Principles of Marketing

Session #21
• Chapter 12
Chapter 12
Marketing Channels: Delivering Customer Value

NETFLIX: Finding the Future by Abandoning the

Past
• Time and again, Netflix has innovated its way to the top in the distribution of
video entertainment. But to stay atop its boiling, roiling industry, Netflix must
keep the distribution innovation pedal to the metal.

Netflix’s innovative distribution strategy:

From DVDs by mail to Watch Instantly
to streaming on almost any device and
creating original content, Netflix has led
the howling pack by doing what it does
best—revolutionize distribution. What’s
next?

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Supply Chains and Value Delivery
Networks
Upstream partners are firms that supply raw materials, components,
parts, information, finances, and expertise needed to create a product or
service.
Downstream partners include the marketing channels or distribution
channels that look toward the customer, including retailers and
wholesalers.
Supply chain “make and sell” view includes the firm’s raw
materials, productive inputs, and factory capacity.
Demand chain “sense and respond” view suggests that planning
starts with the needs of the target customer.
Value delivery network is composed of the company,
suppliers, distributors, and, ultimately, customers who partner with each
other to improve the performance of the entire system.

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The Nature and Importance of
Marketing Channels
Producers forge a Marketing channel to bring products to
the market as they cannot do so themselves.
Marketing channel(distribution channel) is a set of
interdependent organizations that help make a product or
service available for use or consumption by the consumer or
business user.
How Channel Members Add Value
• Transform the assortment of products into assortments
wanted by consumers.
• Bridge the major time, place, and possession gaps that
separate goods and services from users.

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 The Nature and Importance of
Marketing Channels

Figure 12.1 How a Distributor Reduces the Number of Channel Transactions

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 The Nature and Importance of Marketing
Channels
How Channel Members Add Value
• Information: Gathering & distributing information about consumers,
producers, and other actors in the marketing environment needed for
planning and aiding exchange.
• Promotion: Developing and spreading persuasive communications about an
offer.
• Contact: Finding and engaging customers and prospective buyers.
• Matching: Shaping offers to meet the buyer’s needs, including activities such
as manufacturing, grading, assembling, and packaging.
• Negotiation: Reaching an agreement on price and other terms so that
ownership or possession can be transferred.
• Physical distribution: Transporting and storing goods.
• Financing: Acquiring and using funds to cover the costs of the channel work.
• Risk taking: Assuming the risks of carrying out the channel work.

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The Nature and Importance of
Marketing Channels
Number of Channel Levels
Channel level 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.
Direct marketing channel is a marketing channel that has
no intermediary levels.
Indirect marketing channel is a marketing channel
containing one or more intermediary levels.

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The Nature and Importance of
Marketing Channels
Figure 12.2 Consumer and Business Marketing Channels

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The Nature and Importance of
Marketing Channels
Number of Channel Levels
Channel members are connected by several types of flows:
• Physical flow of products
• Flow of ownership
• Payment flow
• Information flow
• Promotion flow

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Channel Behavior and Organization
Channel Behavior
Marketing channels consist of firms that have partnered for their
common good with each member playing a specialized role and each
channel member depends on the others.
Channel conflict refers to disagreement among channel members over
goals, roles, and rewards.
• Horizontal conflict occurs among firms at the same level of the
channel.
• Vertical conflict, conflict between different levels of the same channel,
is even more common.

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Channel Behavior and Organization
Figure 12.3 Comparison of Conventional Distribution Channel with
Vertical Marketing System

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Channel Behavior and Organization
Vertical Marketing Systems
Conventional distribution systems consist of one or more
independent producers, wholesalers, and retailers, each separate
business seeking to maximize its own profits, perhaps even at the
expense of profits for the system as a whole.

Vertical marketing systems (VM Ss) provide channel leadership and

consist of producers, wholesalers, and retailers acting as a unified
system. One channel member owns the others, has contracts with them,
or wields so much power that they must all cooperate. The VMS can be
dominated by the producer, the wholesaler, or the retailer.

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Channel Behavior and Organization
Types of Vertical Marketing Systems
1. Corporate vertical marketing systems combine successive stages
of production and distribution under single ownership.
2. Contractual vertical marketing systems consist 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.
– Franchise organization is a contractual vertical marketing
system in which a channel member, called a franchisor, links
several stages in the production-distribution process.
3. An administered vertical marketing system is a VMS that
coordinates successive stages of production and distribution
through the size and power of one of the parties.

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Channel Behavior and Organization
Horizontal Marketing Systems
Horizontal marketing system is a channel arrangement in which two or
more companies at one level join together to follow a new marketing
opportunity.

Horizontal marketing systems: Target partners with CVS Health, who

operates stores-within-stores to the benefit of all – Target, CVS, and their
mutual customers.

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 Channel Behavior and Organization
Multichannel Distribution Systems
Multichannel distribution systems are systems in which a
single firm sets up two or more marketing channels to reach
one or more customer segments.

Figure 12.4 Multichannel Distribution System

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Channel Behavior and Organization
Changing Channel Organization
Disintermediation is the cutting out of marketing channel intermediaries
by producers or the displacement of traditional resellers by new
intermediaries.
• Disintermediation example: Online music download services such as
iTunes and Amazon pretty much put traditional music store retailers
out of business. In turn, however, streaming music services such as
Spotify, Amazon Prime Music, and Apple Music are now
disintermediating digital download services.

