Place 1, 2 Flashcards
What is a Marketing Channel?
Definition:
A set of individuals and organizations involved in the process of making a product or service available for use or consumption by the consumer or business user.
It makes the flow of goods from a producer, through intermediaries, to a buyer.
Definition: Marketing Channel Intermediaries
Intermediary:
Any firm/organization between the manufacturer and the end user
Categories of Intermediaries
- Agent or broker:
Intermediary with legal authority to act on behalf of the manufacturer - Wholesaler:
An intermediary who sells to other intermediaries, usually retailers - Retailer:
An intermediary who sells to consumers
How can Channel Members Add Value?
The number of contacts needed without a distributor can be much larger than the number of contacts needed with a distributor
Definition: Channel Conflict
Channel conflict refers to disagreement over goals, roles, and rewards by channel members
Vertical conflict:
- Between manufacturer and wholesaler, wholesaler and retailer, etc.
Horizontal conflict:
- Between different wholesalers, different retailers, etc.
Definition: Vertical Marketing Systems
Conventional distribution systems consist of one or more independent producers, wholesalers, and retailers.
Each seeks to maximize its own profits, and there is little control over the other members and no formal means for assigning roles and resolving conflict.
Double marginalization problem
Coordinated Channel = Maximum channel profit
Uncoordinated channel = Efficiency loss
The “double-marginalization problem”:
- An uncoordinated channel makes less profit in total and is less efficient compared to a coordinated channel because each channel member seeks to maximize its own profit, not the whole.
- Think about (1) manufacturer imposing a margin on its cost when it sells to retailer and (2) retailer imposing another margin when it sells to consumers. Consumers buy at too high of a price due to this “double margin”!
Definition: Vertical Marketing Systems
Vertical marketing systems (VMS’s) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system to reduce channel efficiency loss.
It consists of (in order of increasing phases of formalization and control):
- Administered marketing systems
- Contractual marketing systems
- Corporate marketing systems
Definition: Administered vertical marketing systems
Administered vertical marketing systems have a few dominant channel members without common ownership. Leadership comes from size and power.
Ex. Walmart, Amazon, Sephora
Definition: Contractual marketing systems
Contractual vertical marketing system 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.
The most common form is the franchise organization.
Definition: Corporate marketing systems
Corporate vertical marketing system integrates successive stages of production and distribution under single ownership
Ex. Zara
Franchising vs. Direct Ownership
Ex. Starbucks stores are company owned
Ex. McDonald’s stores are mostly franchised (80%)
Summary of Marketing Channels
- Channel members add value to the product or service through transactional, logistical and facilitating functions.
- Double-marginalization problem
- An uncoordinated channel suffers efficiency loss - Vertical marketing systems mitigate double marginalization problem.
- Administered marketing systems
- Contractual marketing systems (franchises)
- Corporate marketing systems
Summary of the Eggman Challenge
- Distribution is often a large source of “hidden” costs. 2. Distribution costs may be the difference between a success and a failure, especially if there are unexpected shocks, such as extreme weather, political unrest, natural disasters, etc.
Corporate marketing systems: Distribution Challenges
In a corporate vertical marketing system, the parent company is forced to absorb the mistake as there is no intermediary (e.g., wholesaler, transport, or retailer) to pass it on to.
There is a limit to what consumers will pay and it is often not an advisable strategy to pass costs onto them, both to maintain good customer relations and also to stay competitive at the point of sale.
