Topic 7: Marketing channels Flashcards
What is a marketing channel (distribution channel)?
This is a set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user.
Explain why companies use marketing channels and discuss the functions these channels perform.
In creating customer value, a company can’t go it alone. It must work within an entire network of partners – a value delivery network – to accomplish this task. Individual companies and brands don’t compete, their entire value delivery networks do.
Most producers use intermediaries to bring their products to market. They forge a marketing channel (or distribution channel). A company’s channel decisions directly affect every other marketing decision. Producers use intermediaries because they create greater efficiency in making goods available to target markets. Through their contacts, experience, specialization, and scale of operation, intermediaries usually offer the firm more than it can achieve on its own.
Marketing channels perform many key functions. Some help complete transactions by:
- gathering and distributing information needed for planning and aiding exchange,
- developing and spreading persuasive communications about an offer,
- performing contact work (finding and communicating with prospective buyers),
- matching (shaping and fitting the offer to the buyer’s needs),
- and entering into negotiation to reach an agreement on price and other terms of the offer so that ownership can be transferred.
Other functions help to fulfill the completed transactions by:
- offering physical distribution (transporting and storing goods),
- financing (acquiring and using funds to cover the costs of the channel work),
- and risk taking (assuming the risks of carrying out the channel work.
What does the company’s supply chain consist of?
This supply chain consists of upstream and downstream partners.
- Upstream from the company is the set of firms that supply the raw materials, components, parts, information, finances, and expertise needed to create a product or service.
- Downstream marketing channel partners, such as wholesalers and retailers, form a vital link between the firm and its customers.
What is a value delivery network?
This is a network composed of the company, suppliers, distributors, and, ultimately, customers who partner with each other to improve the performance of the entire system in delivering customer value.
What is a channel level?
This is a layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer. The number of intermediary levels indicates the length of a channel. There are two types of marketing channels:
- Direct marketing channel: this is a marketing channel that has no intermediary levels. The company sells directly to consumers, e.g. Mary Kay cosmetics.
- Indirect marketing channel: this is a marketing channel containing one or more intermediary levels.
From the producer’s point of view, a greater number of levels means less control and greater channel complexity. Moreover, all the institutions in the channel are connected by several types of flows. These include the physical flow of products, the flow of ownership, the payment flow, the information flow, and the promotion flow. These flows can make even channels with only one or a few levels very complex.
Discuss how channel members interact and how they organize to perform the work of the channel.
The channel will be most effective when each member assumes the tasks it can do best. Ideally, because the success of individual channel members depends on overall channel success, all channel firms should work together smoothly. They should understand and accept their roles, coordinate their goals and activities, and cooperate to attain overall channel goals. By cooperating, they can more effectively sense, serve, and satisfy the target market. However, individual channel members rarely take such a broad view. Cooperating to achieve overall channel goals sometimes means giving up individual company goals. Although channel members depend on one another, they often act alone in their own short-run best interests. They often disagree on who should do what and for what rewards. Such disagreements over goals, roles, and rewards generate channel conflict.
In a large company, the formal organization structure assigns roles and provides needed leadership. But in a distribution channel composed of independent firms, leadership and power are not formally set. Traditionally, distribution channels have lacked the leadership needed to assign roles and manage conflict. In recent years, however, new types of channel organizations have appeared that provide stronger leadership and improved performance, such as the emergence of vertical marketing systems, horizontal marketing systems, and multichannel distribution systems.
What are the types of channel conflict?
- Horizontal conflict occurs among firms at the same level of the channel. For instance, some Ford dealers in Chicago might complain that other dealers in the city steal sales from them by pricing too low or advertising outside their assigned territories. Or Holiday Inn franchisees might complain about other Holiday Inn operators overcharging guests or giving poor service, hurting the overall Holiday Inn image.
- Vertical conflict, conflict between different levels of the same channel, is even more common conflict. For example, McDonald’s has recently faced growing conflict with its corps of almost 3,000 independent franchisees:
What is a conventional distribution channel?
This is a channel that consists of one or more independent producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own profits, perhaps even at the expense of the system as a whole. No channel member has much control over the other members, and no formal means exists for assigning roles and resolving channel conflict.
What is a vertical marketing system (VMS)?
A VMS is a channel structure in which producers, wholesalers, and retailers act as a unified system. One channel member owns the others, has contracts with them, or has so much power that they all cooperate.
What are the three types of VMSs?
- Corporate VMS: a vertical marketing system that combines successive stages of production and distribution under single ownership – channel leadership is established through common ownership, e.g. Zara.
- Contractual VMS: a vertical marketing system in which independent firms at different levels of production and distribution join together through contracts. The most common type of contractual VMS is the franchise organization (a contractual vertical marketing system in which a channel member, called a franchisor, links several stages in the production-distribution process). There are three types of franchises:
- Manufacturer-sponsored retailer franchise system e.g. Ford and its network of independent franchised dealers.
- Manufacturer-sponsored wholesale franchise system e.g. Coca Cola licenses bottlers in various world markets taht buy Coca Cola syrup concentrate and then bottle and sell the finished product to retailers locally.
