UCSI UNIVERSITY

MARKETING PROCESSES 10

DESIGNING AND MANAGING MARKETING CHANNELS AND VALUE

NETWORKS

 Marketing channels and value networks

Most producers do not sell their goods directly to the final users; between them stands a set of
intermediaries performing a variety of functions. These intermediaries constitute a marketing
channel (also called a trade channel or distribution channel).

Marketing channels are sets of interdependent organizations involved in the process of

making a product or service available for use or consumption. They are the set of pathways a
product or service follows after production, culminating in purchase and used by the final
end user.

Some intermediaries – such as wholesalers and retailers - buy, take title to, and resell the
merchandise, they care called merchants. Others – brokers, sales agents - search for
customers and may negotiate on the producer’s behalf but do not take title to the goods, they
are called agents. Still others – banks, advertising agency - assist in the distribution process
but neither takes title to goods nor negotiate purchases or sales, they are called facilitators.

1. The importance of channels

A marketing channel system is the set of marketing channels employed by a firm.

Marketing channels must not just serve markets, they must also make markets. In addition,
channel decisions involve relatively long-term commitments to other forms as well as a set of
policies and procedures.

In managing its intermediaries, the firm must decide how much effort to devote to push
versus pull marketing. A push marketing involves the manufacturer using its sales force and
trade promotion money to induce intermediaries to carry, promote, and sell the product to
end users. A pull strategy involves the manufacturer using advertising and promotion to
induce consumers to ask intermediaries for the product, thus inducing the intermediaries to
order it.

2. Hybrid channels and multichannel marketing

Today’s successful companies are multiplying the number of “go-to-market” or hybrid

channels in any one-market area. Hybrid channels or multichannel marketing occurs
when a single firm uses two or more marketing channels to reach customer segments.

Companies that manage hybrid channels must make sure these channels work well together
and match each target customer’s preferred ways of doing business. Customers expect
channel integration such as:

a. Ordering a product online and pick it up at a convenient retail location.

b. Returning an online-ordered product to a nearby store of the retailer.

-1-
 c. Receiving discounts based on total online and off-line purchases.

3. Value Networks

A supply chain view of a firm sees markets as destination points and amounts to a linear view
of the flow. The company should first think of the target market, and then design the supply
chain backward from that point. This view has been called demand chain planning.

A broader view sees a company at the centre of a value network—a system of partnerships
and alliances that a firm creates to source, augment, and deliver its offerings. A value
network includes a firm’s suppliers, its suppliers’ suppliers, its immediate customers, and
their end customers. A company needs to orchestrate these parties to enable it to deliver
superior value to the target market.

Demand chain planning yields several insights: First, the company can estimate whether
more money is made upstream or downstream. Second, the company is more aware of
disturbances anywhere in the supply chain that might cause costs, prices, or supplies to
change suddenly. Third, companies can go online with their business partners to carry on
faster and more accurate communications, transactions, and payments to reduce costs, speed
up information, and increase accuracy.

Managing this value network has required companies to make increasing investments in
information technology (IT) and software. Marketers have traditionally focused on the side of
the value network that looks toward the customer. In the future, they will increasingly
participate in, influence their companies’ upstream activities, and become network managers.

 The role of marketing channels

Why would a producer delegate some of the selling job to intermediaries? Intermediaries
normally achieve superior efficiency in making goods widely available and accessible to
target markets (Figure 15.1). Through their contacts, experiences, specialization, and scale of
operations, intermediaries usually offer the firm more than it can achieve on its own.

1. Channel Functions and Flows

-2-
A marketing channel performs the work of moving goods from producers to consumers. It
overcomes the time, place, and possession gaps that separate goods and services from those
who need and want them. Members of the marketing channel perform several key functions
(Table 15.1).

Some functions constitute a forward flow of activity from the company to the customer.
Other functions constitute a backward flow from customers to the company. Still others
occur in both directions. Figure 15.2 shows five marketing flows. A manufacturer selling a
physical product and services might require three channels: A sales channel, a delivery
channel, and a service channel.

