Chapter 7

Marketing Channel
Strategy and
Management
 In this chapter, you will
learn about…
1. The Channel-Selection Decision
The Design of Marketing Channels
Channel Selection at the Retail Level
Channel Selection at Other Levels of
Distribution
2. Dual Distribution and Multi-Channel Marketing
Dual Distribution
Multi-Channel Marketing
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 In this chapter, you will
learn about…
3. Satisfying Intermediary Requirements and
Trade Relations
Intermediary Requirements
Trade Relations
4. Channel-Modification Decisions
Qualitative Factors in Modification
Decisions
Quantitative Factors in Modification
Decisions
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 What is a marketing
channel?

A marketing channel consists of

individuals and firms involved in
the process of making a product or
service available for consumption
or use by consumers and industrial
users.

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Role of the channel in
marketing strategy

Links a producer to buyers

Performs sales, advertising, and
promotion
Influences the firm’s pricing strategy
Affects product strategy through branding
policies, willingness to stock and
customize offerings, install, maintain,
offer credit, etc.
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The Channel-Selection
Decision
Fundamental Questions

The marketing manager must

answer the following questions:
Who are potential customers?
Where do they buy?
When do they buy?
How do they buy?
What do they buy?
- Avon Cosmetics example

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Traditional Marketing Channel
Designs
Producer

Brokers or Agents

Distributors or Wholesalers

Retailers or Dealers

Ultimate Buyers
 The Design of Marketing
Channels

INDIRECT DIST. vs. DIRECT DIST.

Use intermediaries to Contact ultimate
reach target market buyers directly
type using its own
location sales force or
density distribution outlets
number of using the Internet
channel levels through a
marketing Web
site or electronic
storefront
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 The Design of Marketing
Channels

Direct distribution is typically used

when:
Buyers are easily identifiable
Personal selling is a major
component of the communication mix
Organization has a wide variety of
offerings for the target market
Sufficient resources are available
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 The Design of Marketing
Channels

Direct distribution must be considered

when:

Intermediaries are not available

for reaching target markets
Intermediaries do not possess
the capacity to service the
requirements of target markets

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 The Design of Marketing
Channels

Indirect distribution must be considered

when:
Intermediaries can perform distribution
functions more efficiently and less
expensively
Customers are hard to reach directly
Organization does not have resources
to perform distribution function
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The Design of Marketing
Channels

Electronic marketing channels employ

some form of electronic communication,
including the Internet, to make products
and services available for consumption
or use by consumers and industrial
users.

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Representative Electronic Marketing
Channels
Amazon.com Autobytel.com Travelocity.com Dell.com
Book Auto Dell
Airline
Publisher Manufacturer Computers

Book
Auto Dealer
Distributor

Amazon.com Auto-By-Tel Travelocity

(Virtual (Virtual (Virtual
Retailer) Broker) Agent)

Ultimate Buyers
The Design of Marketing
Channels

Disintermediation is the elimination of

traditional intermediaries and direct
distribution through electronic
marketing channels.

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Channel Selection at the
Retail Level
Channel Selection Decisions

1. Which channel and intermediaries will

provide the best coverage of the target
market?
2. Which channel and intermediaries will
best satisfy the buying requirements of
the target market?
3. Which channel and intermediaries will be
the most profitable?
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 Channel Selection at the
Retail Level
Target Market Coverage

Exclusive Selective Intensive

Rolex Levi’s Wrigley’s

Faberge Sony Coke
Channel Selection at the
Retail Level

Effective Distribution occurs when a

limited number of retail outlets account
for a significant fraction of the market
potential.
Example: A marketer distributes the
product through 40% of available
outlets, but these outlets account for
80% of the market.