- Service-firm-sponsored retailer franchise system e.g. Burger King
- Administered VMS: a vertical marketing system that coordinates successive stages of production and distribution through the size and power of one of the parties, e.g. GE, P&G, and Apple can command unusual cooperation from many resellers regarding displays, shelf space, promotions, etc. Also, large retailers such as Walmart, Home Depot and Walgreens can exert strong influence on the many manufacturers that supply the products they sell.
What is a horizontal marketing system?
This is a channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity, e.g.:
- Fox, Disney-ABC and NBCUniversal jointly own and market Hulu to compete againstother digital streaming competitors such as Netflix.
- Walmart partners with noncompetitor McDonald’s to place express versions of McDonald restaurants in Walmart stores.
What is a multichannel distribution system?
This is a distribution system in which a single firm sets up two or more marketing channels to reach one or more customer segments. For example, John Deere sells its familiar green-and-yellow lawn and garden tractors, mowers, and outdoor power products to consumers and commercial users through several channels, including John Deere retailers, Lowe’s home improvement stores, and online. It sells and services its tractors, combines, planters, and other agricultural equipment through its premium John Deere dealer network. And it sells large construction and forestry equipment through selected large, full-service John Deere dealers and their sales forces.
Multichannel distribution systems offer many advantages to companies facing large and complex markets. With each new channel, the company expands its sales and market coverage and gains opportunities to tailor its products and services to the specific needs of diverse customer segments. But such multichannel systems are harder to control, and they can generate conflict as more channels compete for customers and sales.
What is disintermediation?
This is the cutting out of marketing channel intermediaries by product or service producers or the displacement of traditional resellers by radical new types of intermediaries.
For example, online music download services such as iTunes and Amazon MP3 have pretty much put traditional music-store retailers out of business. In turn, streaming music services such as Spotify and Vevo are now disintermediating digital download services – digital downloads peaked last year while music streaming increased 32 percent. Similarly, Amazon.com almost single-handedly bankrupted the nation’s number-two bookseller, Borders, in less than 10 years. And the burgeoning online-only merchant has recently forced highly successful store retailers such as Best Buy to dramatically rethink their entire operating models.
Identify the major channel alternatives open to a company.
Channel alternatives vary from direct selling to using one, two, three, or more intermediary channel levels. Marketing channels face continuous and sometimes dramatic change. Three of the most important trends are the growth of vertical, horizontal, and multichannel marketing systems. These trends affect channel cooperation, conflict, and competition.
Channel design begins with assessing customer channel service needs and company channel objectives and constraints. The company then identifies the major channel alternatives in terms of the types of intermediaries, the number of intermediaries, and the channel responsibilities of each. Each channel alternative must be evaluated according to economic, control, and adaptive criteria. Channel management calls for selecting qualified intermediaries and motivating them. Individual channel members must be evaluated regularly.
What are the strategies available when determining the number of channel mebers to use at each level?
- Intensive distribution: Stocking the product in as many outlets as possible. Common with producers of convenience products and common raw materials such as toothpaste, candy and other similar items.
- Exclusive distribution: Giving a limited number of dealers the exclusive right to distribute the company’s products in their territories. Common with producers of luxury brands.
- Selective distribution: The use of more than one but fewer than all of the intermediaries that are willing to carry the company’s products. For example, Whirlpool and GE sell their major appliances through dealer networks and selected large retailers. By using selective distribution, they can develop good working relationships with selected channel members and expect a better-than-average selling effort. Selective distribution gives producers good market coverage with more control and less cost than does intensive distribution.
Discuss the nature and importance of marketing logistics and integrated supply chain management.
Marketing logistics (or physical distribution) is an area of potentially high cost savings and improved customer satisfaction. Marketing logistics addresses not only outbound logistics but also inbound logistics and reverse logistics. That is, it involves the entire supply chain management – managing value-added flows between suppliers, the company, resellers, and final users. No logistics system can both maximize customer service and minimize distribution costs. Instead, the goal of logistics management is to provide a targeted level of service at the least cost. The major logistics functions are warehousing, inventory management, transportation, and logistics information management.
The integrated supply chain management concept recognizes that improved logistics requires teamwork in the form of close working relationships across functional areas inside the company and across various organizations in the supply chain. Companies can achieve logistics harmony among functions by creating cross-functional logistics teams, integrative supply manager positions, and senior-level logistics executive positions with cross-functional authority. Channel partnerships can take the form of cross-company teams, shared projects, and information sharing systems. Today, some companies are outsourcing their logistics functions to third-party logistics (3PL) providers to save costs, increase efficiency, and gain faster and more effective access to global markets.
Shaving off even a small fraction of logistics costs can mean substantial savings. For example, Walmart is currently implementing a program of logistics improvements through more efficient sourcing, better inventory management, and greater supply chain productivity that will reduce supply chain costs by 5 to 15 percent over five years – that’s a whopping $4 billion to $12 billion.