The question is not whether various channel functions needed to be performed but rather,
who is to perform them. All channel functions have three things in common: They use up
scarce resources, they can often be performed better though specialization, they can be
shifted among channel members.

2. Channel Levels

-3-
The producer and the final consumer are part of every channel. Figure 15.3(a) illustrates
several consumer goods marketing channels of different lengths. A zero-level channel (also
called a direct-marketing channel) consists of—a manufacturer selling directly to the final
consumer. A one-level channel contains one selling intermediary—such as a retailer. A two-
level channel contains two intermediaries—wholesaler and a retailer. A three-level channel
contains—wholesalers, jobbers, and retailers.

Figure 15.3(b) shows channels commonly used in industrial marketing. Channels normally
describe a forward movement of products from source to user. One can also talk about
reverse-flow channels. They are important in the following cases: (1) to reuse products or
containers, (2) to refurbish products for resale, (3) to recycle products, and (4) to dispose of
products and packaging.

 Channel-design decisions

Designing a marketing channel system involves analyzing customer needs, establishing

channel objectives, identifying major channel alternatives, and evaluating major channel
alternatives.

1. Analyzing Customers’ Desired Service Output Levels

Consumers may choose the channels they prefer based on price, product assortment, and
convenience, as well as their own shopping goals (economic, social, or experiential).
Channels produce five service outputs:

a. Lot size. The number of units the channel permits a typical customer to purchase on
one occasion.
b. Waiting and delivery time. The average time customers of that channel wait for
receipt of the goods.
c. Spatial convenience. The degree to which the marketing channel makes it easy for
customers to purchase the product.
d. Product variety. The assortment breadth provided by the marketing channel.
e. Service backup. The add-on services (credit, delivery, installation, repairs) provided
by the channel.

The marketing-channel designer knows that providing greater service outputs means
increased channel costs and higher prices for customers.

2. Establishing Objectives and Constraints

-4-
Channel objectives should be stated in terms of targeted service output levels and associated
cost and support levels. Channel institutions should arrange their functional tasks to minimize
total channel costs and still provide desired levels of service outputs. Planners can identify
several market segments based on desired service and choose the best channels for each.

Channel objectives vary with product characteristics. Channel design must consider the
strengths and weaknesses of different types of intermediaries. Legal regulations and
restrictions also affect channel design.

3. Identifying Major Channel Alternatives

Each channel —from sales forces, to agents, distributors, dealers, direct mail, telemarketing,
and Internet – has unique strengths and weaknesses. Channel alternatives differ in three ways:
the types of intermediaries, the number needed, and the terms and responsibilities of each.

 Types of Intermediaries

Consider the case of a test-equipment manufacturer. The manufacturer could assign sales
representatives to contact all prospects in an area or develop separate sales forces for the
different industries; hire manufacturers’ agents in different regions or end-user industries to
sell the new equipment; or find exclusive distributors in the different regions or end-user
industries that will buy and carry the device.

Sometimes a company chooses an unconventional channel because of the difficulty or cost of

working with the dominant channel. Perhaps the most unique type of intermediaries in Asia is
the trading house. These trading houses function basically as matchmakers between potential
buyers and sellers.

 Number of Intermediaries

Three strategies are available: exclusive distribution, selective distribution, and intensive
distribution. Exclusive distribution means severely limiting the number of intermediaries. It
is used when the producer wants to maintain control over the service level and outputs
offered by the resellers. Often it involves exclusive dealing arrangements.

Selective distribution relies on only some of the intermediaries willing to carry a product. It
is used by established companies and by new companies seeking distributors. The company
does not have to worry about too many outlets.

Intensive distribution places the goods or services in as many outlets as possible. This
strategy is generally used for items where products for which the consumer requires a great
deal of location convenience.

Manufacturers are constantly tempted to move from exclusive or selective distribution to

more intensive distribution to increase coverage and sales. Intensive distribution increases
product/service availability but also result in retailers competing aggressively.