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Channel Design Decisions
Marketing channel design
Designing effective marketing channels by analyzing
customer needs, setting channel objectives, identifying major
channel alternatives, and evaluating those alternatives.
• Analyzing consumer needs
• Setting channel objectives
• Identifying channel alternatives
• Evaluating channel alternatives

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Channel Design Decisions
Analyzing Consumer Needs
• Find out what target consumers want from the channel
• Balance consumer needs against costs and
customer price preferences

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Channel Design Decisions
Setting Channel Objectives
• Determine targeted levels of customer service
• Identify which segments to serve
• Determine the best channels to use
• Minimize the cost of meeting customer service requirements

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Channel Design Decisions
Identifying Major Alternatives
Types of intermediaries refers to channel members available to carry
out channel work. Most companies face many channel member choices.
Number of Marketing Intermediaries
• Intensive distribution: stock products in as many outlets as possible.
• Exclusive distribution: producer gives only a limited number of dealers
the exclusive right to distribute its products in their territories.
• Selective distribution: the use of more than one but fewer than all of
the intermediaries who are willing to carry a company’s products.
Responsibilities of Channel Members
A producer and the intermediaries need to agree on:
• Price policies
• Conditions of sale
• Territory rights
• Specific services
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Channel Design Decisions
Evaluating Major Alternatives
• Economic criteria: a company compares the likely sales,
costs, and profitability of different channel alternatives.
• Control issues: Using intermediaries usually means giving
them some control over the marketing of the product, and
some intermediaries take more control than
others. Companies prefers to keep as much control as
possible.
• Adaptability criteria: Channels involve long-term
commitments, but companies want to keep the channel
flexible to adapt to environmental changes.

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Channel Management Decision
Marketing channel management calls for selecting,
managing, and motivating individual channel members and
evaluating their performance over time.
•Selecting channel members: determine what characteristics
distinguish the better ones.
•Managing and motivating channel members: convince suppliers and
distributors that they can succeed better by working together as a part
of a cohesive value delivery system.
•Evaluating channel members: regularly check channel member
performance against standards such as sales quotas, average
inventory levels, customer delivery time, etc. The company should
recognize and reward intermediaries that are performing well and
adding good value for consumers.

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Public Policy and Distribution
Decisions
• Exclusive distribution is when the producer gives only a
limited number of dealers the exclusive right to distribute
its products in their territories.
• Exclusive dealing is when the seller requires that the
exclusive distribution sellers not handle competitor’s
products.
– Exclusive territorial agreements are where producer
or seller limit territory.
• Tying agreements (full line forcing) are agreements
where the dealer must take most or all of the product line.

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 Marketing Logistics and Supply
Chain Management
Nature and Importance of Marketing Logistics
Marketing logistics (physical distribution) involves planning,
implementing, and controlling the physical flow of goods,
services, and related information from points of origin to
points of consumption to meet consumer requirements at a
profit.

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Figure 12.5 Supply Chain Management
Marketing Logistics and Supply Chain
Management
Nature and Importance of Marketing Logistics
Supply chain management involves managing upstream and
downstream value-added flows of materials, final goods, and related
information among suppliers, the company, resellers, and final
consumers.
Importance of Logistics:
1. Competitive advantage through improved logistics giving customers
better service or lower prices.
2. Improved logistics can yield tremendous cost savings to both a
company and its customers.
3. Increasing product variety has created a need for improved logistics
management.
4. Improvements in information technology have created opportunities
for major gains in distribution efficiency.
5. Logistics affects the environment and a firm’s environmental
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Marketing Logistics and Supply Chain
Management
Nature and Importance of Marketing Logistics
Goal of marketing logistics should be to provide a targeted
level of customer service at the least cost.

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 Marketing Logistics and Supply
Chain Management
Major Logistics Functions
• Warehousing: Companies store goods while they wait to be sold.
– Storage warehouses store goods for moderate to long periods.
– Distribution centers move goods rather than just store them.
• Inventory management: Balancing costs of carrying larger inventories
against resulting sales and profits. Eg. JIT logistics.
• Transportation: Transportation choice affects the pricing of products,
delivery performance, and the condition of goods when they arrive.
– Five main transportation modes: truck, rail, water, pipeline, air, internet.
– Multimodal transportation: combining modes of transportation.
• Logistics information management: Companies need simple,
accessible, fast, and accurate processes for capturing, processing, and
sharing channel information.

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Marketing Logistics and Supply
Chain Management
Integrated Logistics Management
Integrated logistics management is the recognition that providing
customer service and trimming distribution costs requires teamwork
internally and externally.
The goal of integrated supply chain management is to harmonize all of
the company’s logistics decisions. The company must also work with
other channel partners to improve whole-channel distribution.
Many firms outsource some or all of their logistics to third-party
logistics (3PL) providers.

Integrated logistics management: Oracle’s supply chain

management software solutions help companies to “gain
sustainable advantage and drive innovation by
transforming their traditional supply chains into integrated
value chains.”
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Session Close