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Channel Selection at the
Retail Level
Satisfying Buyer Requirements

Information
Convenience
Variety
Attendant services

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Channel Selection at the
Retail Level
Profitability

Margins = Revenues – Channel Costs

Channel costs are:
- Distribution costs
- Advertising costs
- Selling costs

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Channel Selection at Other
Levels of Distribution
Types of Wholesaler

Specialty wholesaler
– Limited line of items within a product
line
General-merchandise wholesaler
– Wide assortment of products
General-line wholesaler
– Complete assortment of items in a
single retailing field
Combination
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 Dual Distribution

occurs when an organization distributes

its offering through two or more different
marketing channels that may or may not
compete for similar buyers

the main consideration is whether it will

provide incremental sales revenue or
cannibalize existing sales

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 Dual Distribution
When is it used

own brand and private store brand

distribution to large and small retailers

multibrand strategy

geographic factors

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 Dual Distribution
Example

Hallmark
Sells Hallmark brand cards through
Hallmark stores and selected
department stores

Sells Ambassador brand cards through

discount drugstore chains

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Multi-Channel Marketing

Multi-channel marketing involves the

blending of an electronic marketing
channel and a traditional channel in
ways that are mutually reinforcing in
attracting, retaining, and building
relationships with customers.

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Multi-Channel Marketing
Justifications

An electronic marketing channel can

provide incremental revenue (Victoria’s
Secret)

An electronic marketing channel can

leverage the presence of a traditional
channel (Ethan Allen)

Multi-channel marketing can satisfy

buyer requirements (Clinique division of
Estée Lauder)

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Multi-Channel Marketing
Considerations

Actual incremental revenue or merely

cannibalization?
Incremental cost to launch and sustain
an electronic forefront
Disintermediation – a traditional
intermediary member is replaced by
electronic storefront

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Satisfying Intermediary
Requirements and Trade
Relations
Intermediary Requirements

Improvements in product assortments

Trade discounts
Fill-rate standards
Promotional support
Lead-time requirements
Product-service exclusivity agreements

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Satisfying Intermediary
Requirements and Trade
Relations
Trade Relations

Channel Conflict arises when one

channel member believes another
channel member is engaged in
behavior that is preventing it from
achieving its goals.

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Satisfying Intermediary
Requirements and Trade
Relations
Sources of Channel Conflict

Channel member bypasses another

member and sells or buys direct (Wal-
Mart)
Uneven distribution of profit margins
among channel members (Michelin)
Manufacturer believes channel member is
not giving its products adequate attention
(Heinz)
Manufacturer engages in dual distribution
(Elizabeth Arden)
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Satisfying Intermediary
Requirements and Trade
Relations
Channel Power

Channel Captain is a channel

member that takes on the role of
coordinating, directing, and
supporting other channel members.

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 Satisfying Intermediary
Requirements and Trade
Relations
Forms of Channel Captain Power

Ability to reward or coerce other

members (Microsoft and Wal-Mart)

Expertness (American Hospital Supply)

Identification with a particular channel

member (Ralph Lauren)

Legitimate right to dictate the behavior of

other members (franchising)
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Channel-Modification
Decisions
Reasons

Shifts in the geographical

concentration of buyers
Inability of existing intermediaries
to meet the needs of buyers
Costs of distribution

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 Channel-Modification
Decisions
Basic Objectives

1. Provide the best coverage of the

target market sought
2. Satisfy the buying requirements of
the target market
3. Maximize revenue and minimize
cost

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 Channel-Modification
Decisions
Qualitative Factors
1. Will the change improve the effective coverage
of the target markets sought? How?
2. Will the change improve the satisfaction of buyer
needs? How?
3. Which marketing functions, if any, must be
absorbed in order to make the change?
4. Does the organization have the resources to
perform new functions?
5. What effect will the change have on other
channel participants?
6. What will be the effect of the change on the
achievement of long-range organizational
objectives?
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 Channel-Modification
Decisions
Quantitative Assessment

…considers the financial impact of

the change in channel members in
terms of revenues and expenses

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 Channel-Modification
Decisions
Quantitative Assessment Example

Suppose an organization is considering

replacing its wholesalers with its own
distribution centers. The cost of wholesalers
includes:

Margin to wholesalers $5,000,000

Service expense 500,000
Total cost $5,500,000
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 Channel-Modification
Decisions
Quantitative Assessment Example

The cost of Distribution Centers:

Sales to retailers $1,500,000

Sales administration 250,000
Inventory cost 935,000
Delivery and storage 1,877,000
Accounts receivable 438,000
Total cost $5,000,000
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 Channel-Modification
Decisions
Quantitative Assessment Example

Since using wholesalers costs $3.5 million

and the cost of distribution centers would
be $5 million, a cost perspective suggests
selection of the latter option. However, the
effect on revenues must be considered by:
Determining the dollar value of:
– Market coverage
– Satisfaction of buyer needs
– Channel-participant response
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