 Terms and Responsibilities of Channel Members

-5-
Each channel member must be treated respectfully and given the opportunity to be profitable.
The main elements in the “trade-relations mix” are:

a. Price policy calls for the producer to establish a price list and schedule of discounts
and allowances that intermediaries see as equitable and enough.
b. Conditions of sale refer to payment terms and producer guarantees.
c. Distributors’ territorial rights define the distributors’ territories and the terms under
which the producer will enfranchise other distributors.
d. Mutual services and responsibilities must be carefully spelled out, especially in
franchised and exclusive-agency channels.

4. Evaluating the major alternatives

Each channel alternative needs to be evaluated against economic, control and adaptive
criteria.

 Economic criteria

Each channel alternative will produce a different level of sales and costs. Firms will try to
align customers and channels to maximise demand at the lowest overall cost. Sellers try to
replace high-cost channels with low-cost channels if the value added per sale is enough.

The first step is to determine whether a company sales force or a sales agency will produce
more sales. Most marketing managers believe that a company sales force will sell more. The
next step is to estimate the costs of selling different volumes through each channel. The final
step is comparing sales and costs.

 Control and adaptive criteria

Using a sales agency poses a control problem. Agents may concentrate on the customers who
buy the most, not necessarily those who buy the manufacturer’s goods. To develop a channel,
members must make some degree of commitment to each other for a specified period. Yet
these commitments invariably lead to a decrease in the producer’s ability to respond to a
changing marketplace.

 Channel-management decisions

After a company has chosen a channel alternative, individual intermediaries must be selected,
trained, motivated, and evaluated.

1. Selecting channel members

To customers, the channels are the company. To facilitate channel member selection,
producers should determine what characteristics distinguish the better intermediaries. They
should evaluate the number of years in business, other lines carried, growth and profit record,
financial strengths.

2. Training and motivating channel members

-6-
The company should provide training programs, market research programs, and other
capability-building programs to motivate and improve intermediaries’ performance.

 Channel power

Channel power can be defined as the ability to alter channel members’ behaviour resulting
in actions they would not have taken otherwise. Manufacturers can draw on the following
types of power to elicit cooperation:

a. Coercive power – a manufacturer threatens to withdraw a resource or terminate a

relationship if intermediaries fail to cooperate.
b. Reward power – The manufacturer offers intermediaries an extra benefit for
performing specific acts or functions.
c. Legitimate power – the manufacturer requests a behaviour that is warranted under the
contract.
d. Expert power – the manufacturer has special knowledge that the intermediaries’
value.
e. Referent power – the manufacturer is so highly respected that intermediaries are
proud to be associated with it.

Intermediaries’ cooperation is a huge challenge. Producers often use positive motivators,

such as higher margins, special deals, premiums, cooperative advertising allowances, display
allowances, and sales contests.

 Channel partnership

Most sophisticated companies try to forge a long-term partnership with distributors. To

streamline the supply chain and cut costs, many manufacturers and retailers have adopted
efficient consumer response (ECR) practices to organise their relationship in three areas:

a. Demand side management or collaborative practices to stimulate consumer demand

by promoting joint marketing and sales activities.
b. Supply side management or collaborative practices to optimise supply (with a focus
on joint logistics and supply chain activities).
c. Enablers and integrators or collaborative information technology and process
improvement tools to support joint activities that reduce operational problems, allow
greater standardisation, and so on.

3. Evaluating channel members

Producers must periodically evaluate intermediaries’ performance against such standards as

sales-quota attainment, average inventory levels, customer delivery time, treatment of
damaged and lost goods, and cooperation in promotional and training programs.

4. Modifying channel design and arrangements

The change could mean adding or dropping individual market channels or channel members
or developing a totally new way to sell goods.

 Channel evaluation

-7-
Identifying the best channels might not be a problem; the problem is often to convince the
available intermediaries to handle the firm’s line. The channel system evolves as a function
of local opportunities and conditions, emerging threats and opportunities, company resources
and capabilities, and other factors.

 Channel modification decisions

A producer must periodically review and modify its channel arrangements. Adding or
dropping individual channel members requires an incremental analysis. Perhaps the most
difficult decision involves revising the overall channel strategy.

-8-