benefit is that when the company has large and complex markets (consumers) the company can expand its sales and market coverage by providing services to the specific needs of diverse customer segments.
The disadvantage is that they are harder to control and generate more conflict.

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Problems with an Independent Channel

The lack of channel coordination: Each member has own private interests or profits in mind. National vs. Local perspective Perspective is short-term profits.
Examples Free-Riding McDonalds franchisees in a region. Manufacturer shirking on advertising and retailer on

retail service. Retailer pricing is either too high or too low.

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Contracts Help Achieve Coordination

Types of Contracts: Exclusive dealers - high end clothing. Provides incentives to manufacturers to invest in advertising and retailers to invest in service Exclusive territories: - beer distributors, auto dealerships Prevents free-riding of retail services Quantity Forcing: - Auto companies Ensures that the right level of price and retail service is provided.
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Table 13.1: Factors Influencing Marketing Channel structures

Characteristics of Short Characteristics of Long Channels Channels Market factors Business users Geographically concentrated Extensive technical knowledge and regular servicing required Large orders Product factors Perishable Complex Expensive Consumers Geographically diverse Little technical knowledge and regular servicing not required Small orders Durable Standardized Inexpensive

Continued on next slide . . .

Table 13.1: Factors Influencing Marketing Channel Structures (Continued)

Characteristics of Short Characteristics of Long Channels Channels

Producer factors

Manufacturer has adequate resources to perform channel functions

Broad product line Channel control important

Manufacturer lacks adequate resources to perform channel functions

Limited product line Channel control not important Manufacturer feels dissatisfied with marketing intermediaries performance in promoting products

Competitive factors

Manufacturing feels satisfied with marketing intermediaries performance in promoting products

Market Variables
Market Geography Location, geographical size, & distance from producer Number of customers in a market Number of buying units (consumers or industrial firms) per unit of land area Who buys, & how, when, and where customers buy

Market Size

Market Density

Market Behavior

Product Variables
Bulk & Weight Perishability Unit Value Degree of Standardization Technical versus Nontechnical Newness

Company Variables
Size The range of options is relative to a firms size

Financial Capacity

The greater the capital, the lower the dependence on intermediaries

Intermediaries are necessary when managerial experience is lacking Marketing & objectives may limit use of intermediaries

Managerial Expertise

Objectives & Strategies

Intermediary Variables
Availability Availability of intermediaries influences channel structure.

Cost

Cost is always a consideration in channel structure.

Services

Services that intermediaries offer are closely related to the selection of channel members.

Environmental Variables
Economic Sociocultural Competitive

The impact of environmental forces is a common reason for making channel design decisions.

Technological

Legal

Behavioral Variables
Develop congruent roles for channel members.

Be aware of available power bases.

Attend to the influence of behavioral problems that can distort communications.

Channel Design

Decisions involving the development of new marketing channels either where none had previously existed or to the modification of existing channels

Channel Design
Distinguishing points of the definition include:

1. 2.

3.
4. 5.

A decision made by the marketer The creation or modification of channels The active allocation of distribution tasks in an attempt to develop an efficient structure The selection of channel members A strategic tool for gaining a differential advantage

Who Engages in Channel Design?

Retailers

Firms

Wholesalers

Producers, manufacturers, service providers, franchisors Look down the channel toward the market

Look both up and down the channel

Look up the channel to secure suppliers

Channel Design Paradigm

1. Recognize the need for channel design decision

7. Select channel members

2. Set & coordinate distribution objectives

6. Choose the best channel structure

3. Specify distribution tasks

5. Evaluate relevant variables

4. Develop alternative channel structures

Channel Design Decisions

Designing a channel system include; analyzing consumer service needs setting the channel objectives and constraints identifying the major channel alternatives evaluating the major alternatives

Analyzing Consumer Service Needs

Designing the distribution channel begins with

determining what (e.g. convenient location to buy the products, immediate delivery, credit, repairs, longterm warranty) the consumers want from the channel. The company must balance the consumer service needs with the feasibility and costs plus prices.

Setting the Channel Objectives and Constraints

The company must decide which segments to target and the best channels to use in each segment. Here, the objective of the company is to minimize the total channel cost. Besides the target market, the companys channel objectives are influenced by;
the nature of its product, e.g. perishable products

require more direct marketing to avoid delays and too much handling. company characteristics, e.g. the companys size and financial situation determine which functions it can

handle, how many channels it can use, which transportation can be used characteristics of intermediaries, intermediaries differ in their abilities to handle promotions, customer contact, storage and credit e.g. the companys own sales force is more intense in selling. competitors channel, some companies may prefer to compete in or near the same outlets that carry competitors products, some may not e.g. Burger King wants to locate near McDonalds environmental factors, economic conditions and legal constraints affect channel design decisions e.g. in a depressed economy, producers want to distribute their goods in the most economical way, using shorter channels.

Identifying Major Alternatives

After the channel objective have been determined, the company should identify its major channel alternatives in terms of (1) types of intermediaries, (2) number of intermediaries, and (3) the responsibilities of each channel member. Types of Intermediaries A firm should identify the types of channel members that are available to carry out its channel work.

 Number of Marketing Intermediaries

Companies must also determine the number of channel members to use. There are three strategies;
intensive distribution; is a strategy in which companies

stock their products in as many outlets as possible. Convenience products and common raw materials must be available where and when consumers want them e.g. toothpaste, candy Procter & Gamble, Coca-Cola distributes its products in this way. Here, the advantages are maximum brand exposure and consumer convenience. exclusive distribution; is a strategy (opposite to intensive distribution) in which the producer gives only a limited number of dealers the exclusive right to

 distribute its products in their territories. Often found in

new automobiles and prestige womens clothing e.g. Rolls-Royce. Here, the advantages are establishing image and getting higher markups. selective distribution; (is between intensive and exclusive distribution) is a strategy in which the company uses more than one but fewer than all of the intermediaries. Most television, furniture brands are distributed in this way. Here, the advantages are; it provides good market coverage with more control and less cost than intensive distribution + it does not spread its efforts over many outlets as in intensive distribution.

Responsibilities of Channel Members

The producer and intermediaries must agree on price policies, discounts, territories, and services

to be performed by each party. E.g. McDonalds provides franchisees with promotional support, training, management assistance, in turn, franchisees must meet company standards for physical facilities, buy specific food products...

Evaluating the Major Alternatives

In order to select the channel that satisfy the company objectives in the best way, each alternative should be evaluated by using; economic criteria; the company compares the projected profits and costs of each channel. control issues; the company prefers to keep the channel where it has the highest control. adaptive criteria; the company prefers to keep the channel which is the most flexible to the changing marketing environment.

When to Make a Channel Design Decision

Developing a new product or Dealing with changes in

product line Aiming an existing product at a new market Making a major change in some other component of the marketing mix Establishing a new firm Adapting to changing intermediary policies that may inhibit attainment of distribution objectives

availability of particular kinds of intermediaries Opening up new geographic marketing areas Facing the occurrence of major environmental changes Meeting the challenge of conflict or other behavioral problems Reviewing and evaluating